[House Hearing, 116 Congress]
[From the U.S. Government Publishing Office]
THE STATE OF THE COMMODITY FUTURES TRADING COMMISSION
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON COMMODITY EXCHANGES, ENERGY, AND CREDIT
OF THE
COMMITTEE ON AGRICULTURE
HOUSE OF REPRESENTATIVES
ONE HUNDRED SIXTEENTH CONGRESS
FIRST SESSION
__________
MAY 1, 2019
__________
Serial No. 116-4
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Printed for the use of the Committee on Agriculture
agriculture.house.gov
_________
U.S. GOVERNMENT PUBLISHING OFFICE
36-362 PDF WASHINGTON : 2019
COMMITTEE ON AGRICULTURE
COLLIN C. PETERSON, Minnesota, Chairman
DAVID SCOTT, Georgia K. MICHAEL CONAWAY, Texas, Ranking
JIM COSTA, California Minority Member
MARCIA L. FUDGE, Ohio GLENN THOMPSON, Pennsylvania
JAMES P. McGOVERN, Massachusetts AUSTIN SCOTT, Georgia
FILEMON VELA, Texas ERIC A. ``RICK'' CRAWFORD,
STACEY E. PLASKETT, Virgin Islands Arkansas
ALMA S. ADAMS, North Carolina SCOTT DesJARLAIS, Tennessee
Vice Chair VICKY HARTZLER, Missouri
ABIGAIL DAVIS SPANBERGER, Virginia DOUG LaMALFA, California
JAHANA HAYES, Connecticut RODNEY DAVIS, Illinois
ANTONIO DELGADO, New York TED S. YOHO, Florida
TJ COX, California RICK W. ALLEN, Georgia
ANGIE CRAIG, Minnesota MIKE BOST, Illinois
ANTHONY BRINDISI, New York DAVID ROUZER, North Carolina
JEFFERSON VAN DREW, New Jersey RALPH LEE ABRAHAM, Louisiana
JOSH HARDER, California TRENT KELLY, Mississippi
KIM SCHRIER, Washington JAMES COMER, Kentucky
CHELLIE PINGREE, Maine ROGER W. MARSHALL, Kansas
CHERI BUSTOS, Illinois DON BACON, Nebraska
SEAN PATRICK MALONEY, New York NEAL P. DUNN, Florida
SALUD O. CARBAJAL, California DUSTY JOHNSON, South Dakota
AL LAWSON, Jr., Florida JAMES R. BAIRD, Indiana
TOM O'HALLERAN, Arizona JIM HAGEDORN, Minnesota
JIMMY PANETTA, California
ANN KIRKPATRICK, Arizona
CYNTHIA AXNE, Iowa
______
Anne Simmons, Staff Director
Matthew S. Schertz, Minority Staff Director
______
Subcommittee on Commodity Exchanges, Energy, and Credit
DAVID SCOTT, Georgia, Chairman
JEFFERSON VAN DREW, New Jersey AUSTIN SCOTT, Georgia, Ranking
FILEMON VELA, Texas Minority Member
STACEY E. PLASKETT, Virgin Islands ERIC A. ``RICK'' CRAWFORD,
ABIGAIL DAVIS SPANBERGER, Virginia Arkansas
ANTONIO DELGADO, New York MIKE BOST, Illinois
ANGIE CRAIG, Minnesota DAVID ROUZER, North Carolina
SEAN PATRICK MALONEY, New York ROGER W. MARSHALL, Kansas
ANN KIRKPATRICK, Arizona NEAL P. DUNN, Florida
CYNTHIA AXNE, Iowa DUSTY JOHNSON, South Dakota
JAMES R. BAIRD, Indiana
Ashley Smith, Subcommittee Staff Director
(ii)
C O N T E N T S
----------
Page
Conaway, Hon. K. Michael, a Representative in Congress from
Texas, opening statement....................................... 4
Peterson, Hon. Collin C., a Representative in Congress from
Minnesota, opening statement................................... 6
Scott, Hon. Austin, a Representative in Congress from Georgia,
opening statement.............................................. 3
Scott, Hon. David, a Representative in Congress from Georgia,
opening statement.............................................. 1
Prepared statement........................................... 2
Submitted letter............................................. 39
Witness
Giancarlo, Hon. J. Christopher, Chairman, Commodity Futures
Trading Commission, Washington, D.C............................ 6
Prepared statement........................................... 8
Submitted questions.......................................... 41
THE STATE OF THE COMMODITY FUTURES TRADING COMMISSION
----------
WEDNESDAY, MAY 1, 2019
House of Representatives,
Subcommittee on Commodity Exchanges, Energy, and Credit,
Committee on Agriculture,
Washington, D.C.
The Subcommittee met, pursuant to call, at 10:12 a.m., in
Room 1300 of the Longworth House Office Building, Hon. David
Scott of Georgia [Chairman of the Subcommittee] presiding.
Members present: Representatives David Scott of Georgia;
Van Drew, Vela, Plaskett, Spanberger, Delgado, Craig, Maloney,
Kirkpatrick, Axne, Peterson (ex officio), Austin Scott of
Georgia, Crawford, Bost, Rouzer, Marshall, Dunn, Johnson,
Baird, and Conaway (ex officio).
Staff present: Lyron Blum-Evitts, Carlton Bridgeforth,
Emily German, Matt MacKenzie, Troy Phillips, Isabel Rosa,
Ashley Smith, Paul Balzano, Rachel Millard, Patricia Straughn,
Justina Graff, Dana Sandman, and Jennifer Yezak.
OPENING STATEMENT OF HON. DAVID SCOTT, A REPRESENTATIVE IN
CONGRESS FROM GEORGIA
The Chairman. [Audio malfunction in hearing room] First, I
want to thank you for joining us here today to receive this
report on the state of affairs at the Commodity Futures Trading
Commission. We are happy to have Chairman Giancarlo with us
today. Thank you, Mr. Chairman, for being here. And as this is
our first Subcommittee hearing, I look forward to a productive
Congress alongside the distinguished Ranking Member and my
fellow Georgian, Mr. Austin Scott.
But before we start, I want to take just a second to
reflect on the loss of Mr. Bart Chilton this past weekend. He
was a good man, a great man, and those of us who have been on
the Committee for some time knew Bart from a career that spans
the USDA, Farm Credit Administration, the Farmers Union, and
both the House and the Senate; but everyone knows his
contributions as a Commissioner at the CFTC. He was a strong
advocate for transparency and common sense in regulation, and
we will miss him very, very much.
Now, the CFTC was established as an independent agency
outside of the Department of Agriculture through the Commodity
Futures Trading Commission Act of 1974. The Commission states
that its mission: ``is to foster open, transparent,
competitive, and financially sound markets.'' Dodd-Frank was
passed as a result of the financial crisis and expanded the
CFTC at that time to regulate swaps.
Title VII of Dodd-Frank added safety and soundness to the
markets by including market transparency and required clearing.
Challenges facing the CFTC today are final implementation
of Dodd-Frank, cross-border issues, and new technologies such
as automated trading and cryptocurrency.
For 2019, the CFTC is funded at $268 million. In Fiscal
Year 2020, the Commission is requesting a total of $315
million. This budget request consists of two separate requests:
the annual Commission operational funding of $284 million, and
a new request to support the relocation of three regional
offices at $31 million.
It is also worth noting the purview of the CFTC in real
terms: the total nominal value of the U.S. swaps is $282
trillion and U.S. futures are at $27 trillion. That is real
money and it conveys real weight to what we have to do here.
And for years, I have tried to draw attention to the very
large job the CFTC has, and I have been a long-time supporter
of increased funding for the CFTC, and I hope our Subcommittee
and the full Committee, and the entire Congress will see the
growing responsibilities of the CFTC, and that it is important
that we give them adequate funding.
