Introduction
Good morning and thank you, Alicia, for the kind introduction.
There may be a few FIA Futures Hall of Fame members in the audience who know or can recall the origin of the CFTC. This October, the CFTC will commemorate the 50th anniversary of the passage of the Commodity Futures Trading Commission Act of 1974.[1] The Act established the CFTC as an independent agency with exclusive jurisdiction over futures trading in all commodities.[2] Next year, we will mark the 50th anniversary of the swearing in of the first four Commissioners and the official transfer of authority from our predecessor in the U.S. Department of Agriculture to the CFTC. This 50th milestone is referred to as a golden anniversary or jubilee.
Many of us are familiar with the phrase to “Stay gold, Ponyboy,” a quote from S.E. Hinton’s The Outsiders[3]—which is actually a reference to Robert Frost’s poem “Nothing Gold Can Stay.”[4] It’s a phrase used to remind someone to stay true to their convictions—to have personal strength, because change is inevitable. The “golden standard” is therefore, so to speak, having the strength and principles to show up every day, and meet the challenges of constant change and unavoidable conflicts together. In this current era, many of our issues wrestle with transition and acknowledging new market realities in the derivatives industry that may require changes in the way we regulate our markets.
If you have been in attendance these last few years, this all may sound familiar. In 2022, I remarked that our collective dedication was a testament to our resilience as an industry.[5] Last year, I acknowledged that the modern futures ecosystem was taking off.[6] I invited you to show up, and to be generous with your time, comments, input, and feedback. And I am showing up today to again ask that, if you believe in the derivatives markets and feel strongly about the direction we are moving in, that you engage, meaningfully.
Before sitting down with Walt, I would like to provide a brief overview of the CFTC’s current priorities.
The Current Agenda
In early 2023, I outlined a Commission agenda to consider and vote on roughly 30 regulatory and policy matters in addition to all of the rules and orders proposed in the prior year.[7] I bucketed them into themes that addressed the following: risk management and resilience; customer protections; efficiency and innovation; reporting and data policy; duplicative regulatory requirements; and international comity.
Underlying all of these themes is the need for our ruleset to address the derivatives industry’s current course as a few seek to move away from the traditional and familiar model towards structures that combine unique activities. I touched upon these concepts in 2022, identifying disintermediation and decentralized finance as the dominant disruptors of our current era, 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.[8]
I was not surprised that by last summer, vertical integration, an outgrowth of electronification and DeFi,[9] had grown. Our markets are no longer physically delineated by geographical separation of activities among distinguishable market actors. And, to be clear, there is nothing per se unreasonable or problematic about innovative approaches. The bottom line is that, when presented with legally sound proposals to facilitate the transfer and mitigation of financial risk, we must engage, grapple with the questions they raise and ask our own, apply pressure—sometimes a healthy dose, be transparent, and move with caution and collective wisdom.
As I’ve consistently stated, our role is to regulate a market, ensure integrity and resilience, and protect customers.
Accordingly, last summer I directed staff to draft and issue the Request for Comment on the Impact of Affiliations on Certain CFTC-Regulated Entities (the “RFC”).[10] Your comments have been received and reviewed, and I anticipate that by the summer the Commission will consider a proposal specifically addressing potential risks, conflicts, and governance issues that may be raised by new market structures and affiliate relationships.
Ultimately, I envision that while any new policy will be informed in part by the comments received in the RFC and the Commission’s real-time observations, the goal is to continue using, as a template and anchor, the models and structures that have been time-tested and developed over decades to promote market resiliency and protect customers. Notably, these structures historically include iterations of vertical integration to varying degrees that arguably may be considered the global gold standard for financial market structure in their respective asset classes.
