Acting CFTC Chair Caroline Pham on Harmonization, Market Structure, and the Crypto Sprint

Kenneth E. Bentsen, Jr.: Chairman Pham, thank you for being with us today. Always great to have you. And I think this is maybe the third time I’ve seen you in a week. You were at our global board last week. I know you were meeting with our committees yesterday, so thank you very much for that. We’ll just get right into it. You’ve provided firsthand market experience to rulemaking, which I think is terribly important. You understand how the industry works, and that’s really, I think really helped inform you in how the agency can work. How are you thinking about it with all the things you’re doing? You’ve talked about previously some cleanup around Dodd-Frank. You’ve got various staff actions, rulemaking, et cetera. What are your current priorities?

Acting Chairman Caroline Pham: Well, thank you so much for having me here. It’s really just a pleasure. And I remember coming to attend the SIFMA Annual Meeting. So what an honor to be up here on the stage this year. It has been a exhilarating year. It’s been a lot of fun. There’s been so much that has happened. And one of the things that I was known for in my private sector career when I was at Citi was really strategy and transformation. I like to joke that I’m like the mailman, I always deliver. And so in January I set forth the key goals for my acting chairmanship. And so it was to really do three things that I saw were critical and that I had made many proposals about when I was a Commissioner, number one, help to fix the agency, help to revitalize and modernize the agency as the administration asked me to do.

Number two, to fix the enforcement program and number three, to fix Dodd-Frank. Just a small thing fixed Dodd-Frank. But just like you said, having implemented Dodd-Frank, having been the global head of swap dealer compliance and Volcker compliance and having worked on global regulatory reform enterprise wide, when you understand how the processes work, when you see how the rules leave a lot of room for interpretation, that kind of rolling up your sleeves and just jumping right into it absolutely has informed the approach that I’ve taken as a leader. And so I’m really pleased to say that in our first 100 days we have made significant process accomplished much of what I had originally set out to do. We have issued over two dozen staff letters, advisories and other guidance that helps to fix long-standing issues like FX product definitions or the cross-border treatment of swaps and US persons.

We have completely restructured the enforcement program. We’ve created materiality thresholds for non-compliance issues. I overheard somebody talking about the WhatsApp communication enforcement actions. I completely agree that those really went far beyond what was appropriate and I had a number of dissents in that space. And of course getting the agency ready, which we’ll talk about more later, but getting the agency ready to really take on its new and expanded mission. So the priorities in the near term are to continue working on some of the Dodd-Frank issues, particularly the Dodd-Frank cross-border issues. So there are continuing things that I think we can do around capital relief, margin relief, collateral treatment, and much of it also relates to cross-border harmonization. So there’s just still things where we can be much more efficient. I think I am not understating it when I estimate that I might be able to fix some of these long-standing issues that might provide over 25 billion of savings across the banking industry for all the major dealers.

That is all capital that can be redeployed on the balance sheet to support the economy, to support growth, much more productive uses. And so that’s something I’m very excited about working on and hopefully getting done before the end of the year. The other major priority that we have, of course is the SEC-CFDC, harmonization work-stream, which we will talk more about. And then crypto, crypto, crypto. I have been charged with making America the crypto capital of the world. And so we’ll also talk more about some of the specific milestones and plans that we have in that space as well.

And then just overall, this administration made promises they are delivering on their promises. Some of the key ones that I looked at were looking at bringing down the cost of living for everyday Americans that depend upon the physical commodities that are the inputs that are in our markets. Number two, to improve the flow of credit to US businesses and US households and three, to unleash US energy production. So overarching, those are also three key goals that the administration had charged me with back in January.