Now, there is another issue I want to raise though, and it
is an important one. Yesterday, CFTC Commissioner Rostin Behnam
sent a letter to the CFTC's Office of Minority and Women
Inclusion detailing the diversity and representation profile of
the senior and executive staff at the Commission. He lays out
some troubling numbers and asks some very pointed questions,
and they are things that we are going to look into on this
Subcommittee. But let me say this, it is important. Diversity
is our strength, and it has been our strength from the very
first foundation of this country. It will make the agency, the
CFTC, stronger, not only by the varied viewpoints and
backgrounds that women, LGBTQ employees, and employees of color
bring, but also through the credibility that the agency will
gain by accurately reflecting the diversity of our great
country.
Mr. Chairman, it is my hope that you will take your
colleague's thoughts and concerns to heart and move forward in
a constructive manner on this very important issue of
diversity.
In closing, I want to recognize the work of our Chairman,
Chairman Giancarlo, and all that he has done, and the openness
with which he has approached his interactions with me and with
the Committee. It is certainly a roadmap for a productive
relationship that I hope subsequent Chairmen will follow.
[The prepared statement of Mr. Scott follows:]
Prepared Statement of Hon. David Scott, a Representative in Congress
from Georgia
Thank you for joining us here today to receive this report on the
state of affairs at the Commodity Futures Trading Commission. We're
happy to have Chairman Giancarlo with us today, and as this is our
first Subcommittee hearing, I look forward to a productive Congress
alongside the distinguished Ranking Member and my fellow Georgian, Mr.
Scott.
Before we start, I want to take a second to reflect on the loss of
Bart Chilton this past weekend. Those of us who have been on the
Committee for some time know Bart from a career that spans USDA, Farm
Credit Administration, Farmers Union, and both the House and the
Senate; but everyone knows his contributions as a Commissioner at CFTC.
He was a strong advocate for transparency and common sense in
regulation, and we will miss him very much.
The CFTC was established as an independent agency outside of the
Department of Agriculture through the Commodity Futures Trading
Commission Act of 1974.
The Commission states that its mission: ``is to foster open,
transparent, competitive, and financially sound markets.''
Dodd-Frank was passed as a result of the financial crisis and
expanded the CFTC to regulate swaps.
Title VII of Dodd-Frank added safety and soundness to the markets
by including market transparency and required clearing.
Challenges facing the CFTC today are final implementation of Dodd-
Frank, cross-border issues, and new technologies such as automated
trading and cryptocurrency.
For 2019, CFTC is funded at $268 million. In FY 2020, the
Commission is requesting a total of $315.0 million. This budget request
consists of two separate requests, the annual Commission operational
funding of $284 million and a new request to support the relocation of
three regional offices of $31 million.
It's worth noting the purview of CFTC in real terms: the total
nominal value of the U.S. swaps is $282 trillion and U.S. futures $27
trillion. That's real money and it conveys real weight to what we do
here.
For years I have tried to draw attention to the large job the CFTC
has, and I've been a long-time supporter of increased funding for the
CFTC.
There is an issue I want to raise though, and it's an important
one. Yesterday, CFTC Commissioner Rostin Behnam sent a letter to the
CFTC's Office of Minority and Women Inclusion detailing the diversity
and representation profile of the senior and executive staff at the
Commission. He lays out some troubling numbers and asks some pointed
questions, and they are things that we're going to look into on this
Subcommittee, but let me say this: diversity is a strength. It will
make your agency stronger not only by the varied viewpoints and
backgrounds that women, LGBTQ employees and employees of color bring,
but also through the credibility the agency will gain by accurately
reflecting the diversity of our great country. Mr. Chairman, it's my
hope that you will take your colleague's thoughts and concerns to heart
and move forward in a constructive manner on this important issue.
In closing I want to recognize the work that Chairman Giancarlo has
done, and the openness with which he has approached his interactions
with me and the Committee. It is certainly a roadmap for a productive
relationship that I hope subsequent Chairmen will follow.
With that I would like to recognize my Ranking Member, the other
distinguished Mr. Scott from Georgia, for 5 minutes.
The Chairman. Now with that, I would like to recognize my
Ranking Member, the other distinguished Mr. Scott from Georgia,
for 5 minutes.
OPENING STATEMENT OF HON. AUSTIN SCOTT, A REPRESENTATIVE IN
CONGRESS FROM GEORGIA
Mr. Austin Scott of Georgia. Thank you, Mr. Chairman.
I want to congratulate you on the Chairmanship, and we have
had a great relationship for 25+ years, and I look forward to
continuing that. Some of the best discussions we have are in
the Delta 10C and 10D seat, which is a good opportunity for us
to speak about things that matter on the way home to our state.
I also want to welcome the new Members to the Committee,
and of course, Chairman Giancarlo. I know your wife is here
with us today, so I want to say a special thank you to her for
her service as well as yours, and ma'am, welcome to the
hearing.
It is good to have you back here one last time before you
and your family head back to New Jersey. Your service at the
Commission has been honorable, and I want to thank you for
that. I appreciate the opportunity to work with you over the
last couple of years.
We have some unfinished business, reauthorizing the CFTC.
This Committee and the House of Representatives has moved in a
very bipartisan manner three times in the last 6 years to send
a bill to the United States Senate. Chairman Scott and I have
worked together on that, as well as the other Committee
Members, and here we are. We are going to do it again, and
maybe the fourth time will be the charm.
As you know, last year Darren Soto and I introduced the
CFTC Research and Development Modernization Act. The
legislation would modernize the CFTC research and information
programs and provide the Commission with new tools to engage
with developers and learn about technology. This bill was
developed in response to testimony that you gave, Chairman,
about the difficulty in engaging with the private-sector, and I
look forward to hearing more about the work you are doing to
engage on FinTech so that we as a Committee can get a better
understanding of the needs of this bill as we work to refine
it.
Mr. Chairman, over the last 5 years, you have been a
consistent voice for reason regarding some of the most complex
work this Committee engages in, and again, I appreciate your
steady hand in the negotiations over how to regulate cross-
border derivative transactions and other complex issues. And
while halting progress and moving goalposts have been
frustrating for me to watch, it has been comforting to know
that you have been our man in the room, and we look forward to
your testimony on where we stand and what work your successor
has left to do.
For 9 years, we have been promising end-users they would be
held harmless as we imposed new regulations to protect
financial markets from opaque risk, and how we complete these
international negotiations are key to that promise.
That is one of the most important facts this Committee
cannot forget. The markets must work for the people who need to
manage risk.
Chairman Giancarlo, in closing, I want to say thank you
again. Today's hearing might be a little more like an exit
interview than a typical hearing, but I think it is a good
place to start this new Congress with all of our new Members on
this Subcommittee. I look forward to your wisdom, and leaving
us with a bigger picture of the importance of these markets and
the regulatory structure in getting it right.
Thank you again. Ma'am, thank you for being here. Mr.
Chairman, I turn it back over to you.
The Chairman. All right. Thank you very much. Now I
recognize our distinguished Ranking Member, our distinguished
former Chairman, and my friend, Michael Conaway, for any
opening statements that he would like to make.
OPENING STATEMENT OF HON. K. MICHAEL CONAWAY, A REPRESENTATIVE
IN CONGRESS FROM TEXAS
Mr. Conaway. Well thank you, Mr. Chairman. I would not
normally say much at this juncture, given the good work that
this Subcommittee needs to do, but congratulations on you
becoming the Chairman of the Subcommittee. You and I worked in
a similar role when I was Chairman of the Subcommittee and you
were Ranking Member, so congratulations on that. I appreciate
your indulgence for letting me say a couple of words about my
friend, the distinguished Chairman of the CFTC.
