Senate Ag Hearing on Pending CFTC Nominations
Senate Committee on Agriculture, Nutrition & Forestry
“Hearing to Consider Pending CFTC Nominations”
Thursday, September 15, 2016
Key Topics & Takeaways
- Position Limits: Quintenz acknowledged the four proposed rules and thousands of comment letters the Commodity Futures Trading Commission (CFTC) received on position limits, and noted that the time it is taking to finalize the rules “may not be a result of effort.”
- De Minimis Threshold: Brummer noted Massad’s announcement of a year-long delay on the de minimis threshold to obtain more data and ensure capital rules are right. Quintenz added that “if we get that wrong,” providers of those swaps will be driven out of the market.
- Implementation Delays: Brummer stated that international coordination is “deceptively hard,” and that it is “hard to lead if you don’t lead by example.” He continued that while there have been delays regarding financial reform, by the U.S. standing firm on our implementation dates, other countries have accelerated their own reforms. Quintenz agreed with Brummer, adding that “someone has to go first” and questioned when other countries may move.
- Cybersecurity: Brummer noted the importance of cybersecurity to the markets, noting that it is “critical” that the CFTC remains ahead of the technology curve. He added that while best practices “are a start,” it is important for Commissioners and staff to go “out in the field” to ensure they have the resources to predict cybersecurity trends.
- Cross Border Harmonization: Quintenz explained that the comparability determination for Japan is important and that the U.S. must be open to understanding other jurisdictions if their goals are similar to those of the U.S. He continued that it is “crucial” to understand how U.S. rules are giving an advantage or disadvantage to our own markets. Brummer added that while harmonization is important, rules will never be “100 percent” the same across jurisdictions, and stressed the importance for regulators to be on the same page to ensure a level playing field.
Nominees
- Christopher James Brummer, of the District of Columbia, to be a Commissioner of the CFTC
- Brian D. Quintenz, of the District of Columbia, to be a Commissioner of the CFTC
Opening Statements
In his opening statement, Chairman Pat Roberts (R-Kan.) reiterated the CFTC’s task of protecting market users and consumers from fraud related to derivatives, and how it is “essential” that the agency have Commissioners that take the mission statement to heart. He continued that while farmers and commercial end users did not create the financial crisis, “they’re paying the price” and that the Dodd-Frank Act should not negatively impact those who had “nothing to do with” the crisis. Roberts stressed that the CFTC should look through a “lens of regulatory practicality” and noted his pleasure with CFTC Chairman Timothy Massad’s recommendation to delay the automatic drop of the swap dealer de minimis levels by one year, so the CFTC has more time to research the issue.
In her opening statement, Ranking Member Debbie Stabenow (D-Mich.) stated that the CFTC is the “front line” regulator of all derivatives, and that while the swaps market was “once in the shadows,” due to reform, “a light is shining” on the swaps market. She went on to state that the CFTC needs to continue building on their momentum to ensure the derivatives market remains strong, transparent, free from manipulation and fraud and accessible to end users. Stabenow expressed concerns over the new risks posed by automated trading and cybersecurity threats that could “domino” across the globe, and stressed the importance of regulatory harmonization across borders.
Testimony
Christopher James Brummer
Brummer opened his testimony with an overview of his personal background, noting that he comes from a family of teachers and farmers and grew up in rural America. He continued that he has advised regulators in the U.S. and Asia regarding cross border issues and how to keep financial markets safe and secure, with a focus on cross border oversight of derivatives markets. Brummer explained that close and “smart” coordination abroad creates a “level playing field” and prevents arbitrage. Regarding the CFTC, Brummer explained that the Commission should not be “afraid” of new technology to promote efficient markets, as end users and taxpayers “must be protected.” He concluded that the CFTC’s mission is about fulfilling Dodd-Frank rulemakings, looking forward at trends and risks in the derivatives markets, and that if confirmed, he will listen and keep an open door to those who rely on such markets.