Recent stories and some commenters have struggled in articulating differentiations between Commission rulemakings, policy determinations, and the straightforward exercise of its authorities particularly when it comes to matters that involve digital assets. These stories, in part, are fed by inaccurate narratives illustrative of what I can only believe is an overt hyperfocus on the sensational over the less than attention-grabbing substance of an industry regulator engaging in the business-as-usual meeting of our statutory directives. Fueling much of the debate may be the innate challenge to appreciating where the necessary and appropriate friction resides in a principles-based regime.
There is nothing light touch when it comes to principles-based regulation.[11] Rather, principles-based regulation preserves the concrete, foundational objectives of the underlying law while providing for flexibility and innovation. The discretion it affords requires respect on both sides of the regulatory line such that risk is addressed in the most effective and efficient manner. And, to the extent more prescriptive rules are necessary, they are informed by the individuals and entities who have the greatest experience and expertise.
As I have said throughout my tenure at the Commission, “[t]he best principles-based rules in the world will not succeed absent: (1) clear guidance from regulators; (2) adequate means to measure and ensure compliance; and (3) willingness to enforce compliance and punish those who fail to ensure compliance with the rules.”[12] As Chairman, I would not put forth a proposal, policy, practice, or procedure that does anything less.
In addressing matters before the Commission, including applications for registration that present novel structures, my intent—as always—is to carry out our duty under the Commodity Exchange Act, informed by facts and circumstances, and nothing else. As I have said before, we must continually be fair and consistent in evaluating the products and proposals presented for our consideration. The Commission must abide by core regulatory principles that prioritize, among other things, customer protections, market stability, and resilience. And, we must ensure a level playing field, regardless of the asset class.
The alternative is to inject a level of subjective decision making moved by the prevailing winds of the day, which could lead to a future unmoored from the compass that guides us, the Commodity Exchange Act.
I am pleased to share that we have moved through much of the 2023-2024 agenda, having proposed and finalized changes intended to strengthen governance, improve risk management and resilience, and ensure that all market participants get the information they need and protections they are entitled to, regardless of sophistication.
The Commission will spend the remainder of 2024 largely focused on finalizing rules and considering a few additional proposals currently in drafting. In the upcoming months, we anticipate considering a proposal to amend CFTC rules that address the treatment of certain types of event contracts, in order to provide additional regulatory clarity both for exchanges that seek to list event contracts, and for market participants.
Among the proposals that should be finalized within the year are amendments to the Part 39 rules to address the protection of clearing member funds held by DCOs commonly referred to as the “Member Property” proposal.[13] The straightforward proposal aims to accomplish a simple and very important objective: to provide protections for clearing member funds, analogous to the existing protections of funds belonging to customers of a futures commission merchant.
The comment period for the Member Property proposal remains open through Monday (March 18th),[14] so there is still time to engage.
While it is too early to tell where 2024 will take us in terms of artificial intelligence (“AI”), the Commission is eager to engage. In January, the CFTC’s new AI Task Force issued a request for comment (“AI RFC”) on the use of AI in CFTC-regulated markets.[15] This AI RFC prioritizes promoting responsible innovation and ensuring that we understand AI applications and the associated risks and impacts in our jurisdictional markets and the larger financial system. The AI RFC will be open through April 24th, and we need your input so that we can better engage and evaluate the need for future regulation, guidance, or other Commission action.
Conclusion
At 49 years, our relationship is now 7 times the normal 7-year itch. Not everyone will agree with where the CFTC’s boundaries are or where its resources are best prioritized, but that does not change the commitments we have made to ensuring the derivatives industry not only endures, but flourishes.
There is no question that we will hit that golden anniversary. And I believe that the fact that we have debates, and that we agree to disagree sometimes, demonstrates each of our commitments to stay gold.
Every day, we strive to ensure that our rules, policies, and guidance address the complexities of the derivatives markets with logic and forethought. We approach every policy and legal question, with the judiciousness, care, and craft that the entirety and complexity of our markets demand, even if, acknowledging our humility, we know we may need to adapt and reassess in the future.
I appreciate the time and trust you have given me, and thank you for your engagement.
Source: CFTC