Bentsen: That’s great. That’s great. So you mentioned CFTC-SEC harmonization. Your colleague Chairman Atkins was just on stage this morning. What was it two weeks ago, three weeks ago, the CFTC and SEC, Chairman Atkins, and you convened a joint roundtable to talk about the history and the future with respect to harmonization of the two agencies. I had the pleasure of serving on the first panel that I think your predecessor, Christian Carlos said was the old timers panel. Thank you Chris for that. And perhaps it’s true, but you also, you bring a very unique experience as well because you grew up on the fixed income trading floor. You then go into overseeing regulatory affairs and compliance at a major firm that’s both many things, but also a broker dealer, FCM, DCM, et cetera. You now oversee the futures industry, the swaps area, most of it. So you bring a really interesting perspective. You’ve had to deal with both agencies as a practitioner and the regulatory framework. How do you see this unfold?

Pham: I’m very optimistic. It’s actually been such an honor and such a pleasure to be able to work together with Chairman Atkins because he’s one of my mentors. I’ve known him for about 15 years. So what an honor to kind of be able to work with one of your heroes. Seeing his record as an SEC commissioner, just the pragmatism really set a great standard for how we should approach our jobs when we are at these regulatory agencies, which have a tremendous impact on the markets and on the economy and on the world. So the other thing that is interesting is that I actually was an intern, not just at the CFTC, so I also feel like I’m an old-timer because I started at the CFTC in 2009 as an intern enforcement, but then I went and actually interned at the SEC in enforcement after that. And so having that inside perspective of actually how each building works and how to navigate it, there’s a very different culture between the CFTC and the SEC.

And I think that’s something that’s also very important for any harmonization effort really to be able to put yourself into the shoes of the staff at each respective agency and understand what their focus is on. And then also just process. There is a lot of process at the SEC and being able to understand that and how things get to the 10th floor is critical. And of course, having had enterprise-wide roles and overseeing all capital markets in all regions, particularly for regulatory strategy, really has informed a lot of how I think about the harmonization. So I’m very optimistic because you have the right tone from the top, right. You have strong leadership from Chairman Atkins and from myself where we know what is possible, but again, we have to ensure that there is the will to follow through on it. And I think we have that will.

And I also feel like there is a renewed sense of purpose and mission where we are getting back to basics, which is kind of the theme of my chairmanship that I set in January was we need to get back to basics and we need to get to regular order. Another thematic approach to how we think about the SEC and CPC harmonization, and this is what I said back during the roundtable, imagine if you could take a blank piece of paper and you could come up with a market structure that is the best for liquidity formation and for capital efficiency and never mind all these artificial constraints and sort of these turf wars and all of these other issues, but just what would that optimal market structure be for well-functioning deep in liquid markets? And then let’s see how far we can get there using each of our respective authorities and using our exemptive relief if necessary Innovation exemptions fits into that area.

And I think you’re going to see a level of product innovation that we probably have not seen in our market since the nineties, to be honest, because having that open-mindedness about wanting to go back and revisit different product types or how to ensure that we can have new products come to market that are successful or have new markets develop. I think that’s something that’s very exciting and it will again, lead to a general renaissance that will help to promote our US economic growth. What are some specific examples I’m talking about? So during that roundtable, Adena Friedman, CEO of NASDAQ talked about Bitcoin index options, Bitcoin index options in indexes as a commodity. So that would normally be required to trade only on a DCM, but why shouldn’t we think about letting that trade on a national securities exchange? Because then you can use it for hedging and risk management purposes. It’s much more efficient, you can net it out.

So being able to think about what’s really in the public interest and what’s really best for market functioning I think is something that’s going to be exciting. There’s other elements of the harmonization that is more technical and I’m happy to get into that, but it is really thinking about some of the swap and security-based swap delineation, right? If you’re nine or less components, you’re over on the security-based swap side. If you’re 10 plus, they’re over on the swap side. It’s challenging. I mean, it’s a bright line, but it’s still challenging. So if we can do something to rationalize and harmonize a lot of these technical requirements, I think that’s going to go a very long way.

Bentsen: So you mentioned, following up on that, you mentioned Dodd-Frank clean up and you’ve talked about margin capital rules and CFTC went really quick 15 years ago post passage to Dodd-Frank, SEC, a little more methodical, deliberative, but now those rules have started to converge. And so do you see some of that happening? Another area that we’ve talked about before, portfolio margining, which is now going to be very important when we’re thinking about treasury clearing, et cetera. Are these things you can see the commission, your commission moving forward and working in conjunction with the other commission?

