Friday, December 01, 2017

Commissioner Quintenz focuses on the promise of transformative technologies at ISDA gathering in London

By Brad Rosen, J.D.

CFTC Commissioner Brian Quintenz shared an optimistic vision for the future, and the power of technology to transform the financial markets, in a keynote address before the ISDA Technology & Standards: Unlocking Value in Derivatives Markets conference in London, United Kingdom. Quintenz’s remarks, which were tempered by a measure of caution and skepticism, spanned a wide range of tech-related topics including block chain technology, LabCFTC, the British regulatory sandbox, and the challenge of international coordination in an increasingly complicated world.

Blockchain technology in the derivatives context. Quintenz observed that rapid and widespread acceptance and adoption of distributed ledger technology (DLT) in the financial setting promises to transform a range of business operations in the derivatives industry. This includes how firms handle trade execution, processing, and reporting and recordkeeping of derivatives.

Quintenz noted these innovations are already starting to take shape, and pointed to the example of the Depository Trust Clearing Corporation (DTCC) which recently announced that it is transferring records for more than $11 trillion of cleared and bilateral credit derivatives transactions to its own DLT platform.The platform will provide market participants with real-time access to a single recordkeeping system for their swap transactions. It is expected to go live in early 2018.

According to Quintenz, "the further actualization of DLT in the derivatives space will depend on the ability of market participants to digitize all aspects of their financial transactions. Once the terms of a swap can be reduced to a completely digital, industry-accepted standard, then automatic trade reporting, centralized recordkeeping, and, ultimately, smart contracts become possible." "ISDA’s common domain model, which aims to capture all post-execution trade lifecycle events in a digital format, is an indispensable step toward the fulfillment of blockchain’s full potential," he continued.

LabCFTC and the British regulatory sandbox. Quintenz discussed the CFTC’s LabCFTC initiative which was launched in May of this year as a pathway by which the CFTC can develop and foster dialogue with the FinTech community. He noted that LabCFTC plans to host a series of prize competitions in 2018, and that these competitions are meant to encourage the development of beneficial technologies within the private sector. Quintenz described the prize competitions, in conjunction with the CFTC’s ability to provide no-action relief when necessary, as two powerful tools at the agency disposal to promote innovation.

Quintenz also took the opportunity to laud the British for their approach to promoting FinTech through their regulatory sandbox initiatives. In particular, he pointed to the Financial Conduct Authority’s (FCA) "Project Innovate," which was established in 2014, and the Bank of England’s "FinTech Accelerator" launched last year. Quintenz noted that the FCA’s sandbox initiative, in its first year, reduced the time and cost of getting innovative ideas to market. Specifically, 75 percent of firms that participated in the sandbox successfully completed testing, and 90 percent of those firms are preparing for a wider market launch.

Bitcoin related instruments. Commissioner Quintenz stated that "[p]erhaps one of the most prominent ideas associated with FinTech are digital currencies, led by bitcoin." He described the new bitcoin futures products being proposed by the Chicago Mercantile Exchange Inc. (CME) and the CBOE Futures Exchange (CFE), and how these instruments will provide a new platform to gain or hedge exposure to bitcoin’s volatility. However, his comments on this score were neutral and agnostic. He noted "the Commission does not endorse any particular futures contract, including bitcoin."

Quintenz also described the market oversight roles to be played by both the exchanges and the commission. He noted, "exchanges have a duty to monitor market activity on an ongoing basis to detect and prevent manipulation, price distortions, and, where possible, disruptions in the cash-settlement process." Moreover, he added, "the Commission staff will engage in a variety of oversight activities. These activities include monitoring and analyzing open interest, initial margin, and variation payments, as well as stress testing positions. Commission staff also will conduct reviews of exchanges, clearing firms, and individual traders involved in the trading and clearing of bitcoin futures."

International coordination. Quintenz also highlighted the importance of the CFTC’s coordination with other international regulators, not just on novel FinTech issues, but more generally on the myriad of issues that impact global derivatives markets. He recognizes that progress has been made regarding comparability and equivalence determinations relative to trading venues, as well as harmonizing data standards for swaps trade reporting. However, Quintenz believes more work and discussions are necessary, especially around governance issues. Moreover, the supervision of cross-border CCPs is of paramount importance to both the EU and the CFTC, according to the commissioner.

In his final remarks, Quintenz concluded, "[w]ith the right outlook, we can help guide advancement…promote it...and capture it. The opportunities, as well as the challenges, ahead of us are immense. But, through gatherings like this, on-going dialogue, partnerships, and trust, we will find the wisdom, commitment, and vision to benefit innovators, consumers, and the markets with thoughtful and appropriate regulation."