First off, Chris, thank you. Thank you for your service.
Thank you for your diligence, thoughtfulness, and candor, and
thank you for your relentless curiosity. And most of all, thank
you for your bottomless reservoir of optimism.
Everyone on this dais knows how hard it is to hold a
position of public trust, but you never once have shown that
burden. Rather, I have seen a man engrossed in understanding
the burden of others and consumed with understanding how his
work might ease their difficulties. I saw it firsthand when you
came to San Angelo. Your speech lit up a room of oilmen by
connecting challenges found in the oilfields of Texas to
financial markets in New York and around the world. And then
you graciously talked to every person and shook every hand in
the hour it took you to get out of the room.
I also saw in the letter that you wrote to the congregation
for the Doctrine of Faith at the Vatican. It is strange to
think of a letter about derivatives as moving, but your careful
explanation of why derivatives are important to the most
vulnerable among us was a moving reminder about why these
markets matter and why this Committee should be diligent in its
work in this area.
I also want to thank your family. Your wife, Regina, your
children, Henry, Luke, and Emma, and recognize their role in
your success. For the last 5 years, they have had to patiently
share your time and attention with strangers. No doubt, well,
there may be no doubt they are looking forward to having your
undivided attention as you move into this next chapter.
Let me close by saying that first off, you closed your own
testimony noting that you tried to do what your parents taught
you, and that is to leave places that you visit better than you
found them. Let me close by saying that you learned that really
well. The CFTC is a better place because of your tenure as
Chairman. I suspect that this Committee is also a better place
because of your service. You worked hard to break down the
ideological divisions and positions supported by evidence and
experience that were not rooted in the pitched battles of the
past.
I have greatly appreciated the opportunity to work with you
and to learn from you these past 5 years. As you return to New
Jersey, I don't suspect you will be retiring in any of the
traditional senses. I have no doubt that you will continue to
put your intellect, passion, and values to work on behalf of
the public. And as you pick that next path, I wish you your
well-earned happiness, and Godspeed.
Before I yield back, Mr. Chairman, I too want to add my
condolences on the passing of Commissioner Bart Chilton. I did
not know Commission Chilton as well as some of you in the
audience, but I knew him well enough to know that he cared
deeply about his work. In a career that ran from Capitol Hill
to the Whitten Building to the CFTC to his farm in Arkansas,
his unwavering focus was on how the government can protect the
most vulnerable. I appreciate the opportunities I had to work
with him, and know that he will be missed. His family and
friends are in my prayers and thoughts with these difficult
days ahead.
With that, Mr. Chairman, I yield back. Thank you.
The Chairman. Thank you very much, Ranking Member.
Now, I recognize our distinguished Committee Chairman, Mr.
Peterson, for any opening statement he would like to make.
OPENING STATEMENT OF HON. COLLIN C. PETERSON, A REPRESENTATIVE
IN CONGRESS FROM MINNESOTA
Mr. Peterson. Thank you, Mr. Chairman, and I want to
associate myself with the remarks of the Ranking Member about
Mr. Chilton. He was a great public servant, and somebody I
worked with a lot in a number of different capacities, and it
is a shock to all of us what happened there. And so, our
thoughts and prayers are with his family.
And Mr. Chairman, welcome back to the Committee. I think
the last time you were in this room, we were playing guitars
together, right? That is probably more fun than this.
But anyway, we appreciate you coming back to the Committee,
and we appreciate the job that you have done over at the CFTC.
I think you have done an outstanding job, and you have been
very good to work with and very transparent. I am not happy to
see you leave, but, it is part of the way it works, so thank
you so much for your service, and good luck with whatever you
are going to do, going forward. We look forward to your
testimony. Thanks for being here.
Thank you. I yield back.
The Chairman. All right, thank you, Mr. Chairman.
The chair would now request that other Members submit their
opening statements for the record so the witness may begin his
testimony, and to ensure that there is ample time for
questions.
And certainly, Chairman Giancarlo, I welcome you as our
witness, and I share the parting remarks that our Ranking
Member and our Chairman made. I hate to see you go. We have had
a great and long and very beneficial partnership and
relationship with you and with the CFTC.
And so now, I would like to open it up to you, welcome you,
and thank you for being here. And we will now proceed to
hearing your testimony, Mr. Chairman, and so you will have 5
minutes to give your prepared remarks.
STATEMENT OF HON. J. CHRISTOPHER GIANCARLO,
CHAIRMAN, COMMODITY FUTURES TRADING COMMISSION, WASHINGTON,
D.C.
Mr. Giancarlo. Thank you, Chairman Scott, and Ranking
Member Scott, thank you, Committee Ranking Member Conaway and
Committee Chairman Peterson, thank you all for that, and thank
you for those kind remarks.
Before I begin, I would also like to add my note on the
recent passing of former CFTC Commissioner Bart Chilton. On
behalf of the CFTC, I want to say all of us are deeply saddened
by his passing.
I came today and I am wearing my CFTC pin. I don't normally
wear it on Committee appearances in deference to the oversight
of this Committee over our agency. But I wore this pin today
because this one was actually given to me by Bart Chilton, and
when he gave it to me, he said, ``Wear this pin with pride
because you are working for the finest agency in all of
Washington.'' And I wear that today in memory of Bart. I
understand today would have been his 59th birthday. He was a
very fine public servant, and I just want to add my note of
condolences to him and his family. We will miss him very much.
Two years ago, as I took up the gavel as Chairman of the
Commission, I promised to transition the CFTC from a rearview
focus on the last financial crisis to a forward vision of
derivative markets as essential to economic growth and broad-
based prosperity, and I set out a three-part agenda: to foster
economic growth, to enhance U.S. derivative markets, and to
right size our regulatory footprint.
First, we announced Project KISS to make existing rules
simpler, less burdensome, and less costly. We created the
Market Intelligence Branch to better understand the rapidly
changing markets that we oversee, and we hired a world-renowned
Chief Economist to make us a smarter, more quantitative data-
based regulator. We also launched LabCFTC, one of the first and
most influential FinTech innovation initiatives by a U.S.
market regulator.
To enhance financial markets, we worked with other U.S. and
overseas financial regulators to support bank capital
requirements and leverage ratios that better balance systemic
risk concerns with healthy economic growth. And we proposed a
better regulatory framework for swaps trading and execution.
We championed cross-border regulatory deference to
competent overseas regulators while resisting global regulatory
overreach. And importantly, we refocused our attention on
agricultural commodity markets, the agency's traditional
foundation.
This year in Kansas, we held the CFTC's second annual Ag
Futures Conference, along with K State University. And we also
hosted the first ever CFTC Ag Advisory Committee meeting held
outside of Washington with all five Commissioners in
attendance.
On behalf of the CFTC, I have been fortunate to visit
agriculture producers in over two dozen states, from South
Dakota, Texas, Arkansas, Indiana, and Iowa, to Minnesota,
Missouri, New York, Georgia, Mississippi, and Illinois. And
have walked in wheat fields and harvested soybeans. I have
tramped through rice farms and beneath pecan groves. I have
milked dairy cows and toured feedlots, and I have visited grain
elevators and viewed cotton gins. And throughout, I have been
moved by America's hardworking families, producing food and
staples from this abundant land. And it is for them that we
have reset our regulatory footprint by conducting agency
affairs with regular order and procedure with thorough
econometric analysis, and a reduced docket of new rules and
regulations to be absorbed by market participants.
But at the same time, we have been resolute in holding
market participants to the highest standards of conduct. In
fact, by any measure, enforcement has been among the most
vigorous in the history of the CFTC, including more enforcement
actions, more penalties, more large-scale matters, more
accountability, more partnering with criminal law enforcement,
and more whistleblower awards than in any prior year, in fact,
the entire history of our whistleblower program.
