March 15, 2023
Introduction
Good morning and thank you, Walt, for the kind introduction.
Returning in person to Boca last year was a true milestone as we emerged from the global pandemic only to find ourselves facing tragedy in Ukraine.[1] My remarks focused on the burgeoning era of change presenting risks that would require a consciously balanced approach.
Without question, 2022 went on to present a challenging year across all commodity complexes, some more extreme than others. The CFTC remained on high alert, demonstrating domestically and abroad how we use all available resources, leverage expertise, and develop new skills in monitoring, assessing, and addressing trading volume and volatility, as well as uncovering misconduct in the derivatives and underlying cash commodity markets.
Flipping through our shared agenda for the next few days, it’s my view that the industry is now in construction mode. We are building and re-building at an ambitious scale towards a modern futures ecosystem that addresses real-world problems with enhanced regulatory oversight. This entails sound and resilient structures, informed by recent lessons learned and mindful of future challenges.
Before sitting down with Walt, I would like to provide a high-level overview of the CFTC’s current agenda and share my views on some recent events as well as our current thinking at the agency.
A Strategic Agenda
Last month I delivered extensive remarks outlining the CFTC’s regulatory agenda that I have set in motion for 2023 and into 2024.[2] I also highlighted areas of ongoing importance requiring deliberation before the Commission. Our goal for the agency is to address the expanding dislocation between regulation and innovation through rulemakings, policy, and guidance that, in the simplest terms, acknowledge where we are.
Looking at the over 30 matters in process for Commission consideration, several themes emerge: (1) enhancing risk management and resilience across intermediaries, exchanges, and derivatives clearing organizations; (2) fostering sound and responsive practices regarding cybersecurity and the use of third-party vendors across all registrants; (3) strengthening customer protections; (4) promoting efficiency and innovation; (5) improving reporting and data policy; and (6) addressing any duplicative regulatory requirements and amplifying international comity.
Underlying all of these themes is the need for our ruleset to address the derivatives industry’s current trajectory. Our regulations historically developed according to activities as they related to an individual registrant. However, we are continuing to observe a desire to shift to structures that combine unique activities into a single entity, raising important questions about conflicts of interest, the strength of capital, margin, and segregation requirements, the role and responsibilities of self-regulatory organizations, affiliate risk management, and of course, customer protections. Indeed, what we are seeing also raises questions as to whether certain service providers should fall within our traditional registration categories.
Several proposed rulemakings underway will aim to address these risks, building on the post-financial crisis reforms with a wealth of knowledge and experience. We are also working with our domestic and international counterparts, taking a cue from the prudential regulators whose activities-based jurisdiction provides for greater opportunities to define the limits and ensure ample guardrails around practices that may threaten the safety and soundness of the individual entities they oversee and the larger banking and financial systems.
Replication and consistency of regulations across financial entities facing the same or similar risks has eluded us for far too long. Under my leadership, we will address what we can within our current authority, leveraging both our principles-based approach and the support of our self-regulatory organizations.
A Commitment to Collective Efforts
Keeping this in mind, I want to reiterate a commitment I have made many times over the years, including at my first nomination hearing in 2017.[3] That is, when it comes to regulation and policy, no one stakeholder bears all the responsibility; we need collective efforts, public-private partnerships, and open dialogues.
As the Commission is increasingly presented with proposals that envision new models, invite new participants, introduce new products, and incentivize new risks, we must carefully balance our commitment and legal obligation to engage with and be responsive to our registrants and applicants with our primary oversight mission, which is to protect customers and ensure market integrity.
In addition to the multiple meetings being coordinated by the Commission’s various Advisory Committees, in the coming months I anticipate that the Commission may hold roundtables or consider seeking public comment on issues such as: retail market participation in the derivatives markets; the movement towards integrated market structures that combine unique activities into a single entity, raising important questions about conflicts of interest, the strength of capital, margin, and segregation requirements, the role and responsibilities of self-regulatory organizations and designated self-regulatory organizations, affiliate risk management, and customer protections; and third-party service provider and vendor relationships. Your contributions to the discussions will be critical to our collective thinking and future success, and I hope that you will be generous with your feedback.
We all have a shared interest in accomplishing this mission, and with the stakes increasing, we must collectively ask ourselves: “What should the future of our markets look like?”We know that the way things are today will not be the way things are in the future. Change, through technology, innovation, and competition is at the heart of how this industry has, over decades, become stronger, more efficient, and resilient. The question, acknowledging this as a baseline, then becomes: “How are we going to work together to ensure we maintain the same success that has defined us thus far?”
An Eye on Cyber Risk and Service Providers
Just as I was preparing the remarks I referenced earlier, the CFTC issued its first public statement on the cyber-related incident at ION Cleared Derivatives.[4] The severity of the impact on each futures commission merchant’s (FCM’s) operations varied based on the ION application used, and the FCM’s ability to work-around impacted applications. The incident prevented certain FCMs from submitting timely and accurate positions data to the CFTC and, as a result, the CFTC’s release of Commitments of Traders (CoT) paused. The CFTC is receiving corrected historical data and is now publishing the CoT Reports sequentially. It is expected that publication of backlogged reports will be complete this month.[5]
Current law could not have prevented the ION incident, as the direct regulation of third-party service providers is beyond our jurisdiction. With growing cyber risk permeating all elements of our markets, as I testified last week,[6] I believe that Congress, through reauthorization, must consider what role the CFTC should have with respect to entities who provide services to registered entities, and, perhaps more broadly, to our markets.
In the interim, and in addition to addressing the increasing reliance on third-party service providers in conjunction with upcoming rulemakings aimed at establishing adaptive CFTC-specific cyber requirements for FCMs and swap dealers, I have asked our Market Participants Division to further identify potential weaknesses with respect to third-party service providers and vendor relationships and identify appropriate solutions for Commission consideration.
The goal of any upcoming proposals on cybersecurity will be the fostering of sound and responsive cybersecurity practices among our registrants; elevating existing standards that will ultimately improve operational resilience across the financial sector and better protect customer assets.
Climate and Crypto
Turning to two other topics that remain top of mind and dominated my testimony last week, I will be brief.
I received several questions last week from Senators regarding the CFTC’s role in the voluntary carbon markets (VCMs), and, more particularly, what the agency can do to support the healthy acceleration and development of these markets consistent with our jurisdiction. I reaffirmed that the CFTC is here as a market regulator to ensure, where appropriate, that VCMs grow in a responsible way, with appropriate supervision and necessary guidance and guardrails. To the extent that contracts listed on CFTC regulated exchanges are noncompliant with the requirements of the CEA or Commission regulations, or are found to have terms that are fraudulent, we will act against them.
I know that Congress is intently focused on VCMs, and not only is the agency’s Climate Risk Unit hard at work exploring these very questions, but I have also offered the CFTC’s assistance as Congress considers whether and what kind of legislation may be appropriate in this area.
The crypto market was recently shaken to its core, on several different fronts, and continues to face challenges related to different points of contact with the traditional financial system. In my view the bankruptcies, failures, and runs only validate that Congressional action is needed. The ecosystem is vast, it will not vanish, and it desperately needs comprehensive legislation. The cryptoverse is not a closed system. Regulation is necessary to protect customers and to prevent failures which cannot predictably be contained within any boundaries across the domestic and global financial markets. Regardless of whether one or many occur in 2023 or 2033, we must act. There is a new Congress, and I will continue to engage and provide technical assistance to developing legislation, as requested.
Conclusion
It is always good to be back here at Boca—which like spring, opens with the promise of blossoms on trees and new beginnings. It brings us together from every corner of our markets on a global scale. Thank you again for having me here today.