Brian D. Quintenz
In his testimony, Quintenz described his Midwest childhood in a family of entrepreneurs and small business owners, and that he currently owns a commodity pool operator registered with the CFTC – explaining he is familiar with investor protection rules. He continued to note that in his business, he has depended on the accuracy and accessibility of public information, and that he is a “firm believer” in data and transparency. Quintenz added that while the CFTC’s focus on data and transparency is “encouraging …more progress is needed,” and committed himself to advance that work if confirmed. He stressed that while the financial crisis showed a “deep flaw” in the derivatives markets, regulations should not “spill over” and harm the operability of normal businesses.
Question & Answer
Dodd-Frank Rulemakings
Roberts asked the nominees if the CFTC has done an adequate job of balancing the rules and requirements set forth in the Dodd-Frank Act. Quintenz replied that it is “crucial” the CFTC does a thorough job in understanding, estimating, and disclosing the cost of rule writing, as he fears costs are applied broadly and the CFTC will enter the dangerous area of regulating generic activity. Brummer added that the CFTC is required to consider costs, adding that it is “critical” that their work is data driven.
De Minimis Level and Position Limits
Roberts asked the nominees about the rules and regulations the CFTC is considering that could negatively impact end users, such as the de minimis level and position limits. Quintenz stressed the importance of position limits and that the proposal contains limitations that would be subject to Commission approval. Regarding the de minimis threshold, he stated that “if we get that wrong,” providers of those swaps will be driven out of the market. Brummer noted Massad’s announcement of a year-long delay on the de minimis threshold to obtain more data and ensure capital rules are right.
Sen. Joe Donnelly (D-Ind.) argued that position limits should be a tool in the CFTC’s toolbox to promote transparent, open markets, and asked the nominees if they will work to help to finalize a “strong” position limits rule in timely manner. Brummer replied – “absolutely,” adding that it is one of the tools the CFTC has “historically relied on” and will continue to rely on. Quintenz noted the four proposed rules and thousands of comment letters the CFTC received on position limits, and noted that the problems in finalizing the rules “may not be a result of effort.”
Sen. Amy Klobuchar (D-Minn.) asked the nominees about the differences when it comes to financial regulations for agricultural end users. Brummer replied that while the origin of derivatives is in the agriculture sector, farmers and ranchers did not cause the financial crisis. He continued that it is not only important to understand the differences in market participants but also the types of contracts. Quintenz noted his concern over ensuring the position limits rule allows for “longstanding, tried and true” hedging practices in the energy markets.
Klobuchar then asked what steps the CFTC should take to reduce the risk of market manipulation from large market participants that use one market to influence the pricing for similar contracts to another market. Quintenz replied that there needs to be a focus on all aspects that could “artificially impact” the price in any market, and that position size has been recognized as being able to impact prices and create large price moves.
Cybersecurity
Stabenow noted the amendments to system safeguard rules that were adopted last week, and asked the nominees if they believe a best practices approach is enough to address the cyber threats to financial markets. Quintenz stressed that there is “no more important issue” to regulators and the marketplace than cybersecurity, and how the CFTC has taken it “very seriously.” He opined that the Commission needs to allow for innovation in the cyber space. Brummer echoed the importance of cybersecurity to the markets and that it is “critical” the CFTC remains ahead of the technology curve. He added that while best practices “are a start,” it is important for Commissioners and staff to go “out in the field” to ensure they have the resources to predict cybersecurity trends.
Sen. Sherrod Brown (D-Ohio) asked the nominees if the CFTC’s funding has kept up with the pace of cyber threats. Brummer replied that while the CFTC’s funding has expanded “dramatically,” so have cyber threats. He noted his “serious concerns” about whether the funding is sufficient to promote regulatory certainty and protect the economy from cybersecurity attacks. Quintenz noted that the Commission has focused on best practices for the industry, but explained that private companies are able to spend hundreds of millions of dollars on their own cybersecurity.