By almost any measure, we have been enforcing the law with
determination and with gusto. Our goal has been to run a
professional operation keenly responsible to the American
taxpayer, who are our ultimate shareholders. Looking back, I
feel we have stayed true to this agenda.
Now looking forward, before I leave the Commission, I
intend to maintain a steady but brisk course advancing policy
proposals on cross-border regulation and position limits, to
progress rule harmonization with the SEC, to stay focused on
initial margin implementation, and to move away from LIBOR
(London Interbank Offered Rate), and to defend our markets
against threats, whether those threats are cyber-maliciousness,
or a result of geopolitical events such as Brexit.
If I have been consistent in anything in my almost 5 years
at the CFTC, it is in voicing the value proposition of
derivative trading markets as foundational to U.S. economic
health and broad-based prosperity. Robust markets for commodity
and financial derivatives make it possible for Americans to
find plenty of food at stable prices in our grocery stores,
affordable energy to warm homes and drive cars, and steady
rates to pay home mortgages and invest their retirement
savings.
As I end 5 years on the Commission, I remain a champion and
defender of free market capitalism, the disciplined and
independent financial regulation that safeguards it, and the
outstanding work of the CFTC. I greatly appreciate the
thoughtful oversight of this Committee and the Subcommittee,
and I am grateful to my wife and my family for their love and
support. And I thank God for the blessings of having led the
fine men and women of the CFTC, and having served this
wonderful country.
Thank you very much.
[The prepared statement of Mr. Giancarlo follows:]
Prepared Statement of Hon. J. Christopher Giancarlo, Chairman,
Commodity Futures Trading Commission, Washington, D.C.
Introduction
Thank you, Chairman Scott, Ranking Member Scott, and Members of the
Subcommittee. I appreciate the opportunity to appear before you today
to discuss issues before the Commission.
Before I begin, I would like to note the recent passing of a former
CFTC Commissioner, Bart Chilton. All of us at the agency, from the
staff to the five Commissioners, are saddened by this sudden loss. With
his trademark flair and enthusiasm, Bart was an unceasing advocate for
American's farmers and ranchers, acting as their voice in Washington.
In the aftermath of the financial crisis, Bart used panache and humor
to draw attention to pressing issues for the agency and the markets at
large. With his passing, the commodities world has lost some unique
sparkle and luster. There will never be another quite like Bart
Chilton.
As you know, the Commodity Futures Trading Commission (CFTC)
oversees the futures, options and swaps markets. While most Americans
do not directly participate in these markets, businesses of all sizes
use derivatives markets to manage commercial and market risk. These
markets are one reason why American consumers enjoy stable prices, not
only in the supermarket, but in all manner of consumer finance from
auto loans to household purchases.
Derivatives markets influence the price and availability of heating
in American homes, the energy used in factories, the interest rates
borrowers pay on home mortgages, and the returns workers earn on their
retirement savings.
Today, American derivatives markets are the world's largest, most
developed, and most influential. They are relatively unmatched in their
depth and breadth, providing deep pools of trading liquidity, low
transaction costs and friction and participation by a diverse array of
global counterparties. They are also some of the world's fastest
growing and technologically innovative.
American derivatives markets are also the world's best regulated.
The United States is the only major country in the Organisation for
Economic Co-operation and Development to have a regulatory agency
specifically dedicated to derivatives market regulation: the CFTC.
There is a connection between having the world's most competitive
derivatives markets and independent Federal regulation. For over forty
years, the CFTC has been recognized for its principles-based regulatory
framework and econometrically-driven analysis. The CFTC is respected
around the world for its depth of expertise and breadth of capability.
The combination of regulatory expertise and competency is one of
the reasons why U.S. derivatives markets continue to serve the global
need to hedge price and supply risk safely and efficiently. It is why
well-regulated U.S. derivatives markets, by allowing low-cost and
effective hedging, are of great benefit to American producers and
consumers and to the rest of the world.
In short, America's well-regulated derivatives markets are a
national advantage in global economic competition. However, we must not
take this advantage for granted. In order for U.S. derivatives markets
to remain the world's best, U.S. markets must remain the world's best
regulated.
It was 5 years ago this spring that I first testified before the
Senate Agriculture Committee concerning my nomination to serve on the
Commission. I knew that if confirmed, I would bridge the last years of
the Obama Administration and the early years of a new Administration.
In 2017, as Chairman of the Commission, I set out my agenda for moving
the Agency forward. I pledged to make sure that our derivatives markets
performed their essential role moderating price, supply and other
commercial risks--shifting risk to those who can best bear it from
those who cannot. I said that our markets should be neither the least
nor the most prescriptively regulated--but the Best regulated--
balancing market oversight, health and vitality. To do that, we would
follow a three-part agenda: completing unfinished business of the past,
improving current operations, and preparing for the future, what I call
becoming a 21st Century digital regulator.
Agricultural Commodity Futures
Under my leadership at the Commission, we have refocused our
attention on agricultural commodity futures, the agency's traditional
foundation.
During almost 5 years on the Commission, I have traveled the
country and visited agriculture producers in over two dozen states from
Montana, Texas, Arkansas, Louisiana and Iowa to Minnesota, Missouri,
New York, Georgia, Mississippi and Oklahoma. I have walked in wheat
fields and harvested soybeans, tramped through rice farms and beneath
pecan groves, milked dairy cows and toured feedlots, visited grain
elevators and viewed cotton gins. I have also met with our energy
producers, going 900 underground in a Kentucky coal mine and 90 in
the air on a North Dakota oil rig. Throughout, I have been moved by the
diverse beauty of this country. I have come to love its hard-working
families producing food and energy from this abundant land. These
visits have been a great privilege for me.
This year in Kansas, we held the CFTC's second annual agricultural
futures conference along with Kansas State University.\1\ Panelists
discussed current macro-economic trends and issues affecting our
markets, such as market speculation, algorithmic trading, trade data
transparency, novel hedging practices and market manipulation. Our
common purpose was to hear from end-users who use our markets to hedge
risk and consider and address issues of emerging market structure and
trading practices.
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\1\ 2nd Annual Agriculture Commodity Futures Conference, April 11-
12, 2019, at: https://www.k-state.edu/riskmanagement/conference1.html.
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We also hosted a CFTC Agricultural Advisory Committee meeting in
Kansas where panelists discussed the future of Futures Commission
Merchants (FCM) and cash market innovations, as well as the evolution
of electronic trading in agricultural markets, both very timely and
important topics. I believe this was the first ever CFTC advisory
committee meeting held outside of Washington with all five
Commissioners in attendance.
21st Century Regulator
I have frequently talked about transforming the CFTC into a 21st
Century regulator amidst today's increasingly digital and algorithmic
markets. I recently identified several factors that are challenging the
work of regulators: 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.
I said that the CFTC's response to rapidly changing markets and
technological developments, including blockchain technology and
cryptocurrencies, 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.
For us, that stakeholder is LabCFTC, which was launched under my
chairmanship almost 2 years ago. In that time, it has had over 250
separate interactions with innovators big and small. It has offices in
New York City. It conducts ``lab hours'' in places where innovators
work: from Silicon Valley, California to Silicon Hills, Texas and from
the South Bank of London to Singapore Center. LabCFTC is not a
``sandbox.'' It does not try to pick winners from losers, nor does it
exempt firms from CFTC rules.
Instead, LabCFTC provides us both an internal and external
technological focus. Internally, it means explaining technology
innovation to agency staff and other regulators and advocating for
technology adoption. Externally, that means reaching out and learning
about technological change and market evolution, while providing a
dedicated liaison to innovators. It has entered into FinTech
cooperation agreements with regulators in London, Singapore and
Australia. It has published well-regarded technology primers and
requests for comments. I am proud to say that LabCFTC has become a
category leader. Every U.S. Federal financial regulator has either
created or is creating a program similar to LabCFTC.
