House Agrisulture Committee CEEC Hearing with CFTC Chairman Giancarlo

House Agriculture Subcommittee on Commodity Exchanges, Energy, and Credit

“The State of the CFTC”

Wednesday, May 1, 2019

Key Takeaways

• Brexit: Chairman Scott asked for Chairman Giancarlo’s thoughts on Brexit’s impact on the markets and market participants. Giancarlo replied that while he makes it clear that this is a decision for the UK and Europe, it will have a “tremendous” impact on the U.S. as two-thirds of liquidity in the markets is made up of U.S. banks. He added that the CFTC is “keenly focused” on the impact of Brexit on the markets.
• Clearinghouses: Chairman Scott and Rep. Mike Bost (R-Ill.) expressed concern about the EU’s European Markets Infrastructure Regulation (EMIR) 2.2, as it could potentially make the EU a primary regulator over U.S. clearinghouses. Giancarlo questioned how the European Securities and Markets Authority (ESMA) could have oversight over non-European clearinghouses when they are unqualified to regulate European clearinghouses. He stressed that ESMA has never regulated clearinghouses before but that the CFTC has done it for decades, vowing that “under [his] watch,” and hopefully his pending successor, “this will not happen” and the clearinghouses will remain under U.S. regulation.
• LIBOR: When asked about the plan for ensuring there is a smooth transition and stability for loans based on the London Inter-bank Offered Rate (LIBOR), Giancarlo replied that the International Swaps and Derivatives Association (ISDA) has been working on protocols that the markets will use regarding the transition, and that there is a timeline that has either been met on time or early. He added that the public-private partnership to move way from LIBOR is “working very well” and that he is optimistic the markets will get there.
• Harmonization: Rep. Neal Dunn (R-Fla.) asked about harmonization efforts between the CFTC and SEC, to which Giancarlo replied that for existing rules that have different approaches, the two agencies are working to bring them closer to each other, but that with new policy matters, such as the SEC’s work on capital and margin segregation rules, since the CFTC already has rules in place in these spaces they are working with the SEC to ensure the rules are close together.

Witness

• The Honorable J. Christopher Giancarlo, Chairman, Commodity Futures Trading Commission (CFTC)

Opening Remarks

Chairman David Scott (D-Ga.), Commodity Exchanges, Energy, and Credit Subcommittee

In his opening statement, Chairman Scott noted that after the financial crisis the Dodd-Frank Act expanded the Commodity Futures Trading Commission’s (CFTC) authority to regulate the swaps market and that Title VII added safety and soundness to the markets as a result of including market transparency and clearing requirements. The Chairman discussed some of the current challenges for the CFTC, including finalizing the implementation of Dodd-Frank, cross-border issues, and new technology such as automated trading (AT) and cryptocurrencies. He applauded CFTC Commissioner Rostin Behnam’s recent letter to the Director of the CFTC’s Office of Minority and Women Inclusion regarding diversity and inclusion in the CFTC workforce, with the Chairman stressing that “diversity is our strength.”

Ranking Member Austin Scott (R-Ga.), Commodity Exchanges, Energy, and Credit Subcommittee

In his opening statement, Ranking Member Scott discussed the bipartisan efforts over the last six years to reauthorize the CFTC and how they will be doing it again this year, adding that “maybe the fourth time will be the charm.” He discussed legislation he introduced last year, referred to as the CFTC Research and Development Modernization Act, that would modernize the CFTC’s research programs and give them new tools to learn about technology, as well as allow the Commission to participate in efforts made by the private sector.

Witness

The Honorable J. Christopher Giancarlo, Chairman, CFTC

In his testimony, Giancarlo explained his three-part agenda for his time as chairman of the CFTC: fostering economic growth, enhancing the derivatives markets, and right-sizing the regulatory footprint. He discussed the CFTC’s Project KISS that focused on making existing rules simpler and less costly, as well as the hiring of a chief economist to make the Commission a smarter, data-based regulator. Giancarlo noted the launching of LabCFTC to look into financial technology, as well as his work with other U.S. and international regulators, noting that he has championed cross-border regulations and prevented regulatory overreach. He explained that he intends to maintain a “steady but brisk course” while he remains chairman, to include continuing work on cross-border regulations and position limited, harmonizing regulations with the Securities and Exchange Commission (SEC), focus on initial margin implementation, the movement away from the London Inter-bank Offered Rate (LIBOR), and defending against market threats such as cyber and Brexit.

Q&A

Brexit

Chairman Scott stated that Brexit is presenting “troubling winds that need to be looked at,” noting that the derivatives and swaps market is valued at over $820 trillion of the world’s economy and asked for Giancarlo’s thoughts on Brexit’s impact on the markets and market participants. Giancarlo replied that while he makes it clear that this is a decision for the UK and Europe, it will have a “tremendous” impact on the U.S. as two-thirds of liquidity in the markets is made up of U.S. banks. He added that the CFTC is “keenly focused” on the impact of Brexit on the markets.

In response to a question from Rep. Dusty Johnson (R-S.D.) on Brexit’s end user impact, Giancarlo replied that it will “work its way into the real economy” and have an impact on things such as interest rates. He continued that he is “very concerned and focused on this,” and that he went to the Financial Stability Oversight Council (FSOC) to discuss the destabilization of London. Giancarlo also noted his concern about efforts by Brussels to expand their jurisdiction over institutions outside of the EU.

