CFTC Chair Rostin Behnam repeated a call for new legislative authority for the CFTC to develop a regulatory framework for the cash digital asset commodity markets, saying growing risks in these markets require a proactive federal regulatory approach. In remarks at the annual FIA Boca derivatives conference, Behnam said he is pleased that President Biden’s recent Executive Order calls on the Financial Stability Oversight Council (FSOC) to provide insights and recommendations on financial stability risks and regulatory gaps arising from various digital assets.
Behnam also discussed the disintermediation of financial markets and the CFTC’s work on climate risk and diversity, equity, inclusion, and accessibility (DEIA), among other topics.
Digital asset commodity markets. Behnam repeated a statement he gave in February in testimony before the Senate Agriculture Committee:
“I believe [that the] unique characteristics [of digital assets], combined with the growing size and customer, operational, and potential future financial stability risks associated with the cash market necessitate a proactive federal regulatory approach to ensure that the standards that American investors have come to expect from our financial markets are equally present in digital markets.”
Behnam said the CFTC has actively used its existing statutory authority against fraud and manipulation in the digital asset commodity markets. The CFTC has brought 50 enforcement actions since 2014 in the digital asset space. Of these, 24 involved alleged fraud. In addition, a large number of the more than 600 whistleblower tips the CFTC has received since October allege cryptocurrency fraud, said Behnam.
But as the Executive Order stated, the growth and widespread adoption of digital assets presents many novel issues for regulators. Behnam noted that he suggested in 2019 that the FSOC specifically convene the U.S. financial regulators to propose a FinTech agenda, and said he looks forward to cooperating and coordinating with fellow agencies as outlined in the Executive Order.
Alongside an FSOC review, he sees a need for greater authority specifically for the CFTC, and specifically greater oversight over cash markets.
“I will continue advocating for and supporting legislative authority for the CFTC to develop a regulatory framework for the cash digital asset commodity market,” said Behnam.
DeFi and disintermediation. The spread of digital assets and supporting infrastructure has had a disruptive effect on existing market structures, but it is not the only game changer. Behnam said that while decentralized finance (DeFi) would be the dominant disruptor of the day, it is more the harbinger of a global shift.
Behnam observed that last week the Commission sought public comment on a request for an amended order of registration as a derivatives clearing organization (DCO) by an entity seeking to offer non-intermediated clearing of margined products to retail participants. If approved, this would introduce a new model in which a registered DCO offers margined products to retail participants without relying on an FCM intermediary. Other registered entities have expressed interest in exploring similar models, said Behnam.
Given the potential impact on clearing members and futures commission merchants (FCMs), who play a critically important risk management role and currently hold more than $456 billion in customer funds, it is paramount to be transparent and provide an opportunity to hear from the public, said Behnam. He added that the CFTC does not choose winners or losers; only the market and customer can do that.
Climate risk. Turning to the topic of climate risk and transition, Behnam urged the audience to reach out to the CFTC with ideas, input, and feedback in the climate as well as the larger ESG space. He noted that the Climate Risk Unit (CRU), created at his direction last year, is tasked with engaging with traditional market participants, offset registries, NGOs, and multilateral bodies to understand the role of the official sector regarding emissions markets.
Behnam announced that he was recently appointed as the new co-chair of the IOSCO Sustainable Task Force’s (STF) Carbon Markets Workstream. He added that he looks forward to working with co-chair Verena Ross, the chair of the European Securities and Markets Authority (ESMA).
“Recognizing that carbon emissions have no geographic boundaries, it’s critical that regulators from around the world work together to ensure a thoughtful and harmonized approach to carbon allowances, carbon offsets, and the related derivatives,” said Behnam.
Diversity, equity, inclusion, and access. Behnam said Commission needs to adopt new strategies to develop a workforce that reflects the diversity of the people it serves and the markets it oversees. To help cultivate a culture where all employees feel valued, safe, empowered, and respected, Behnam hired the agency’s first Chief Diversity Officer (CDO) earlier this year.
Other topics. Behnam touched on additional topics including:
- Geopolitics and market volatility. The war in Ukraine has caused extreme volatility and record volume in global markets. Staff is “surgically focused” on looking for manipulative, inappropriate, or disruptive conduct, and is actively monitoring compliance by exchanges, self-regulatory organizations, and intermediaries for trade processing, execution, and clearing. FIA is sharing up-to-date information related to global sanctions on their website.
- Central counterparties (CCPs). Given the critical role of derivatives clearing organizations in managing risk, Behnam supports additional tools to further strengthen registered DCOs, and the CFTC expects to grow its stress testing program. The CFTC will continue to with international counterparts and international standard setting bodies to advance thoughtful policy and discourage a race to the bottom.
- Data. Behnam has directed the Division of Data to transform the agency’s analytics toolkit to leverage cloud architecture with advancements in AI, machine learning, and data analytics. The agency is also exploring ways to more efficiently accept certain filings such as registration applications.
- Cybersecurity. Staff in the Market Participants Division is considering regulation amendments for FCMs, swap dealers, and major swap participants to require the establishment and maintenance of a program of system safeguards and risk analysis, including vendor risk.
- Enforcement. While the CFTC continues to work cooperatively and in parallel with criminal and fellow civil authorities at the federal and state level, there may be times when justice can only be achieved and objectives met by individually asserting CFTC interests.