The work of LabCFTC has highlighted an important issue that U.S.
regulators face. We have certain limitations in the ability to test,
demo, and generate proof of concepts around these complex emerging
technologies and systems. Specifically, the CFTC lacks the legal
authority to partner and collaborate with outside entities engaging
directly with FinTech and innovation within a research and testing
environment, including when the CFTC receives something of value absent
a formal procurement. The general rule is that without such authority,
the CFTC must forego the increasing number of opportunities to engage
in research that may benefit the derivatives markets that the agency
oversees, as well as the CFTC's own activities.
The Commission would like the ability to partner, collaborate, or
engage in a cooperative agreement regarding emerging financial and
compliance technologies with persons or entities; Federal, state, or
local agencies or instrumentalities; or foreign governments or
international organizations. Legislation introduced last Congress by
Representative Austin Scott provides such authority and would greatly
enhance the Commission's ability to keep pace with emerging technology,
explore its potential, and facilitate its adoption.
Enforcement
Two years ago, I issued a warning to those who may seek to cheat or
manipulate our markets that they would face aggressive and assertive
enforcement action by the CFTC. I pledged there would be no pause, let
up or reduction in our enforcement of the law and punishment of
wrongdoing.
During my watch, the CFTC has been resolute in holding market
participants to the highest standards of behavior. In fact, by any
measure, enforcement has been among the most vigorous in the history of
the CFTC, including more enforcement actions, more penalties, more
large-scale matters, more accountability, more partnering with criminal
law enforcement at home and abroad and more whistleblower awards than
in prior years.\2\
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\2\ See, generally, ``Regulatory Enforcement & Healthy Markets:
Perfect Together!'', Remarks of Chairman J. Christopher Giancarlo at
Economic Club of Minnesota, October 2, 2018, Minneapolis, Minnesota,
at: https://www.cftc.gov/PressRoom/SpeechesTestimony/opagiancarlo56.
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The Commission has strengthened its rules and procedures to better
protect whistleblowers, brought new impactful enforcement cases, and
successfully resolved other important enforcement cases. In addition,
enforcement resources have been enhanced through the internal
realignment of the Market Surveillance Branch in 2017 to report
directly to the Director of Enforcement. This is one of several actions
the Commission has taken to better utilize resources across the
Commission.
At the same time, I have strived to make sure CFTC enforcement
staff is committed to providing incentives for companies and
individuals to engage in ethical corporate behavior--to develop a true
culture of compliance, to do the right thing. The cooperation and self-
reporting policies issued by the Division make clear that companies and
individuals could receive a recommendation for a Commission reduction
in penalty if they fully cooperate with enforcement investigations,
timely remediate, and, most importantly, self-report the misconduct
before the Commission learns about it.
In further implementation of providing incentives for self-
reporting and cooperation, the Division recently issued an advisory on
cooperation and self-reporting concerning foreign corrupt practices. As
noted in remarks accompanying the advisory, James McDonald, the
Commission's enforcement director, made clear that if a company or
individual not registered (or required to be registered) with the CFTC
timely self-reports a violation of the CEA involving foreign corrupt
practices, fully cooperates, and appropriately remediates, the Division
will apply a presumption, absent aggravating circumstances, that it
will not recommend a civil monetary penalty.
Economic Modeling and Econometric Capabilities
One of the most important jobs of the CFTC now and in the coming
years is to boost the agency's ability to monitor systemic risk in the
derivatives markets by increasing both its analytical expertise and its
capacity to process and study the voluminous data provided by market
participants since the passage of the Dodd-Frank Act. This resulting
work will further enhance the Commission's understanding of market risk
or systemic risk and derivatives market structure and participants,
including end-users, intermediaries, and traders, and connections
between futures, cleared swaps, and uncleared swaps.
Improved economic and econometric analysis will benefit the
analytical and empirical foundations of the Commission's policies and
rules and better inform its cost-benefit considerations. It will also
further enable the Commission to provide more of its analysis to the
public.
Dodd-Frank Rulemaking
The CFTC has been a consistent leader among regulators of the
world's major swaps and derivatives markets in enacting effective
regulation and oversight. By 2014, it was the first regulatory agency
to implement most of the internationally agreed swaps reforms. As
result, we now have more than 4 years of U.S. experience with the
current CFTC regulatory framework with its varied strengths and
deficiencies. Four years provides a significant sample size, if not a
long period of history, to evaluate the effects of these reforms and
their implementation. Based on a careful analysis of that data and
experience, we are in position to recognize success, address flaws,
recalibrate imprecision and optimize measures in the CFTC's initial
implementation of swaps market reform.
I have long been a public supporter of the swaps market reforms
passed by Congress in the Dodd-Frank Act.\3\ I believe that market
regulators have a duty to apply the law in ways that enhance trading
markets and their underlying vibrancy, diversity and resilience. That
duty includes continuously reviewing past policy applications to
confirm that they remain optimized for the purposes intended. It means
adopting a forward-looking approach that considers the impact of
technological innovation and anticipates changing market dynamics.
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\3\ Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub.
L. No. 111-203, 721-774, 124 Stat. 1641, 1641-1807.
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The Commission has continued to make progress on completion of
Dodd-Frank Act rulemaking. On November 5, 2018, a five-Member
Commission voted unanimously on the threshold for swap dealer de
minimis to provide the market with certainty that the threshold will
not fall from $8 billion to $3 billion.\4\
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\4\ ``Commission Approves Final Rule on Swap Dealer Registration De
Minimis Exception'', November 5, 2018, at: https://www.cftc.gov/
PressRoom/Events/opaeventstaffmeeting110518.
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In addition, all five Commissioners have committed to Congress to
move forward with a final position limits rule. I believe the final
rule must be responsive to the public comments and ensure that
regulatory barriers do not stand in the way of long-standing hedging
practices of American farmers, ranchers, producers and manufacturers,
who depend on our markets. I intend to put forth such a position limits
rule proposal before the end of the second quarter of this year.
SEF Reforms
The CFTC's particular implementation of its swaps trading rules has
long been a concern of mine. I believe the current framework is
inconsistent with the Dodd-Frank Act by being too prescriptive, too
burdensome and too modeled on futures markets. The framework is also
highly subjective and overly reliant on a series of no-action letters,
staff interpretations and temporary regulatory forbearance that may
change at anytime.
That is why, last November, the Commission issued a proposed rule
to amend the SEF regulations and the trade execution requirement and a
request for comment on the practice of ``post-trade name give-up.'' \5\
I believe there are two crucial reasons to improve the SEF rules: risk
and opportunity. The impermanence of the current SEF rule framework
poses risk for market participants. At any time staff may well change
or withdraw the numerous interpretations, guidance and compliance
expectations that underpin the current framework. Moreover, the current
restrictions on methods of execution may turn out to be, by themselves,
a source of trading risk during a liquidity crisis--when swaps
counterparties need to be found through less prescriptive and more
flexible means of execution.
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\5\ Federal Register, November 30, 2018, at: https://
www.federalregister.gov/documents/2018/11/30/2018-24643/post-trade-
name-give-up-on-swap-execution-facilities.
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On the other hand, improving the SEF rules presents opportunity--
opportunity for service innovation by existing and new market entrants
that has waned under the current framework. It is the opportunity to
boldly create a regulatory framework that actually fosters innovation,
entrepreneurship, competition and increased market vibrancy rather than
stifle it. Improving the SEF rules also increases the chance that the
SEC will draw on the new framework in whole or in part for their
security-based SEF regime. It would create a common U.S. regulatory
approach for all swaps products, reducing operational and compliance
costs and risks.