Clearinghouses

Chairman Scott and Rep. Mike Bost (R-Ill.) expressed concern about the EU’s European Markets Infrastructure Regulation (EMIR) 2.2, as it could potentially make the EU a primary regulator over U.S. clearinghouses, and that there may even be a surcharge for the EU regulating them. Giancarlo questioned how the European Securities and Markets Authority (ESMA) could have oversight over non-European clearinghouses when they are unqualified to regulate European clearinghouses. He stressed that ESMA has never regulated clearinghouses before but that the CFTC has done it for decades, vowing that “under [his] watch,” and hopefully his pending successor, “this will not happen” and the clearinghouses will remain under U.S. regulation. Giancarlo added that the 2016 agreement should have lasted “forever” and that he did not expect to be negotiating 18 months after it was signed, noting that if a jurisdiction has the same outcome as U.S. reforms, they should be deferred to for supervision in their markets and vice versa with the U.S.

CFTC Research and Development Modernization Act

Ranking Member Scott stated his hope to include the legislation in CFTC reauthorization this year and asked about the importance of having a plan for research and development activities. Giancarlo replied that the Commission must keep pace with technology and changes in the markets, noting that international regulators participate in technology advances but that the CFTC is prohibited from doing so because it is considered a gift to the agency. He continued that the legislation would allow them to participate in such innovations and would benefit the agency by continuing to keep markets safe and sound. Giancarlo gave the example of having the opportunity to participate in Blockchain experiments but that their general counsel advised them not to because it would be considered a gift, stressing that the Commission should be part of these innovations.

LabCFTC

Ranking Member Scott asked about LabCFTC, to which Giancarlo replied that it is a dedicated team that is familiar with technology innovations and provides a stakeholder within the Commission focused on such changes who can help everyone understand and adapt.

Cryptocurrency

Rep. Abigail Spanberger (D-Va.) asked where there are gaps in cryptocurrency regulation now, to which Giancarlo replied that if it is like a derivative, the CFTC has oversight and if it is like a security, the Securities and Exchange Commission  (SEC) has oversight, but that there is a gap for spot platforms. He added that while there is an ad hoc working group on cryptocurrency, the area could be further developed and more routine if the Commission received adequate funding by Congress.

Rep. Sean Patrick Maloney (D-N.Y.) stated that there is a lack of understanding when it comes to cryptocurrency and asked what other countries are doing. Giancarlo replied that France is encouraging coin offerings to take place under French law and that Germany is looking at similar laws, noting that this could develop offshore in a way that is “hard for the U.S. to control.” He continued that many parts of the globe do not have a functioning currency and so he could see this new payment system working for areas such as Southeast Asia.

LIBOR

Spanberger asked about the plan for ensuring there is a smooth transition and stability for loans based on LIBOR. Giancarlo replied that the International Swaps and Derivatives Association (ISDA) has been working on protocols that the markets will use regarding the transition, and that there is a timeline that has either been met on time or early. He added that the public-private partnership to move way from LIBOR is “working very well” and that he is optimistic the markets will get there.

Staff Guidance and Interpretations

In response to a question from Rep. David Rouzer (R-N.C.) on the reliance of staff interpretations and guidance, especially when it comes to swap execution facility (SEF) trading rules, Giancarlo noted that it is easy for larger institutions to “parse through” no-action relief or guidance to know what they can and cannot do, but that it is hard for new entrants and smaller participants who do not have the resources to understand the law. He stressed that it is “always better to have rules that are clear and easily understandable.” Giancarlo explained that the SEF regime is a “help up in a range of key areas by a series of no-action relief and staff guidance” but that the SEF proposal would put them into the “proper text of the rule and make it clear.”

Harmonization

Rep. Neal Dunn (R-Fla.) asked about harmonization efforts between the CFTC and SEC, to which Giancarlo replied that they have an ongoing harmonization process and multiple ad hoc working groups on this, one specifically that focuses on rule harmonization. He noted that for existing rules that have different approaches, the two agencies are working to bring them closer to each other, but that with new policy matters, such as the SEC’s work on capital and margin segregation rules, since the CFTC already has rules in place in these spaces they are working with the SEC to ensure the rules are close together.

Regulation Automated Trading (Reg AT)

Rep. Stacey Plaskett (D-U.S.V.I.) asked about automated trading, to which Giancarlo replied that former CFTC Chairman Timothy Massad’s Reg AT proposal required thousands of automated trading firms to register with the CFTC, but Giancarlo argued that the Commission does not have the resources to take on that many new firms. He continued that Massad’s proposal also gave the CFTC authority to take control of the source code behind mechanisms without a subpoena, which Giancarlo does not support. He noted that the CFTC’s Technology Advisory Committee has taken up the path forward and that he thinks Blockchain could be a “quantum leap forward” in how the Commission “digest[s]” information.

Standardized Approach to Counterparty Credit Risk (SA-CCR)

Johnson asked about SA-CCR and its impact on the supplemental leverage ratio (SLR), noting that the proposed rule would have a negative impact on low-volume traders, manufacturers and community banks. Giancarlo stated that the agencies “have to get it right.”

For more information on this hearing, click here.