Pham: Absolutely. Especially because I am the commission.

Bentsen: The commission of one.

Pham: Yes. So portfolio margining is absolutely a top priority and not just for the treasury market, which is the entire world runs on US treasuries. This is the most critical market for the financial system and just the most important market. So yes, absolutely that’s a high priority.

But more generally speaking, again, this goes to some of the structural limitations that I’ve been talking about that for decades, you’ve got this artificial delineation. And there’s important reasons, but you’ve got your FCM 4d account, you’ve got your broker dealer 15c3-3 account. Are there ways that we can try to improve, again, sort of the capital and margin efficiency across there? So I think portfolio margining is definitely probably number one on the list of things that we want to work on. Harmonizing.

There is a tremendous body of work that has been done by associations like SIFMA and other industry market participants on all of the pain points for swaps and security-based swaps. So we certainly have, I think a laundry list that we can work through. It’s certainly have our work cut out for us, but I think portfolio margining definitely at the top of the list. But besides the efficiency piece of it, again, I still want to emphasize we’re very much also focused on the product innovation piece as well.

Bentsen: So I want to shift to that and it’s still on point if you think about it, you talked about crypto and the work, and I want to get into that the CFTC is doing there, but I would note I think that, and Chairman Atkins is making a similar point as the agencies do their work, as Congress does its work, there’re going to be certain things just like in the swap space, there’re going to be certain things that are under the purview of the CFTC, certain things under the purview of the SEC and also some under the Prudential regulators. So again, like we went through in the swap series, there’s going to be a demand for coordination and collaboration. So the CFTC launched the crypto sprint, I think you coined it to facilitate the listing of spot crypto contracts on CFTC-registered futures exchanges. How’s that working? Where do you want that to go?

Pham: It’s going great. I’m very excited about it. So again, coming back to the mission that I was asked to deliver on the promises that I was to deliver on for the administration, obviously crypto, very top of the list, but I also had a lot of work doing product development, business development, regulatory strategy, exam strategy, et cetera in digital assets. I had been working on digital assets at the CFTC back in 2013 and then at Citi I started working on it in 2017. So needless to say, I came into being a commissioner with a very clear vision about what was necessary to enable tokenization in our markets, blockchain-based market infrastructure, and then also how do we treat crypto as a novel asset class. So for the roadmap, so the president’s working group report on digital asset markets was the administration’s crypto roadmap. It set forth a number of very specific recommendations.

And so for the CFTC’s portion of the recommendations, since I of course wrote them and submitted them to the working group with my team, we are going to get all of the CFTC-specific recommendations in the PWG report done by next August. So set forth like a 12-month implementation timeline for those. The first stage of that was the listed spot crypto on our registered futures exchanges. So for probably at least 10 years, the international regulatory community has had is its mantra that we must bring crypto inside the regulatory perimeter. What better way to bring it inside the regulatory perimeter than to put it on our highly regulated futures and securities exchanges, which have been proven for a hundred years plus to be the best for, again, liquidity formation for efficiency, for investor protection, for best execution, for transparency, this is the gold standard hour registered and regulated exchanges.

And so that’s exactly what we’re doing. I expect that we will be live with listed spot crypto trading on at least one of our designated contract markets, our futures exchanges by the end of the year. It’s a crypto sprint. I’m very serious about that. So we are moving quickly, but also the CFTC does have a principle-based regulatory framework, which does give us that flexibility to adapt and anticipate changes in market structure, evolving and emerging risks, so on and so forth. So listed spot crypto live trading on one of our futures exchanges by the end of the year. I also would, I’m planning on having something announced, issued some type of, I don’t know, maybe an advisory, maybe a guidance, maybe something else. But we will issue something on tokenized collateral by the end of the year, particularly as it relates to OTC markets. So that’s another one of the big initiatives that I announced.