I do not support merely tinkering with the current SEF rules to fix
their most glaring shortcomings or perpetuating the many no-action
letters and staff guidance on which they rely. Such a step would be
unworthy of the regulator of the world's most vital derivatives
markets. Instead, the agency must be unafraid to build a better and
more durable regulatory framework for swaps execution that supports
vibrant markets and broad-based prosperity for a generation or more.
Increased Examinations of Clearinghouses
The agency's work to conduct regular examinations, in concert with
the Commission's surveillance and other functions, is a highly
effective method to maintain market integrity so that American
businesses can rely on these markets. The Commission leverages
resources by conducting joint examinations across Commission divisions
and through coordinated examinations with the Federal Reserve and the
SEC, where possible. This effort allows the Commission to be more
efficient with its limited resources and at the same time, reduce
burdens for dual registrants.
In addition, examinations of clearinghouses help the Commission
identify issues that may affect a clearinghouse's ability to control
and monitor its risks. These are among the most important examinations
that the Commission conducts, as clearinghouses have become critical
single points of risk in the global financial system. Furthermore, the
number of clearinghouses, the scope and complexity of the examination
issues and the importance of these examinations to overall financial
stability are all increasing.
In addition to U.S. clearinghouses, the Commission has six
registered clearinghouses located overseas and exempted four foreign
clearinghouses. The Commission anticipates new applications for
clearinghouse registration resulting from the explosion of interest in
cryptocurrencies; an area in which protection of the cryptocurrencies
will be one of the highest risks.
The Commission has an active, data-driven, daily risk surveillance
function, and expects to continue investing additional resources on
human capital, data, and technology to improve our current analytical
capabilities to keep up with growth in both the scale and complexity of
risk transmission in the derivatives markets. Given the emphasis of G20
and Dodd-Frank reform efforts on central clearing as a critical tool to
help mitigate systemic risk in the global financial markets, the
Commission expects to grow our stress testing program to help ensure
that the clearing ecosystem continues to be resilient to absorb both
market and systemic shocks.
Effective International Engagement
Recently, the CFTC along with the Bank of England and the Financial
Conduct Authority (FCA), with support from Her Majesty's Treasury,
issued a joint statement providing assurances to market participants on
the continuity of derivatives trading and clearing activities between
the UK and U.S. regardless of the outcome of the UK's withdrawal from
the EU.\6\ Together, the four authorities are taking measures to avoid
regulatory uncertainty about the continuation of derivatives market
activity between the UK and U.S. These measures should give confidence
to market participants about their ability to trade and manage risk
across the Atlantic. It is a great credit to the decades-long
cooperation between the CFTC and the Bank of England, FCA, and HM
Treasury, that we are able to work together to take these steps.
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\6\ ``Joint Statement by UK and U.S. Authorities on Continuity of
Derivatives Trading and Clearing Post-Brexit'', February 25, 2019, at
https://www.cftc.gov/PressRoom/PressReleases/7876-19.
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It is critical that the CFTC continues to work positively with its
overseas regulatory counterparts, not just in the UK, but in all
financial centers. I am a firm believer that by working together with
my regulatory counterparts across the globe, in a cooperative spirit,
we can strengthen our economies while keeping our financial system
resilient and stable.
That is why the afternoon after the CFTC-UK announcement, I
traveled to Brussels to meet with European Commission Vice President
Valdis Dombrovskis and Director-General Olivier Guersent to discuss how
to broaden cooperation between the CFTC and the EC.
In addition, I am proud to report that we achieved a significant
milestone on March 13 as the CFTC and the Monetary Authority of
Singapore announced the mutual recognition of swaps trading venues in
our respective jurisdictions.\7\ In this regard, the CFTC exempted
certain Singapore trading venues from the SEF registration
requirements. This exemption reduces the burdens associated with
duplicative and overlapping regulations, mitigates market
fragmentation, enables U.S. market participants to access Singaporean
markets to manage risks effectively, and enhances cross-border business
opportunities for both U.S. and Singaporean firms.
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\7\ ``Joint Statement of the CFTC and the Monetary Authority of
Singapore Regarding the Mutual Recognition of Certain Derivatives
Trading Venues in the United States and Singapore'', March 13, 2019, at
https://www.cftc.gov/PressRoom/PressReleases/7887-19.
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Recently, EU co-legislators reached a political agreement on the
new amendments to the European Market Infrastructure Regulation (EMIR
2.2) pertaining to the regulation and supervision of central
counterparties (CCPs). To mark this occasion, I issued two statements:
a joint statement with Valdis Dombrovskis (Dombrovskis), the Vice
President of the European Commission (EC), and a separate statement as
Chair of the CFTC. The statements publicly affirm that the CFTC's
concerns regarding the potential adverse impact EMIR 2.2 on U.S. CCPs
and the broader U.S. financial markets remain a significant issue for
the U.S. and it is our expectation, that EU authorities will address
our concerns during the EMIR 2.2 legislative process.
The joint statement with Dombrovskis asserted that the CFTC will
continue to engage with EU authorities on EMIR 2.2 through the next
phase of the legislative process, the drafting of the implementation
regulations (the Level 2 process), and that the EC will consider the
CFTC's concerns during this Level 2 process. It also states that it is
the expectation of the EC and the CFTC that the implementation of EMIR
2.2, along with the CFTC's on-going review of its cross-border regime,
will result in a future transatlantic relationship between the EU and
the CFTC, which will be based on greater deference than there is now.
In my separate statement, I reaffirmed my understanding that
although the application of EMIR 2.2 to U.S. CCPs is not likely to
occur until the end of 2020 or beyond, EU authorities, including the EC
and the European Securities and Markets Authority (ESMA), will work
with the CFTC to address U.S. concerns during the legislative process.
Further, I state that the starting point for any future recognition
assessment of U.S. CCPs must be the current 2016 Equivalence Decision.
These statements taken together are meant to provide market
participants who transact in both U.S. and EU markets assurances that
the CFTC and the EC will continue to work on through our differences to
mitigate the impact of unnecessary regulatory and supervisory burdens,
and to foster economic growth and stability for our global CCPs.
Six months ago, I released a White Paper on cross-border swaps
regulation that proposed updating the agency's current cross-border
application of its swaps regime with a rule-based framework based on
regulatory deference to third-country regulatory jurisdictions that
have adopted the G20 swaps reforms.\8\ As our regulatory counterparts
continue to implement swaps reforms in their markets, it is critical
that we make sure our rules do not conflict and fragment the global
marketplace. That is why I believe the CFTC should move to a flexible,
outcomes-based approach for cross-border equivalence and substituted
compliance and operate on the basis of comity, not uniformity, with
overseas regulators.
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\8\ ``Chairman Giancarlo Releases Cross-Border White Paper'',
October 1, 2018 at: https://www.cftc.gov/PressRoom/PressReleases/7817-
18.
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Before I leave my post, I intend to put before the Commission a
rule proposal to address the registration of non-U.S. CCPs clearing
swaps for U.S. persons. I also intend to put forth a rule proposal
addressing the registration and regulation of non-U.S. swap dealers and
major swap participants. In particular, the proposal will address the
risk that non-U.S. swap dealing activity poses to the United States,
but do so in a way that does not apply the swap dealer rules
extraterritorially without sufficient consideration of whether the
activity truly poses a ``direct and significant'' risk to the U.S.
financial system, as Congress intended.
Cybersecurity
As market leaders and regulators, we must continue to take every
step possible to thwart cyber-attacks that have become a continuous
threat to U.S. financial markets. In the coming year, the Commission
plans to strength cybersecurity and network defenses, support the
LabCFTC 2.0 initiative, and invest in the agency's multi-year cloud
strategy.
