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Senate Agriculture Meeting on Oversight of the CFTC

Senate Committee on Agriculture, Nutrition, and Forestry

Oversight of the Commodity Futures Trading Commission

Wednesday, March 8, 2023

Topline

  • Senators on both sides of the aisle discussed concerns surrounding crypto and renewed calls for regulation.
  • Republicans pressed Behnam to refrain from adding climate change to the CFTC’s portfolio.

Witnesses

  • The Honorable Rostin Behnam, Chairman, Commodity Futures Trading Commission

Opening Statements

Chairwoman Debbie Stabenow (D-Mich.)

In her opening statement, Stabenow noted that agricultural producers trade futures to manage risk and provide greater certainty around how much they will earn from and pay for commodities. She added it’s the CFTC’s job to make sure these markets are working properly and are free from abuse. Stabenow said technology is changing the way financial markets operate and who uses them, noting futures exchanges are offering more products geared towards individuals, and many people hold commodity funds in their retirement plans. She added that while crypto assets promised everyday Americans an easy way to speculate in financial markets, they have been volatile and riddled with fraud.

Stabenow called for federal oversight of the crypto industry, noting she remains committed to holding crypto companies to the same rules as traditional financial firms. She noted the digital transformation of our financial system brings efficiencies, but also exposes vulnerabilities. Stabenow discussed the prominent threat cyberattacks present to financial stability and national security, calling for the CFTC to be vigilant in protecting derivatives markets from cyber threats.

Ranking Member John Boozman (R-Ark.)

In his opening statement, Boozman discussed how the CFTC is vital to agriculture stakeholders who have used derivatives markets for price discovery and risk management for over 150 years. He added the futures market has proven to be the gold standard in terms of resilience especially during times of market stress. This can be largely attributed  to the CFTC’s regulatory framework. Boozman said he is pleased Chairman Behnam recently committed to considering codifying certain no-action relief. He noted the CFTC deserves adequate funding, but clarified that funding must not come from user fees. Boozman concluded he’s confident the CFTC is ready for an expanded role in regulating the digital commodities market.

Testimony

Rostin Behnam, Chairman, Commodity Futures Trading Commission

In his testimony, Behnam said strengthening the CFTC’s ruleset is a major priority for 2023. He listed rulemaking themes, including enhancing risk management and resilience, fostering sound and responsive practices regarding cybersecurity and the use of third-party service providers, strengthening customer protections, promoting efficiency and innovation, and addressing duplicative regulatory requirements.

Behnam said the Agriculture Committee’s reauthorization efforts should consider the role the CFTC would play when it comes to third-party service providers and vendors of registered entities.

Question & Answer

Futures Markets

Stabenow asked Behnam how the CFTC defines a retail investor, and what the CFTC is doing to address their increased participation in the futures markets. Behnam said the CFTC characterizes retail investors by the characteristics of the individual and the trades they are making. He said these characteristics include the amount of money investors are posting for margin, what types of products they’re investing in, durations of trading periods, and whether they use a personal or customer account. Behnam added retail investors tend to lose money.

Sen. Amy Klobuchar (D-Minn.) asked about the distinct needs of farmers and users of futures products that deserve particular attention from the Agriculture Committee. Behnam emphasized the importance of ensuring products remain cost effective and efficient, adding futures markets must remain a risk management tool.

Carbon Markets

Stabenow asked what the CFTC learned from the public engagement process about actions the agency can take to address climate-related financial risk. Behnam said the process resulted in a fairly unanimous consensus that the CFTC should use its enforcement authority around cash voluntary carbon markets.

Sen. Roger Marshall (R-Kans.) asked if it’s prudent for the CFTC to be pushing a carbon market agenda, rather than focusing on its traditional responsibilities. Behnam said the CFTC is focused on traditional markets, reaffirming that it’s their number one priority.

Sen. Joni Ernst (R-Iowa) asked if there is a role for derivative markets infacilitatating carbon reduction, and about the risk associated for those individuals. Behnam said carbon markets are growing and emerging on the compliance and voluntary side. He added this presents a huge opportunity for landowners to create a new revenue stream by sequestering carbon. Behnam noted this effectively creates a market, which means there is a role for the CFTC to play.

Crypto

Marshall asked if Behnam thinks the CFTC has the resources and expertise to bring out of control crypto exchanges into compliance. Behnam said the CFTC has the expertise and the personnel, but not the resources.

