Friday, June 09, 2017

CFTC Acting Chairman Giancarlo looks to score an additional $31.5 million for 2018 budget

By Brad Rosen, J.D.

Acting Chairman J. Christopher Giancarlo made a cogent and compelling case in support of a $281.5 million budget request and 739 full-time equivalents (FTE) for the CFTC’s fiscal year 2018 operations in testimony before the House Appropriations Subcommittee on Agriculture, Rural Development and Related Agencies. This request, which was submitted in late May, was in contrast to the White House’s proposed FY 2018 budget which sought to keep spending at the FY 2017 level of $250 million and 703 FTE. Commissioner Sharon Bowen also supported the budget request but had reservations. Not surprisingly, Giancarlo received pushback from some of the subcommittee’s Republican members at the hearing.

Along with his prepared remarks, Giancarlo responded to his congressional questioners by demonstrating expertise, and a deep understanding of the complex issues at hand. In responding to a query from ranking member Rep. Sanford Bishop (D-Ga), the acting chairman clearly articulated that the request for $31.5 million in additional funding was not a formulaic or arbitrary number but rather the result of a thorough and informed assessment of what the CFTC requires to execute its mission. In particular, Giancarlo identified three areas where the additional resources would be the directed that included: (1) ramping up the Office of the Chief Economist; (2) growing the Commission’s examination capabilities in connection with the burgeoning swap markets arena; and (3) implementing Fin Tech initiatives.

In response to a question from Rep. Steven Palazzo (R-Miss) about allocating resources towards technology versus personnel, Giancarlo paraphrased hockey legend Wayne Gretzky, indicating that “the CFTC needs to skate to where the puck is going, not to where it is.” He added, “For too long the outlook at the Commission has been backward looking. Now it needs to forward looking,” and pointed to issues like high frequency trading, algorithmic trading, blockchain technology, and cybersecurity, all matters he noted were not even considered or addressed in the Dodd-Frank market reforms.

Attracting world class economists. In responding to Rep. Mark Pocan’s (D-Wis) questions about employee relations and attracting and retaining top personnel, Giancarlo stated that “the Office of the Chief Economist is severely under-resourced, and additional funding would enable the Commission to attract world class econometric thinkers.” “We are competing with Silicon Valley, and regulating a highly sophisticated and complex multi-trillion dollar market. We need very talented personnel,” he added.

Growing the Commission’s examination capabilities. The Commission is also requesting additional resources that would strengthen the Commission's examinations capability and enable it to keep pace with the explosive growth in the number and value of swaps cleared by designated clearing organizations (DCOs), pursuant to global regulatory reform implementation. Giancarlo indicated that there are currently 16 DCOs registered with the Commission, and that the notional value of the swap markets is estimated to be as high as $600 trillion. As the size and scope of DCOs has increased, so too has the complexity of the counterparty risk management oversight programs and liquidity risk management procedures of the DCOs under CFTC regulation here and abroad.

Fin Tech initiatives and keeping pace with advancing technology. “We must avoid being an analogue regulator, in a digital industry,” Giancarlo told the subcommittee. He pointed to a number of rapidly development innovations that present regulatory challenges including: (1) “big data” capabilities that enable sophisticated data analysis and interpretation; (2) artificial intelligence guiding highly dynamic trade execution; (3) “smart” contracts that value themselves and calculate payments in real-time; (4) behavioral biometrics that can detect and combat online fraud,; and (5) distributed ledger technology (more commonly known as blockchain), that may challenge the foundations to today’s financial market infrastructure.

Pushback. Subcommittee Vice Chairman David Valadao (R-Cal) expressed deep concerns whether any increase in funding would boost funding for Fin Tech initiatives rather than going to pay for increased salaries for Commission staff, who he claimed are able to bring a labor actions due to “loopholes” in labor law applicable to federal employment. He further contended that any increase in funding will simply encourage the status quo. Other Republican committee members expressed concerns with various aspects of the CFTC’s regulatory framework as a reason to avoid boosting the agency’s funding level.

Rep. Kevin Yoder (R-Kan) expressed concerns with applicable supplemental leverage ratio requirements which adversely impact farmers, ranchers, and small market participants. Similarly, Chairman Robert Aderholt took issue with proposals to lower threshold amounts in connection with the swap dealer de minimis rules.

Giancarlo was sympathetic to these concerns and underscored his commitment to take a fresh look at all of the Commission’s regulations to assure that they are sensible and being applied sensibly, and repeated a familiar sentiment of his: “The U.S. derivatives markets should be neither the most regulated nor the least regulated of the world—but the best regulated.” Whether the acting chairman will receive the additional funding to assist in scoring this goal remains to be seen. He may be on thin ice.