The Commission has requested from Congress new IT security
resources to continue progress towards achieving compliance with
Federal Information Security Management Act (FISMA) and related Office
of Management and Budget (OMB) security mandates and ensuring the
protection of sensitive market participant data.
The same vulnerabilities hold true in the case of futures
commission merchants where customer accounts hold records and
information that requires protection. We as an agency will work hard to
ensure that regulated entities live up to their responsibility to
ensure their IT systems are adequately protected from attacks and
customers are protected.
Agency Reform and Project KISS
Two years ago, I announced the launch of Project KISS. It stands
for ``Keep It Simple Stupid.'' It is an 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.\9\ Many
KISS initiatives were recommended by market participants, but many were
also initiated by our own agency staff that saw ways to reduce undue
obligations on registrants and market participants. There are still
more Project KISS initiatives in the pipeline. It is my belief that
this effort should continue upon my departure and be a regular part of
the agency's mission.
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\9\ Michael Gill, Chief of Staff, U.S. Comm. Fut. Trading Comm'n,
Remarks at the National Press Club, CFTC KISS Policy Forum, Washington,
D.C. (Feb. 12, 2018), available at https://www.cftc.gov/PressRoom/
SpeechesTestimony/opagill2.
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Conclusion
Looking to the past, I will be pleased that I have furthered and
confirmed much of the Dodd-Frank mandate for swaps. Where I have
identified flaws in implementation, I have proposed comprehensive
solutions. In my view, now is the time to create better frameworks that
are more flexible, more durable and more supportive of deep and liquid
markets, in good times and in bad.
As for the present, I have tried to do what my parents taught me--
to leave any place I visit in a better condition than I found it:
better run, better funded, more transparent, more accountable and more
efficient in its vital mission overseeing American markets.
As for the future, I will be satisfied that I have raised the
profile and reputation of the CFTC and set it on a course for the
digital Twenty-First Century. So much is changing, and changing rapidly
in our commodity derivatives markets. As market regulators, we must be
ready to listen, and work to understand. The greater the pace of
change, the greater must be our capacity to keep pace, understand and
harness it.
The CFTC is well along the course of that new direction set 2 years
ago--a course that is sustainable and true.
Thank you for a privilege to speak to you today.
It has been my honor to serve you, our dynamic markets and the
American people.
The Chairman. And thank you, Chairman, for that very
informative and, indeed, touching presentation. It is evident
of why many of us hate to see you leave. You have great
experience.
I would like to start and I will start with this question.
I have long been concerned and worked with you, as you know,
through the years, on our cross-border. Right now, our
derivatives swaps, that area is valued at over $820 trillion
piece of the world's economy. But we need to get our arms
around this issue with Brexit.
Mr. Giancarlo. Yes.
The Chairman. It is presenting some very troubling winds
that I think we need to look at.
And I have done some background on it, but I would like to
get your perspective on this whole issue and the impact on our
markets and our market participants. This Brexit thing keeps
worrying me.
My understanding that, of course, the United Kingdom is in
the middle of what I call a drawn out, bitterly difficult
divorce from the European Union, and Prime Minister May has
negotiated a withdrawal agreement with the EU last year. But
Parliament has voted it down three times, even though a UK exit
without an agreement promises nothing but chaos.
The EU gave the UK an extra 6 months to come up with a way
to leave on negotiated terms, but so far, there is no deal,
much less any consensus on how to move forward.
Mr. Chairman, during your negotiations with the Europeans
on swap trading venue equivalence, you have been closer than
anyone here to the process of the UK leaving the European
Union. It seems that there is a desire in Europe to make it
pretty hard on the UK for deciding to leave the Union. Have you
seen any of those attitudes bleeding into your discussions on
equivalence?
Mr. Giancarlo. Thank you for the question. It is a very
complicated subject, as you have outlined in your remarks.
It is appropriate for the United States, as a public
official of the United States, to make clear to our European
friends on either side of the English Channel that we take no
view as to what is entirely a European decision about Britain's
staying or going, and what that means politically for Europe.
But economically, it has a tremendous impact on us in the
United States. There are two sides to our derivatives markets.
There are our listed markets, our futures markets that trade on
exchange, which in many ways may be considered an export
business, an important export business for the United States.
The global swaps markets, which are not traded on exchange, are
traded over-the-counter, of which U.S. banks and financial
institutions make up as much as perhaps \2/3\ of the liquidity
provision in those markets. And yet, that entire swaps market
is centered in London. London has emerged over the last several
decades as the servicing center of this global swaps market
that in your remarks you referred to in the hundreds of
trillions of dollars in gross size, and that marketplace for
historical reasons has become centered in London.
As the regulator of both our domestic export futures
business and of the swaps--the U.S. involvement in the swaps
markets, we have been keenly focused on the impact of Brexit on
these markets that we are charged to oversee.
The Chairman. I am also very concerned, and I want to be
cognizant with our time here.
Mr. Giancarlo. Yes.
The Chairman. But I am deeply concerned about something
else, and that is there is this new EU law that is bubbling up,
and it is called EMIR 2.2.
Mr. Giancarlo. Yes.
The Chairman. Which could have major effects on our United
States clearinghouses, potentially setting up the EU as a
primary regulator over our own United States clearinghouses.
This is a problem, and our U.S. clearinghouses, in addition to
that, may even be required to fund ESMA, the EU regulator of
all EU finance, through surcharges.
Mr. Giancarlo. Yes.
The Chairman. Just for the privilege of their regulating
us. I am hoping that you will tell me that I have it all wrong.
I am hoping. I know you are deeply engaged in the
implementation phase of EMIR 2.2. Should we have hope that
these dramatic outcomes can be avoided?
Mr. Giancarlo. Well, I wish I could tell you that you have
it wrong, but you have it right, and to some degree, you don't
even know how right you have it.
This new law, EMIR 2.2, which has passed the European
Parliament, is now going to a process where they write the
technical rules, but the law has been passed. It assigns to a
European body based in Paris, called ESMA that you referenced,
oversight over non-European clearinghouses, including
potentially American ones, but deems them to be unqualified to
regulate European ones. They have the capacity not to regulate
European clearinghouses, but to regulate non-European ones. It
is completely unprecedented. in the geopolitical realm, I know
of no other body that has such powers, nor does it have
experience in doing this because it has never regulated
clearinghouses before. Unlike the CFTC, which in your opening
remarks, you noted for 40 years, we have been doing it as an
independent agency, for another 30 years before that as part of
the Department of Agriculture. We have 70, 80 years of
experience regulating clearinghouses, and suddenly now, under
this EMIR 2.2, we face the prospect of having to share
oversight of our domestic American clearinghouses with a
foreign regulator that is not competent to regulate its own
clearinghouses, but is competent somehow to regulate American
ones.
I have said publicly, Mr. Chairman, that at least under my
watch, and I know my pending successor, Heath Tarbert, has said
the same thing. This will not happen. U.S. markets will stay
under U.S. regulation under the oversight of its respective
committees in Congress. That is our constitutional system. That
is our duty, and that is the way it will remain.
The Chairman. Very quickly, yes or no. In your view, is
there something at work here where the EU is trying to wrestle
the clearing business in particular and the financial services
business in a general way from London?
Mr. Giancarlo. I believe so.
The Chairman. Okay, thank you.
Now I will yield 5 minutes to our distinguished Ranking
Member, Mr. Scott.
Mr. Austin Scott of Georgia. Thank you, Mr. Chairman.
Chairman Giancarlo, with regard to CFTC R&D Modernization
Act, you discussed that in your testimony. You obviously helped
us with that legislation. I hope that we are able to include it
in CFTC reauthorization this year.