Cross Border Harmonization
Stabenow noted the recent decision by international regulators to delay the September 1 implementation of margin requirements for uncleared swaps, and asked the nominees for their opinion on the challenges individual regulators face when it comes to global harmonization. Brummer stated that international coordination is “deceptively hard,” and that it is “hard to lead if you don’t lead by example.” He continued that while there have been delays regarding financial reform, by the U.S. standing firm on our implementation date, other countries have accelerated their own reforms. Quintenz agreed with Brummer, adding that “someone has to go first” and questioned when other countries may move.
Sen. John Boozeman (R-Ark.) asked the nominees how they would approach decisions such as the CFTC’s comparability determination for Japan, and how they would ensure U.S. firms are able to compete with their international counterparts. Quintenz explained that the comparability determination for Japan is important and that the U.S. must be open to understanding other jurisdictions if their goals are similar to those of the U.S. He continued that it is “crucial” to understand how U.S. rules are giving an advantage or disadvantage to our own markets. Brummer added that while harmonization is important, rules will never be “100 percent” the same across jurisdictions, and stressed the importance for regulators to be on the same page to ensure a level playing field.
Brown asked the nominees if there are unintended consequences of the CFTC repeatedly delaying the implementation of rules or those of another country. Brummer noted the importance of leading by example while also understanding that other countries work differently.
Sen. Thom Tillis (R-N.C.) asked why is it wise for the U.S. to move forward with implementing margin requirements for uncleared swap when top global competitors have delayed their implementation dates. Brummer explained that he “wouldn’t want to reward bad behavior,” and that if the U.S. wants to promote rules, we have to lead by example.
Tillis commented that it seems like the U.S. is being penalized for “good behavior.” Quintenz replied that he “couldn’t agree more,” and continued that when it comes to moving first or delaying rules, regulators must be aware of how it will impact the market and disadvantage the economy.
Sen. Kirsten Gillibrand (D-N.Y.) asked what some of the additional risks are from uncleared swaps. Brummer replied that clearing is an “essential” aspect of CFTC rulemaking, as it allows for a better opportunity to standardize and assess risk. He continued that when it comes to cross border harmonization, it is important to consider that other parts of the world are behind and may not have incentives to opt into global reforms. Brummer noted that while it is important to get the rest of the world on board, “they’re coming along” and an “enormous amount of progress has been made.” Quintenz added that uncleared swaps can provide very essential risk mitigating features for companies, but that it is “crucial” to ensure large exposures do not harm our markets.
Clearing Houses
Stabenow asked the nominees what actions they believe the CFTC should take to ensure registered clearing houses manage risk appropriately. Brummer stressed that clearing reforms are “very important” and that the CFTC has to ensure clearing houses operate well, function properly, and that clearing house members are fulfilling their obligations to the clearing house. He continued that there needs to be inspections of clearing houses to ensure they are adequately capitalized and so U.S. taxpayers are not “on the hook ever again” for the shortcoming of the financial markets. Quintenz added that it is “crucial” clearing houses are keeping their obligations, and that they are able to protect themselves against their largest members failing.
Advisory Committee Reports
Brown asked the nominees about transparency when it comes to CFTC advisory committee reports, as they can be one-sided. Quintenz stressed that it is “crucial” for advisory committees to be open and transparent, and that he would encourage a robust conversation from both sides on any advisory committee. Brummer agreed, adding that it is important to have people from different vantage points when it comes to decision making, as it is the “only way to get decisions right.”
Reg AT
Tillis questioned the rule to remove the subpoena requirement in regulation automated trading (Reg AT) and asked the nominees for their thoughts on the issue. Quintenz noted that the programs firms develop do not only represent historic trading files, but also future and current business strategy, and that it is “inconvenient” to maintain the subpoena process so firms can be compelled to disclose intellectual property. Brummer acknowledged the surveillance concerns but added that the CFTC has to ensure they have the tools they need, and that if confirmed, he will assure confidentiality of any information collected.
SEFs
Gillibrand asked if there are any other inconsistencies the U.S. should address, and Quintenz replied that the CFTC needs to continue working on swap execution facility (SEF) rules, as there is evidence it is “fracturing” an important market and shrinking liquidity.