I announced a effort to enable tokenized collateral in our markets, including stablecoins, and I announced that together with some of the largest industry participants in the space, both stablecoin issuers as well as regulated crypto trading platforms. So that’s very exciting. Those are by the end of the year in first or second quarter of next year, I expect that we will have some of our derivatives clearing organizations. DCOs are registered clearing houses enabling stablecoins as collateral again, first or second quarter of next year. And then the other piece that we have to the crypto sprint is I opened a consultation on about a half dozen or so rules that may need some technical amendments to enable tokenization and blockchain-based market infrastructure.

So margin, collateral, clearing, settlement, record-keeping, reporting. And so that consultation period closes later this year. It’s a little bit extended because of the government shutdown. And so I think the CFTC can do a rulemaking, one rulemaking next year, the first six months of next year to propose those technical amendments, get public comment, and then issue a final rule by August, which then we will have completed implementing all of the PWG recommendations for the CFTC. So that’s the crypto sprint.

Bentsen: One thing I was going to ask you about the collateral, but one thing that I neglected to mention at the outset, but I want to ask you about, so before you became acting Chairman as a commissioner, you chaired the Global Markets Advisory committee and our global partner GFMA had the opportunity to participate on both the full committee and some of the subcommittees. You did a lot of work on that committee leading up to this point, right? You did the taxonomy around digital assets. How much of that work of the GMAC has informed your ability mean, would it be fair to say you were already sprinting before you started the sprint that you had? I mean, is a lot of that GMAC work coming into fruition at this point?

Pham: Absolutely. So again, I was particularly known for strategy and transformation. I love a project plan. So yes, I put together a number of deliverables and milestones that I thought it would be great to achieve, and we have just methodically gone through and ticked those off. So I was immensely proud to relaunch the CFTC’s Global Markets Advisory Committee, which is about having a level playing field for global businesses and global markets. And I want to thank and AFMI as well as the other trade associations, many of your firms here in this room who have committed not only your most senior leaders, but your time and resources to supporting the work of the GMAC. So given my perspective being at a global international bank like Citi, everything that I worked on was very much about global markets, and a lot of it was dealing with market fragmentation and other issues like that.

So because of that experience that I had working so closely with the global markets business, but then also at one point in time, I oversaw all of Citi’s participation in all of the trade associations that Citi is a member of. So I sort of built my own Uber trade association, I suppose, like industry organization, and was really able to leverage. We had over across the GMAC in its three subcommittees, global market structure, digital asset markets and technical issues, over 125 members. It’s the largest single advisory committee initiative ever at the CFTC. And these are all sector leaders, segment leaders, the most preeminent firms in each of their spaces, the sell side, the buy side, the service providers, the FMIs. Also, we had digital or crypto natives, and we put out recommendations about 14 recommendations that span all the issues that are most impactful, most significant to global markets.

So in many ways, the scope of the GMAC mirrors the FSB agenda. My scope at Citi was very broad, and so when I came back to the CFTC, I basically wanted to blow my scope back out to what I liked doing and why not. But it was great because we were to tackle issues like treasury market reform, T plus one, security settlement, looking at issues around capital margin and clearing in wholesale markets and how to make that more efficient. We looked at systemic risk and using the data that we’ve been collecting since Dodd-Frank and how to enable that data so that regulators could, for example, try to spot buildups or issues like ARCHAIGOS in the data that we’re already collecting. A lot of that ties into the NBFI work that the international regulatory community is focused on and so on and so forth. Because if you think about it, look, we regulate derivatives markets.

That’s every asset class. There’s an underlying every asset class in derivatives markets. And so that’s why I looked at all of the asset classes. So all of that GMAC work has informed what we have done all year this year, right, because I mean, that was the whole point was to have the GMAC propose solutions that were pragmatic and that could be implemented. And now I’ve been implementing them. We have gone through and implemented all the GMAC recommendations that the CFTC would require action by the CFTC and is something that we could accomplish this year. I had gridlock. I was not able to move anything through the commission because there was no majority until September 4th after the departure of my colleague.

