By Lene Powell, J.D.
Rapid technological change and structural economic problems, including massive manufacturing job losses, are causing many Americans to feel they’re not getting a fair deal, said CFTC Commissioner Sharon Bowen in recent remarks at Northwestern University. Warning of a widespread loss of faith in societal institutions, Bowen discussed the impact of major disruptive trends on the markets and the broader economy. She urged regulators to be mindful of the human dimension of change and suggested actions the CFTC can take as a market regulator to restore confidence, including working to democratize markets for end users, bring more large cases to court, and strengthen governance at regulated entities.
Demographic changes. The demographics of the professions, the economy, and the country have changed from 50 years ago, or even 15 years ago, said Bowen, and that’s for the better. As a child in southern Virginia, she saw a cross burned on her neighbor’s front lawn. Several decades later, she became the first African-American commissioner of the CFTC.
But to fully realize the benefits of diversity, including improved decision-making outcomes, it’s important to increase diversity of all kinds, said Bowen. For the futures and swaps world in particular, it’s important to increase the involvement of farmers in the heartland. She noted that futures markets were originally created to give farmers a better way of receiving fair and efficient prices for their goods. Farmers were the heart of the economy for much of American history, but they are increasingly not being given enough consideration when it comes to economic development and market regulation, she said.
Economic upheaval. Although the economy has made great strides since the Great Recession of 2008–2009, including increased employment and a stronger financial system, the country still has economic problems, said Bowen. Real median household income was lower in 2015 than in 2000 or 2007, and manufacturing jobs have declined by nearly 30 percent in just the last 16 years.
In both the U.S. and abroad, market regulators including the CFTC need to consider the effect of rules on end users and ordinary investors and consumers, said Bowen. Regulators need to consider, in more than just a cursory or passing way, whether rules democratize markets and make them more fair and accessible to consumers and investors. Along those lines, Bowen continues to support proposed CFTC rules to set position limits to reduce excessive speculation, and hopes that the CFTC will complete the rulemaking “in the near future or a few years off.”
Technological disruption. From futures trading being carried out mostly by human traders up through the end of the twentieth century, the vast majority of trading is now done electronically, making up over 99 percent of CME Group trading volume, said Bowen. In addition, most trading now occurs via automatic algorithms.
Bowen observed that these changes have brought benefits including faster and more consistent order execution, but also the potential for disruption. In addition to the societal cost of lost middle-class jobs—a technological displacement mirrored throughout the economy—increased automation also brings increased cyber risk, including potential attacks by non-state actors or hostile foreign governments. The CFTC adopted final rules last year requiring futures and swaps market participants to have adequate cybersecurity safeguards. Given cybersecurity breaches, however, Bowen wonders if it’s already time to strengthen these safeguards. She is optimistic that CFTC rules on automated trading, for which the comment period was recently extended to May 1, can be finished this year.
What the CFTC can do. Along with these disruptive trends causing radical change in markets, the economy, and American society, Bowen sees a troubling fourth trend that makes responding to the others difficult. Americans have increasingly lost faith in institutions across the board, with less than half saying they had a “great deal” or “quite a bit of” confidence in 17 broad institutional categories, including government, the financial industry, large corporations, the media, public schools, or even religious leaders and organizations.
“Simply put, we have a crisis in our institutions, and that is a crisis for our markets, for our government, and for our society,” said Bowen.
This broad lack of faith will take a long time to fix, and there are no easy answers, she said. One aspect to tackle, however, is that when investors and consumers feel that there are two sets of standards, one for the well-connected and one for everyone else, that is a recipe for further destruction of faith in government. For the CFTC’s part, Bowen said the agency should be more aggressive in enforcing rules fairly, including being willing to take individuals and institutions to court rather than just settling. This is difficult due to limited agency resources, but it’s important to try to take more big cases to court, she said.
In addition to more aggressive enforcement, it’s important to focus on governance, said Bowen. She hopes that the CFTC will promulgate a rule soon, as it is obligated to do under Dodd-Frank, to improve governance at regulated entities. Along with that, she hopes that institutions consider ways they can improve their own internal governance, as this will help to rebuild faith.
“I am a believer that just about all of a company’s culture and record goes to the state of its governance,” said Bowen.