Friday, November 02, 2018

Commissioner Behnam proposes “test track” to vet FinTech innovations

By Lene Powell, J.D.

Looking to salvage a key feature of the CFTC’s stalled Regulation Automated Trading (AT) proposal, Commissioner Rostin Behnam urged stakeholders to develop a “stress test track” for FinTech providers to test their models for resiliency and stability before introducing them to the market. Likening the markets to street races and market participants to racers, Behnam called for regulators to create safety features to limit the impact of FinTech failures.

Behnam’s remarks, “FinTech, Friction, and Formula 1: A Learning Journey”, were presented at the Asia Securities Industry and Financial Markets Association (ASIFMA) Annual Conference in Singapore.

Stress “test track.” Behnam acknowledged the common critique that overly vigorous regulation can stifle innovation and risk picking winners or losers, particularly at early stages of FinTech development. But, he said, “we cannot engage so late that we leave our markets, infrastructures, and the public unprotected.” And, regulation can actually benefit innovators by providing “a little necessary friction,” lowering development costs by reducing the need for legal counsel to clarify legal status or defend in litigation resulting from innovation gone awry.

Drawing on metaphors of self-driving cars and glitchy racetracks, Behnam said that “humans are generally terrible overseers of highly automated systems.” But he contended that it is feasible to build safety features to mitigate FinTech accidents. One way would be for regulators, self-regulatory organizations, and private industry to develop a closed environment or “test track” for simulation, stress testing, and training new technologies. FinTech providers would use this environment to stress test their models to demonstrate market readiness. This idea comes from the Regulation AT proposal, which CFTC Chairman Giancarlo has announced will not advance in its current form due to disagreements over registration requirements and access by regulators to firms’ proprietary algorithmic source code.

The “test track” environment would include privacy protections for users’ techniques, practices, products, and processes, said Behnam. Stakeholders would be able to share feedback to enhance and continue the environment’s evolution and inform plans for standard setting and best practices.

Next steps. Behnam said he plans to give the idea more thought and socialize it within the Commission and stakeholders he has met on his FinTech “listening tour.” He noted that the CFTC recently signed a Cooperation Arrangement on Financial Technology Innovation with the Monetary Authority of Singapore (MAS), which has consistently shown thought leadership in the FinTech space. The CFTC’s LabCFTC will participate in the Singapore FinTech Festival 2018 in a few weeks.