So you may have noticed that right on September 4th, many things were issued by the CFTC, and that’s because we were able to break through the gridlock. And then for the crypto asset space, yes, we had the tokenized non-cash collateral recommendation by the Digital Asset Market subcommittee last November. That in a large part, very much did focus on tokenized treasury money market funds. But the learnings there and the principles there are broadly applicable to include stable coins as well. And then the taxonomy work also informed what was in the president’s working group.

Bentsen: So maybe to bring us back home here as we finish up to the work you did at the GMAC, laid out your agenda, but you’ve also, since you have become acting chairman, you’ve also in effect restructured the agency and both how it operates, how it engages, similar to what you did with the GMAC, how it engages with its stakeholders. Maybe talk us through a little bit of that.

Pham: Yeah. So I think one of the things that I’m most proud of is the work that I’ve done to really revitalize the CFTC and to bring back the agency that I remember working at, starting back in 2009. And I was at the agency during Chairman Gensler’s tenure and then of course was in the private sector and then have come back now and the agency is very different now than it was when I left and also when I started originally. So it is a special agency. It is a place that is near and dear to my heart since my entire career started there. And this is my fourth time being back at the agency. I mean, it’s like a baby bird that left the nest and came back, right? So it’s so important to me. It’s such a huge part of my life and who I am today.

I had three years to observe, study, see where things that could have been improved. And also I had the benefit of looking at how the SEC had gone through its transformation and its restructuring after the financial crisis that was in the Dodd-Frank Act. And I also was at the SEC when some things like their enforcement division was getting restructured. So I came up with the transformation plan. There’s five pillars, governance, culture, talent, operations and excellence. And so we’ve done things like updated the performance plan for the first time in eight years, created KPIs that actually measure something. I’ve saved $50 million on an annualized basis, which is 12% of our $365 million budget with what we saved. I was able to provide performance bonuses for the first time ever in the CFTC’s history of 1000 to $10,000. And we gave those to 17% of our staff who had just demonstrated exceptional achievements.

So performance bonuses, these are things that work in the private sector and they will work in the public sector as well if we implement them and put them into place. Doing things like identifying like functions that have been scattered into different divisions and combining them into one place to eliminate redundancies. I mean, these are very common sense things. I don’t think anybody would look at anything that I’ve done and been like, oh no, that’s unusual. And just having that rigor when you’re a public company and you have to report your quarterly earnings and you have stocks audits, and you’re accountable to your shareholders, there’s a rigor there. And why should a public institution, like a government agency be any less accountable to their stakeholders than a public company? That’s fundamentally the viewpoint that I bring to it. So the next piece of what we’re doing and what I’ve been asked to do is to now build the agency back and to build it back to be able to take on its new mission expanded jurisdiction.

So we are working on hiring now, and I am looking at standing up now senior leadership and executive management team to now lead all of the new division. So I am looking for things, like I need a head of markets. I need a head of research. I need a head of market surveillance. I need a head of, somebody with a background, like a head of compliance examinations. We need to have people at the CFTC who are from the markets, because the CFTC’s mission is to ensure well-functioning markets, to ensure market integrity.

And when we think about the heightened macroeconomic and geopolitical risk, the environment that we are in, it’s never been more important that at the CFTC, given that we oversee the 700 trillion notional derivatives markets, we oversee the most systemically important clearing houses in the world, we need to be on top of our game. I implemented NASDAQ market surveillance, so we finally updated our 90s era legacy surveillance system. So industry leaders with 30 to 40 years of experience who would like to serve their country, who would like to have a hand in shaping this exciting moment that we have, an inflection point for markets, please come and find me. Please come talk to me. We need top talent at the CFTC, and it’s very rewarding. Thank you.

Bentsen: Chairman Pham, thank you so much for being with us today, and thank you for your service.

Pham: Thank you.

Bentsen: Thank you. Thank you.