Senate Ag Nomination Hearing for CFTC Nominee Heath Tarbert

Senate Committee on Agriculture, Nutrition & Forestry

Nomination Hearing

Wednesday, March 13, 2019

Key Topics & Takeaways

EU Clearinghouse Equivalence: Chairman Pat Roberts (R-Kan.) discussed how the EU is pushing to regulate the financial markets in the U.S. and asked what Congress can do to ensure the CFTC is the exclusive regulator for the derivatives markets. Tarbert replied that he is watching the issue closely, as is the Treasury Department. He explained that the Level 1 text will be finalized shortly, with the Level 2 text (regulations) is being worked on in the next few months. Tarbert stressed that clearinghouses and exchanges in the U.S. must be solely supervised and regulated by U.S. regulators, but added that there can be a collaborative relationship with foreign regulators.

Systemic Risk: Sen. Tina Smith (D-Minn.) discussed her concern about concentration in the swaps market and the dominance of larger financials, to which Tarbert replied that it is “critically important” that initial margin and variation margin are imposed on financial institutions so that there is not a domino effect if an institution falls. He continued that moving swaps through centralized clearing and swap execution facilities (SEFs), as well as trading on exchanges, will make the market more open and transparent, with greater liquidity. Tarbert also stated that it is important for the CFTC to supervise clearinghouses to ensure they have the capital, liquidity and risk management tools necessary, as well as resolution and recovery plans in place.

De Minimis Threshold: Sen. Sherrod Brown (D-Ohio) asked if Tarbert commits to maintaining the current $8 billion de minimis threshold and not consider changes that would weaken registration requirements. Tarbert replied that the CFTC made a unanimous decision to hold at the $8 billion level and that he will not reopen the issue if confirmed.

Regulation Automated Trading (Reg AT): Sen. Kirsten Gillibrand (D-N.Y.) discussed Reg AT and asked if Tarbert would reopen the rule if confirmed, and Tarbert replied that it is something he wants to “get back up and running,” adding that the CFTC needs to continue its analytical studies and ensure clearinghouses and exchanges have the risk management to deal with algorithmic trading.

Witness

Dr. Heath P. Tarbert, Nominee, to be Chairman and a Commissioner of the Commodity Futures Trading Commission (CFTC)

Opening Statements

Chairman Pat Roberts (R-Kan.)

In his opening statement, Roberts discussed how the CFTC oversees the derivatives markets, preventing systemic risk and protecting against fraud and manipulation. He noted that since the passage of the Dodd-Frank Act, end users such as farmers and ranchers have been the most burdened by regulations on derivatives. Roberts stated that current CFTC Chairman Chris Giancarlo has done a “great job” and that he has “no doubt” the nominee to replace him will continue the legacy.

Ranking Member Debbie Stabenow (D-Mich.)

In her opening statement, Stabenow echoed Roberts’ comments about the CFTC’s role in protecting the derivatives markets and stated she wants to know how the nominee will continue the CFTC’s progress in implementing the Dodd-Frank Act, to include establishing minimum capital requirements for swap dealers.

Testimony

Dr. Heath P. Tarbert, Nominee, to be Chairman and a Commissioner of the CFTC

In his testimony, Tarbert introduced his family, many of whom have been or currently are public servants. He noted that he has served in all branches of the federal government which has given him a “deep and broad” background into regulating financial services. Tarbert echoed comments by Roberts and Stabenow about the responsibilities of the CFTC, adding that he will take the time to travel the country and meet with stakeholders. He stressed the importance of implementing Title VII of Dodd-Frank, adding that the law has led to significant improvements in the financial markets. Tarbert also discussed financial technology, explaining the importance of finding the right balance between encouraging innovation and protecting the markets from harm.

Questions & Answer

EU Clearinghouse Equivalence

Roberts discussed how the EU is pushing to regulate the financial markets in the U.S. and asked what Congress can do to ensure the CFTC is the exclusive regulator for the derivatives markets. Tarbert replied that he is watching the issue closely, as is the Treasury Department. He explained that the Level 1 text will be finalized shortly, with the Level 2 text (regulations) is being worked on in the next few months. Tarbert stressed that clearinghouses and exchanges in the U.S. must be solely supervised and regulated by U.S. regulators, but added that there can be a collaborative relationship with foreign regulators.

Position Limits

When asked by Roberts and Stabenow about the position limits rule, Tarbert replied that the rule is finalized and that he will work to “get it done.”

Enforcement

Stabenow asked how the CFTC can further strengthen its enforcement program, to which Tarbert stated that he will invest resources into enforcement, with a priority on protecting markets and consumers, and that he will work with other regulators and the law enforcement community. She asked if the CFTC has the tools to enforce against individuals, and Tarbert said he would have to look into it.

Cybersecurity

Stabenow asked about cybersecurity threats, to which Tarbert replied that his concern is about the combination of systemic risk and cyber risk, adding the importance of the CFTC having access to necessary information to assess threats. Sen. Amy Klobuchar (D-Minn.) discussed legislation she co-sponsored that will allow private sector cyber employees to come to the government for two years and for government employees to do the same in the private sector to “better understand each other.” Tarbert replied that such legislation could help with cyber, noting that the UK has similar secondments that are helpful.

Systemic Risk

Sen. Tina Smith (D-Minn.) discussed her concern about concentration in the swaps market and the dominance of larger financials, to which Tarbert replied that it is “critically important” that initial margin and variation margin are imposed on financial institutions so that there is not a domino effect if an institution falls. He continued that moving swaps through centralized clearing and swap execution facilities (SEFs), as well as trading on exchanges, will make the market more open and transparent, with greater liquidity. Tarbert also stated that it is important for the CFTC to supervise clearinghouses to ensure they have the capital, liquidity and risk management tools necessary, as well as resolution and recovery plans in place.

When asked by Smith which agency should have resolution authority of a failing clearinghouse, Tarbert replied that it is a “complex question” but that under Dodd-Frank’s Title II, it would be the Federal Deposit Insurance Corporation (FDIC).

Sen. Deb Fischer (R-Neb.) asked about the biggest threats to liquidity, and Tarbert said contracts that are not converging, as they cannot be used to hedge and result in less liquidity.

Funding

Sens. Sherrod Brown (D-Ohio) and Kirsten Gillibrand (D-N.Y.) asked why the CFTC is not self-funded like other agencies. Tarbert replied that it is a decision that needs to be made by elected officials but that he can provide technical expertise to consider alternate funding mechanisms.

De Minimis Threshold

Brown asked if Tarbert commits to maintaining the current $8 billion de minimis threshold and not consider changes that would weaken registration requirements. Tarbert replied that the CFTC made a unanimous decision to hold at the $8 billion level and that he will not reopen the issue if confirmed.

Glass-Steagall

Sen. Kirsten Gillibrand (D-N.Y.) asked if the administration has discussed reinstating an updated version of Glass-Steagall with him or if he had looked at any changes the CFTC would have to make under a new Glass-Steagall, and Tarbert replied “no” to both.

Regulation Automated Trading (Reg AT)

Gillibrand discussed Reg AT and asked if Tarbert would reopen the rule if confirmed, and Tarbert replied that it is something he wants to “get back up and running,” adding that the CFTC needs to continue its analytical studies and ensure clearinghouses and exchanges have the risk management to deal with algorithmic trading.

Volcker Rule

Fischer discussed the Volcker Rule’s impact on community banks and legislation providing an exemption to small banks from the Volcker Rule, to which Tarbert replied that Volcker is “one of the most complex rules out there” and that while there are important reasons why large financial institutions are subject to the rule, it is not appropriate for smaller banks.

For more information on this hearing, click here.