For more information on this hearing, please click here.
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Senate Committee on Agriculture, Nutrition & Forestry
“Hearing to Consider Pending CFTC Nominations”
Thursday, September 15, 2016
Key Topics & Takeaways
- Position Limits: Quintenz acknowledged the four proposed rules and thousands of comment letters the Commodity Futures Trading Commission (CFTC) received on position limits, and noted that the time it is taking to finalize the rules “may not be a result of effort.”
- De Minimis Threshold: Brummer noted Massad’s announcement of a year-long delay on the de minimis threshold to obtain more data and ensure capital rules are right. Quintenz added that “if we get that wrong,” providers of those swaps will be driven out of the market.
- Implementation Delays: Brummer stated that international coordination is “deceptively hard,” and that it is “hard to lead if you don’t lead by example.” He continued that while there have been delays regarding financial reform, by the U.S. standing firm on our implementation dates, other countries have accelerated their own reforms. Quintenz agreed with Brummer, adding that “someone has to go first” and questioned when other countries may move.
- Cybersecurity: Brummer noted the importance of cybersecurity to the markets, noting that it is “critical” that the CFTC remains ahead of the technology curve. He added that while best practices “are a start,” it is important for Commissioners and staff to go “out in the field” to ensure they have the resources to predict cybersecurity trends.
- Cross Border Harmonization: Quintenz explained that the comparability determination for Japan is important and that the U.S. must be open to understanding other jurisdictions if their goals are similar to those of the U.S. He continued that it is “crucial” to understand how U.S. rules are giving an advantage or disadvantage to our own markets. Brummer added that while harmonization is important, rules will never be “100 percent” the same across jurisdictions, and stressed the importance for regulators to be on the same page to ensure a level playing field.
Nominees
- Christopher James Brummer, of the District of Columbia, to be a Commissioner of the CFTC
- Brian D. Quintenz, of the District of Columbia, to be a Commissioner of the CFTC
Opening Statements
In his opening statement, Chairman Pat Roberts (R-Kan.) reiterated the CFTC’s task of protecting market users and consumers from fraud related to derivatives, and how it is “essential” that the agency have Commissioners that take the mission statement to heart. He continued that while farmers and commercial end users did not create the financial crisis, “they’re paying the price” and that the Dodd-Frank Act should not negatively impact those who had “nothing to do with” the crisis. Roberts stressed that the CFTC should look through a “lens of regulatory practicality” and noted his pleasure with CFTC Chairman Timothy Massad’s recommendation to delay the automatic drop of the swap dealer de minimis levels by one year, so the CFTC has more time to research the issue.
In her opening statement, Ranking Member Debbie Stabenow (D-Mich.) stated that the CFTC is the “front line” regulator of all derivatives, and that while the swaps market was “once in the shadows,” due to reform, “a light is shining” on the swaps market. She went on to state that the CFTC needs to continue building on their momentum to ensure the derivatives market remains strong, transparent, free from manipulation and fraud and accessible to end users. Stabenow expressed concerns over the new risks posed by automated trading and cybersecurity threats that could “domino” across the globe, and stressed the importance of regulatory harmonization across borders.
Testimony
Christopher James Brummer
Brummer opened his testimony with an overview of his personal background, noting that he comes from a family of teachers and farmers and grew up in rural America. He continued that he has advised regulators in the U.S. and Asia regarding cross border issues and how to keep financial markets safe and secure, with a focus on cross border oversight of derivatives markets. Brummer explained that close and “smart” coordination abroad creates a “level playing field” and prevents arbitrage. Regarding the CFTC, Brummer explained that the Commission should not be “afraid” of new technology to promote efficient markets, as end users and taxpayers “must be protected.” He concluded that the CFTC’s mission is about fulfilling Dodd-Frank rulemakings, looking forward at trends and risks in the derivatives markets, and that if confirmed, he will listen and keep an open door to those who rely on such markets.
