CFTC’s Technology Advisory Committee covers the technological waterfront at recent meeting

By Brad Rosen, J.D.

The sixth meeting of the CFTC’s Technology Advisory Committee (TAC), held by teleconference, featured a content-packed agenda addressing a variety of issues that are top-of-mind for the Commission and U.S. derivatives market participants. Commissioner Brian Quintenz, who also serves as the TAC sponsor, led off the day’s event noting the topics to be explored. These included cybersecurity lessons learned from the Covid-19 pandemic, a discussion of the Commission’s recently proposed rule on electronic trading risk principles, an update on the resiliency and scalability of distributed ledger technology (DLT) systems and potential use-cases, and an overview of central bank digital currencies and their place in the derivatives regulatory landscape.

The TAC’s various subcommittees led each of the four engaging panel discussions. Highlights from the panels are noted below.

Panel I: Cybersecurity Subcommittee on preliminary cybersecurity lessons learned from Covid-19 pandemic. The COVID-19 pandemic and the ensuing social distancing efforts forced the transition of massive, complex businesses to 100 percent work-from-home environments. Still, firms faced daunting challenges associated with protecting their confidential and in some cases, highly proprietary, data from cyber theft. Nina Neer, director of Technology Operational Risk Management at Credit Suisse, and Jason Harrell, head of Business and Government Cybersecurity Partnerships at The Depository Trust & Clearing Corporation discussed these issues and provided actionable advice for addressing risks associated with a work-from-home setting. These included:

• increased external threat monitoring;
• heightened internal communication on cyber-phishing threats; and,
• providing staff with guidance on home working set ups, including firewall settings and disabling IoT; and providing a robust framework for approving exceptions and requiring strong controls for use of new platforms.

Panel II: Automated and Modern Trading Markets Subcommittee on an analysis of the CFTC’s proposed rules on electronic trading risk principles. Adam Nunes, head of Business Development at Hudson River Trading, led a discussion on the CFTC’s recently proposed rule on electronic trading risk principles and the "market disruption." The proposal is designed to prevent, detect, and mitigate. This topic drew particular interest from Chairman Heath Tarbert. He had noted that the proposal had been introduced in the wake of the Commission withdrawing Regulation AT, which controversially entailed registration and source code production requirements. Tarbert asserted the proposed regulation reaffirmed the CFTC’s commitment to addressing the risks posed by electronic trading while strengthening longstanding principles-based approach to overseeing exchanges. During discussion, the participants conceded there were difficult line-drawing challenges in determining exactly what constituted market disruption in context of the rule. Along these lines, Commissioner Dan Berkovitz questioned why the proposed rule made a distinction between "market disruption" and "significant market disruption."

Panel III: Distributed Ledger Technology and Market Infrastructure Subcommittee on resiliency and scalability of DLT systems. Marc Pryor, the CEO of The Seam, focused on the use of asset tokenization to track agricultural commodities and promote sustainable farming. He noted that sustainable practices used in the production of agricultural goods must be digitally linked with actual production. He remarked on recent advances in the use of DLT in connection with the cotton markets and the emergence of the "dirt to shirt" practices in which the provenance of a given raw material is a predominant factor. Pryor also pointed to the growing importance of carbon credit tokens and their role in sustainable farming. Typically, a token relates to the right of one ton of carbon dioxide removal. Farmers have the capability of removing carbon from the air and storing it in their soil. As companies like Microsoft have committed to becoming carbon neutral or negative in the next decade, the market for these tokens is promising for the agricultural sector.

Panel IV. Virtual Currencies Subcommittee on central bank digital currencies. Dr. Chris Brummer, Georgetown Law Professor and Faculty Director of the Institute of International Economic Law, discussed the design and evolution of central bank digital currency (CBDC) concepts. As the widespread adoption of CBDCs could have significant impact on the nature of financial intermediation in the derivatives markets it is an important topic for Commission. Brummer noted that while CBDCs are not yet a standardized term among central banks, there are a number of widely recognized characteristics. These include:

• central bank-issued money and a liability of the central bank;
• backed by the government in the same way current forms of fiat currency are backed by the central bank; and.
• distinct from existing master accounts at Federal Reserve Banks.

According to Brummer, while CDBCs are comparable to stablecoins, CDBCs are trying to solve a number of problems including the movement of fiat 24 hours a day/seven days a week, contactless payments, riskless payments, and extending fiat into the programmable money era.

CFTC encourages standardized approaches to assessing cybersecurity preparedness. Lastly, the CFTC took the occasion of the TAC meeting to announce the approval of the Financial Services Sector Coordinating Council (FSSCC) Cybersecurity Profile. In so doing, the CFTC recognized the benefits provided when private sector financial institutions regulated by Commission use a standardized approach to assess and improve their cybersecurity.