Marshall asked how concerned Behnam currently is about the crypto industry, on a scale of 1-10. Behnam answered a seven and a half.

Sen. Tommy Tuberville (R-Ala.) asked Behnam which proposed bill provides the best clarity on regulations for crypto. Behnam said the three main bills each have beneficial components. He discussed the expansiveness of the Gillibrand-Lummis bill, and noted Senator Stabenow and Boozman’s bill is very narrowly tailored to the CFTC. Behnam added the House bill has some challenges.

Tuberville asked if the CFTC has the ability to block a Chinese company from buying a U.S. crypto exchange, or if legislation is needed to prevent that transaction from happening. Behnam said the CFTC alone does not have the authority to prevent an acquisition of that type.

Tuberville asked if Behnam saw similarities between crypto markets and foreign currency exchange markets. Behnam said he did not, noting foreign currency exchange markets are very well regulated.

Sen. Sherrod Brown (D-Ohio) asked if the CFTC had concerns about the adequacy of margin requirements or supervision of crypto market. Behnam called for regulators to be mindful of the intent, purpose, and utility of crypto derivatives, and ensure margin requirements are sufficient and eliminate risk to the fullest extent possible.

Klobuchar asked how the CFTC views the state of inner connectedness in the cryptocurrency market post FTX collapse. Behnam said the CFTC has seen valuations of the crypto market come down significantly after the FTX collapse but doesn’t view this as a permanent change.

Sen. Dick Durbin (D-Ill.) noted he’s been skeptical about “crypto mania” from the start. He called crypto a dangerous investment, and said the government needs to do its job in regulation.

Durbin asked if we are closer to getting to the bottom of what happened with FTX. Behnam noted there is open litigation, and said regulators are working as quickly as possible.

Durbin asked if Behnam thought the FTX collapse was an anomaly. Behnam called for comprehensive regulation, noting that these technology and trading markets won’t go away.

Sen. Kirsten Gillibrand asked Behnam to provide an assessment of her bill with Senator Lummis, asking how they could improve. Gillibrand highlighted that they will be releasing a new draft in April. Behnam said their bill thoughtfully considered all components of the market. He explained in light of FTX, it’s important to place a premium on the segregation of assets and customer conflicts of interest. He said he agreed with them that stablecoins should be regulated financial instruments.

Enforcement

Brown asked Behnam to discuss his goals for enforcement, and the areas that give him the most concern. Behnam said his goal is to ensure markets are reflective of supply and demand and are free from speculative activity. He noted crypto continues to be a priority, and that cyber issues continues to be a huge risk for the agency and financial markets in general.

Klobuchar asked Behnam to describe how the CFTC’s limited authority only allows them to pursue bad actors after the fact. Behnam said the CFTC needs comprehensive regulation and authority in the crypto space, noting they only have the authority to police fraud and manipulation, and are forced to rely on tipsters and complaints.

Sen. John Boozman (R-Ark.) asked why the CFTC’s principals-based regulatory framework is the gold standard in terms of market resiliency, and how has the agency shown an ability to protect market participants. Behnam highlighted the CFTC’s enforcement record, adding CFTC markets and clearing systems have withstood historic market volatility.

Boozman asked if the CFTC will consider a rulemaking or other regulatory solution that provides U.S. customers with greater access to non-U.S. swap markets. Behnam said the CFTC is always considering ways to increase access for U.S. customers. It’s important that bankruptcy protections are concerned. We also need reciprocity.

Climate

Marshall said farmers are concerned about the CFTC’s focus on the Administration’s climate agenda.

Marshall asked if Behnam intended to bar risk-management at the CFTC unless someone conforms to climate policies. Behnam said his focus is on ensuring the markets remain resilient as Americans face dramatic weather events. He promised the CFTC will not create any policy that will force an action.

Sen. Mike Braun (R-Ind.) expressed his concern over the SEC’s decision to shoehorn climate into its materiality standard for financial risk disclosure. He noted his plans to introduce the Protect Farmers from the SEC Act.

Braun asked Behnam to commit to waiting for clear authorization from Congress before adding climate change to the CFTC’s portfolio. Behnam said he would, noting everything the CFTC does will be within the bounds of the Commodity Exchange Act. He added the CFTC must be aggressive and forward-thinking to support the development of its markets.

For more information on this meeting, please click here.

For an archive of past SIFMA hearing coverage, please click here.