Brian D. Quintenz
In his testimony, Quintenz described his Midwest childhood in a family of entrepreneurs and small business owners, and that he currently owns a commodity pool operator registered with the CFTC – explaining he is familiar with investor protection rules. He continued to note that in his business, he has depended on the accuracy and accessibility of public information, and that he is a “firm believer” in data and transparency. Quintenz added that while the CFTC’s focus on data and transparency is “encouraging …more progress is needed,” and committed himself to advance that work if confirmed. He stressed that while the financial crisis showed a “deep flaw” in the derivatives markets, regulations should not “spill over” and harm the operability of normal businesses.
Question & Answer
Dodd-Frank Rulemakings
Roberts asked the nominees if the CFTC has done an adequate job of balancing the rules and requirements set forth in the Dodd-Frank Act. Quintenz replied that it is “crucial” the CFTC does a thorough job in understanding, estimating, and disclosing the cost of rule writing, as he fears costs are applied broadly and the CFTC will enter the dangerous area of regulating generic activity. Brummer added that the CFTC is required to consider costs, adding that it is “critical” that their work is data driven.
De Minimis Level and Position Limits
Roberts asked the nominees about the rules and regulations the CFTC is considering that could negatively impact end users, such as the de minimis level and position limits. Quintenz stressed the importance of position limits and that the proposal contains limitations that would be subject to Commission approval. Regarding the de minimis threshold, he stated that “if we get that wrong,” providers of those swaps will be driven out of the market. Brummer noted Massad’s announcement of a year-long delay on the de minimis threshold to obtain more data and ensure capital rules are right.
Sen. Joe Donnelly (D-Ind.) argued that position limits should be a tool in the CFTC’s toolbox to promote transparent, open markets, and asked the nominees if they will work to help to finalize a “strong” position limits rule in timely manner. Brummer replied – “absolutely,” adding that it is one of the tools the CFTC has “historically relied on” and will continue to rely on. Quintenz noted the four proposed rules and thousands of comment letters the CFTC received on position limits, and noted that the problems in finalizing the rules “may not be a result of effort.”
Sen. Amy Klobuchar (D-Minn.) asked the nominees about the differences when it comes to financial regulations for agricultural end users. Brummer replied that while the origin of derivatives is in the agriculture sector, farmers and ranchers did not cause the financial crisis. He continued that it is not only important to understand the differences in market participants but also the types of contracts. Quintenz noted his concern over ensuring the position limits rule allows for “longstanding, tried and true” hedging practices in the energy markets.
Klobuchar then asked what steps the CFTC should take to reduce the risk of market manipulation from large market participants that use one market to influence the pricing for similar contracts to another market. Quintenz replied that there needs to be a focus on all aspects that could “artificially impact” the price in any market, and that position size has been recognized as being able to impact prices and create large price moves.
Cybersecurity
Stabenow noted the amendments to system safeguard rules that were adopted last week, and asked the nominees if they believe a best practices approach is enough to address the cyber threats to financial markets. Quintenz stressed that there is “no more important issue” to regulators and the marketplace than cybersecurity, and how the CFTC has taken it “very seriously.” He opined that the Commission needs to allow for innovation in the cyber space. Brummer echoed the importance of cybersecurity to the markets and that it is “critical” the CFTC remains ahead of the technology curve. He added that while best practices “are a start,” it is important for Commissioners and staff to go “out in the field” to ensure they have the resources to predict cybersecurity trends.
Sen. Sherrod Brown (D-Ohio) asked the nominees if the CFTC’s funding has kept up with the pace of cyber threats. Brummer replied that while the CFTC’s funding has expanded “dramatically,” so have cyber threats. He noted his “serious concerns” about whether the funding is sufficient to promote regulatory certainty and protect the economy from cybersecurity attacks. Quintenz noted that the Commission has focused on best practices for the industry, but explained that private companies are able to spend hundreds of millions of dollars on their own cybersecurity.
