Thursday, March 14, 2019

Giancarlo reflects on tenure and looks forward in final FIA Boca appearance as agency chief

By Brad Rosen, J.D.

In remarks at 44th Annual International Futures Industry Conference held in Boca Raton, CFTC Chairman J. Christopher Giancarlo reflected on his time at the Commission and covered a vast array of topics in a speech titled Improving the Past, Tackling the Present, and Advancing to a Digital Market Future. Giancarlo took the opportunity to recall becoming a commissioner five years ago, and then being nominated by President Trump as CFTC chairman two years ago. He observed “Knowing that my time as Chairman would be short, I wanted to be bold in action.” During the course of his speech, the chairman highlighted some of the bold actions he has initiated during his term as the agency’s leader, and also underscored his efforts to put the CFTC on the path to become a 21st Century digital regulator.

Improving on past work. Noting his long public support for the G-20 swaps market reforms as adopted in Title VII of the Dodd-Frank Act, the chairman pointed to those areas of regulatory implementation where he has been critical. These include:
  • Dealer capital. The adverse impact of new bank capital requirements, particularly the supplementary leverage ratio (“SLR”), which has caused financial institutions to take capital out of trading markets in amounts out of proportion with the capital level needed support overall market health and durability. The Commission has recently submitted comments to banking regulatory to implement a new approach for calculating the exposure amount of derivatives contracts under the agencies’ regulatory capital rules.
  • SEF rules. He sees the current swap trading framework as inconsistent with the Dodd-Frank Act by being too prescriptive, too burdensome, and too modeled on futures markets. Last November, amid controversy among commissioners the Commission issued a proposed rule on Amendments to Regulations on Swap Execution Facilities and the Trade Execution Requirement and request for comment. The chairman believes the impermanence of the current SEF rule framework poses risk for market participants.
  • Swap data harmonization. Giancarlo is frustrated with the progress made on swaps data harmonization, which is one of the last unfinished elements of the G-20 swaps reforms to be completed. He warned that if changes are not forthcoming in the governance of the implementation of these data standards, the CFTC will consider working with its key international counterparts to pursue a separate and more effective course to finally complete this swaps reform. 
Addressing the present. The chairman pointed to a number of current undertakings that are front row and center for the Commission. These include:
  • Project KISS. Project KISS is the agency-wide review of CFTC rules, regulations, and practices to make them simpler, less burdensome, and less costly. It has resulted in a range of rule and process improvements that are reducing regulatory costs and burdens. The chairman noted there are still more Project KISS initiatives in the pipeline.
  • Market Intelligence Branch. In 2017, the Market Intelligence Branch (MIB) was created as part of the CFTC’s Division of Market Oversight. Its charge is to understand, analyze, and communicate current and emerging derivatives market dynamics, developments, and trends – such as the impact of new technologies and trading methodologies. In Giancarlo’s view, MIB has been a resounding success as it keeps commission leadership and staff apprised of key market developments.
  • Running a tight ship. Upon assuming the chairmanship, Giancarlo, as a former business executive, pledged that he would run a tight ship at the CFTC. That meant bringing the best operational practices from the private sector to the CFTC. Giancarlo believes progress has been made on this front, noting that staff morale is good. Importantly, the chairman points to first funding increase the agency has received in half-a-dozen years, which he asserts was based solely on the merits of the agency budget request. With the funding increase, Giancarlo stated that the Commission can now turn to many important needs of the agency, including some longer-range goals that have had too little attention. 
Preparing for the future. Echoing familiar themes, Chairman Giancarlo advanced his vision of the future where the CFTC is transformed into a 21st Century regulator. In the midst of today’s increasingly digital and algorithmic markets, Giancarlo identified several factors that are challenging the work of regulators. These include the extraordinary pace of exponential technological change, the disintermediation of traditional actors and business models, and the need for technological literacy and big data capability.

Giancarlo observed that the CFTC’s response to rapidly changing markets and technological developments, is built upon the following four cornerstones:
  • Adopting an "exponential growth mindset" that anticipates the rapid pace of technological innovation and the need for appropriate regulatory response;
  • Becoming a "quantitative regulator" able to conduct independent market data analysis across different data sources, including decentralized blockchains and networks, without being reliant on self-regulatory organizations and market intermediaries;
  • Embracing "market-based solutions" to determine the value of technological innovations, as we witnessed with the launch of crypto-asset-based futures products; and
  • Establishing an internal FinTech Stakeholder to address the opportunities and challenges that FinTech presents and manage the ever-present tension between innovation and regulation. 
According to Giancarlo, for the CFTC that stakeholder is LabCFTC, which was launched almost two years ago. In that time, it has had over 250 separate interactions with innovators big and small. According to the chairman, the unit has effectively explained technology innovation to agency staff and other regulators and has effectively advocated for technology adoption. It has also reached out and learned about technological change and market evolution, while providing a dedicated liaison to innovators.

Conclusion. In closing, the Chairman Giancarlo stated, “With the proper balance of sound policy, regulatory oversight, private sector innovation and a little bit of courage, new technologies and global trading methodologies will lead our markets to evolve in responsible ways, and continue to grow the economy and create a future of untethered aspiration, a future where creativity and economic expression is a social good in its own right, a source of human growth and advancement.”