Cross Border Harmonization
Stabenow noted the recent decision by international regulators to delay the September 1 implementation of margin requirements for uncleared swaps, and asked the nominees for their opinion on the challenges individual regulators face when it comes to global harmonization. Brummer stated that international coordination is “deceptively hard,” and that it is “hard to lead if you don’t lead by example.” He continued that while there have been delays regarding financial reform, by the U.S. standing firm on our implementation date, other countries have accelerated their own reforms. Quintenz agreed with Brummer, adding that “someone has to go first” and questioned when other countries may move.
Sen. John Boozeman (R-Ark.) asked the nominees how they would approach decisions such as the CFTC’s comparability determination for Japan, and how they would ensure U.S. firms are able to compete with their international counterparts. Quintenz explained that the comparability determination for Japan is important and that the U.S. must be open to understanding other jurisdictions if their goals are similar to those of the U.S. He continued that it is “crucial” to understand how U.S. rules are giving an advantage or disadvantage to our own markets. Brummer added that while harmonization is important, rules will never be “100 percent” the same across jurisdictions, and stressed the importance for regulators to be on the same page to ensure a level playing field.
Brown asked the nominees if there are unintended consequences of the CFTC repeatedly delaying the implementation of rules or those of another country. Brummer noted the importance of leading by example while also understanding that other countries work differently.
Sen. Thom Tillis (R-N.C.) asked why is it wise for the U.S. to move forward with implementing margin requirements for uncleared swap when top global competitors have delayed their implementation dates. Brummer explained that he “wouldn’t want to reward bad behavior,” and that if the U.S. wants to promote rules, we have to lead by example.
Tillis commented that it seems like the U.S. is being penalized for “good behavior.” Quintenz replied that he “couldn’t agree more,” and continued that when it comes to moving first or delaying rules, regulators must be aware of how it will impact the market and disadvantage the economy.
Sen. Kirsten Gillibrand (D-N.Y.) asked what some of the additional risks are from uncleared swaps. Brummer replied that clearing is an “essential” aspect of CFTC rulemaking, as it allows for a better opportunity to standardize and assess risk. He continued that when it comes to cross border harmonization, it is important to consider that other parts of the world are behind and may not have incentives to opt into global reforms. Brummer noted that while it is important to get the rest of the world on board, “they’re coming along” and an “enormous amount of progress has been made.” Quintenz added that uncleared swaps can provide very essential risk mitigating features for companies, but that it is “crucial” to ensure large exposures do not harm our markets.
Clearing Houses
Stabenow asked the nominees what actions they believe the CFTC should take to ensure registered clearing houses manage risk appropriately. Brummer stressed that clearing reforms are “very important” and that the CFTC has to ensure clearing houses operate well, function properly, and that clearing house members are fulfilling their obligations to the clearing house. He continued that there needs to be inspections of clearing houses to ensure they are adequately capitalized and so U.S. taxpayers are not “on the hook ever again” for the shortcoming of the financial markets. Quintenz added that it is “crucial” clearing houses are keeping their obligations, and that they are able to protect themselves against their largest members failing.
Advisory Committee Reports
Brown asked the nominees about transparency when it comes to CFTC advisory committee reports, as they can be one-sided. Quintenz stressed that it is “crucial” for advisory committees to be open and transparent, and that he would encourage a robust conversation from both sides on any advisory committee. Brummer agreed, adding that it is important to have people from different vantage points when it comes to decision making, as it is the “only way to get decisions right.”
Reg AT
Tillis questioned the rule to remove the subpoena requirement in regulation automated trading (Reg AT) and asked the nominees for their thoughts on the issue. Quintenz noted that the programs firms develop do not only represent historic trading files, but also future and current business strategy, and that it is “inconvenient” to maintain the subpoena process so firms can be compelled to disclose intellectual property. Brummer acknowledged the surveillance concerns but added that the CFTC has to ensure they have the tools they need, and that if confirmed, he will assure confidentiality of any information collected.
SEFs
Gillibrand asked if there are any other inconsistencies the U.S. should address, and Quintenz replied that the CFTC needs to continue working on swap execution facility (SEF) rules, as there is evidence it is “fracturing” an important market and shrinking liquidity.
For more information on this hearing, please click here.