My question for you is while the focus on this legislation
has been on the expanded transaction and gift authority, it
also reorients the Commission's statutory research and
development purpose. Can you talk about the importance of
having a focused plan for research and development activities?
Mr. Giancarlo. Absolutely. When I meet with farmers and
ranchers around the country, they often will say to me what is
going on in the markets? These markets are driven by algorithms
and high frequency traders, and we feel like we are being run
over in the markets.
Well, they are right. The markets are changing
dramatically. They are moving from human markets to computer-
driven markets. And if we are going to provide the function
that Congress requires us to do to oversee these markets, we
need to keep pace with those changes in the markets.
Some of our overseas regulators, such as the UK, are
actively participating in new technological advancements to see
whether they can both help the regulator to keep pace, but to
better understand the markets. In many cases, we found we are
prohibited from participating in new technological innovations
because if we were to participate in what they call proofs of
concept or beta tests of technology, it would be considered a
gift to the agency. And we couldn't accept a gift. We would
have to go through a procurement process.
And as I understand the legislation, the legislation would
allow us to participate in some of these technological
innovations in a way that would benefit the agency to do its
job so we can make sure these markets stay safe and sound and
able to be used by our American agricultural and commodity
producers.
Mr. Austin Scott of Georgia. I am going to come back to
that word gift in a second, but I want to talk about FinTech
and 21st century regulating. Can you talk more about LabCFTC
with regard to the R&D Modernization Act, and how it can help
the agency explore new tools that will help improve the
regulatory and oversight activities?
Mr. Giancarlo. Absolutely. As I say, things are rapidly
changing. Just as in every element of our lives today, going
from analog to digital, so are our markets. And there is a lot
of innovation going on right now, and innovation will come to
the agency and often be faced with regulators who are familiar
with the rule book, but not necessarily familiar with their
technological innovation. And LabCFTC allows us to have a
dedicated team within the agency that are familiar with some of
these technological innovations that can help translate the
language of innovators to language we are traditionally used to
in our markets.
It provides a stakeholder within the agency who is focused
on technology change and can help us understand it, adapt to
it, evolve with it.
Mr. Austin Scott of Georgia. One of the issues is how fast
things are changing, as you have said. And we have the Gift
Acceptance Authority.
Mr. Giancarlo. Yes.
Mr. Austin Scott of Georgia. And I think that those three
words perhaps give a false impression of what is actually
happening when somebody shares something with the Commission.
Can you talk about what a gift is in the context of the
Commission's budget, and what sort of a gift the Commission is
seeking to accept to further its research and development
mission?
Mr. Giancarlo. Sure. I will give you an example that we are
facing right now. There is this new innovation called the
blockchain. The blockchain potentially could have enormous
transformational advantages for us, as an agency, to be able to
actually see trading in the market in real-time and to see the
counterparty exposure of one large financial institution to
another in real-time. Right now, we do that the old-fashioned
way. We get data from the market and then we try to piece it
together, and hopefully we can understand. But if we could
participate in the blockchain, we could see it in real-time.
We have been offered the opportunity by many innovators to
actually participate in blockchain experiments, but I have been
advised by our General Counsel's office that if we were to
participate, it would be considered a gift, which we couldn't
accept. And so, we are missing out on participating in
innovations that are going on right now, which ultimately, we
have a role to play in. We should be a part of these
innovations. And as I understand the legislation, it would
allow us to participate and not deem our participation as a
gift, under the law, which we could not accept.
Mr. Austin Scott of Georgia. I think that is an accurate
portrayal of what we are trying to accomplish, and whatever the
language is, if we need to make minor language changes, I want
my Chairman to know that we simply need to get you the
authority to be able to participate in these so that we as the
regulators understand better what is happening in those fields.
And so, again, I will yield the 24 seconds that I don't
have back, but I want to thank you for your service. And ma'am,
thank you for your service as well.
The Chairman. And now I will recognize Ms. Spanberger, for
5 minutes.
Ms. Spanberger. Thank you very much, Mr. Chairman, for
being here today.
Thank you to the Chairman. I spent most of my career as a
CIA case officer, and as someone who has been deeply involved
in counterterrorism efforts, I know how vital it is to follow
the money, and how these efforts can illuminate and track down
terrorist groups and prevent future attacks.
A recent RAND report concluded that if a future
cryptocurrency provided better anonymity than bitcoin and
became widely adopted, it could be particularly useful for
terrorist organizations and therefore, make it much more
challenging for our intelligence and law enforcement agencies
to counter.
The current U.S. regulatory approach to cryptocurrency is a
patchwork and involves a SEC, IRS, DOJ, Treasury Department, as
well as the CFTC. What would you say is the biggest gap in
cryptocurrency regulation right now, and do you think new
regulatory authorities are needed to address the security
concerns surrounding cryptocurrency?
Mr. Giancarlo. The gap right now are spot cryptocurrency
platforms for spot markets, not derivative market
cryptocurrencies, non-ICOs. That is the gap between ourselves
and the SEC that exists.
Now, FinCEN (Financial Crimes Enforcement Network) examines
them for money laundering purposes. There are state regulation
that are partial, not comprehensive. But we do not regulate
non-derivative trading platforms. We don't have the requirement
that they register with us, nor are they subject to our
oversight and supervision. That is the gap that exists.
Ms. Spanberger. Okay. Would you make any broad-brush
generalizations of recommendations of where we could close that
gap and how, from Congress' perspective, we could anticipate
any future concerns, be able to address those gaps?
Mr. Giancarlo. Yes. If it is on the derivative side, as it
is with bitcoin futures, we have it, and it fits within our
traditional capabilities. If it is like a security, then the
SEC has it. We work very closely with the SEC. We have an ad
hoc working group on cryptocurrencies, and I could see how that
ad hoc working group could be further developed into something
that could be more routine. If it were adequately funded by
Congress, and could, with some extension of jurisdiction, legal
jurisdiction, it could take a more active role on those spot
exchanges. Right now, we don't have the legal authority and we
don't have the resources. But with resources and authority,
that is something that could be developed.
Ms. Spanberger. Thank you very much.
My second question, switching gears, is talking about
LIBOR. With the transition from LIBOR to SOFR (Secured
Overnight Financing Rate) as the new recommended benchmark
being voluntary, I am particularly concerned about farmers in
my district in central Virginia who have loans based on LIBOR,
as well as other constituents who have business loans,
mortgages, and student loans that are currently based on LIBOR
and could be affected by this transition. I know that the
CFTC's Market Risk Advisory Committee has been working on this
transition, and based on the current state of their work, what
is the plan to make sure that these transitions happen smoothly
to communicate these transitions and to provide stability for
farmers, homeowners, and others who might have loans based on
LIBOR?
Mr. Giancarlo. Yes, thank you for that. It is something we
have been very focused on, and the work of the Market Risk
Advisory Subcommittee on LIBOR has been doing some great work
in this area, as has a number of work streams, both
domestically and internationally.
If I could just take a moment, because your constituents
are probably wondering why we need to move away from LIBOR?
Well, LIBOR was something that was started 30, 40 years ago
when banks actually financed themselves by lending to each
other in overnight markets. Over the last several decades, that
has dwindled down to less than a dozen trades a day, and less
than $1 billion worth of trades a day of banks lending to each
other. Banks simply don't finance their operations with
overnight lending anymore. They use repo markets and other
longer-dated instruments. There is virtually no LIBOR market
left, and yet, we have trillions of dollars of loans--some to
your constituents--that are based on a market that doesn't
really exist anymore. It is like a house that only has one
stone left as its foundation and could collapse at any time.
And that is why in an act of great responsibility, world
financial regulators have said let's not wait until the crisis
happens. Let's take steps in advance of the crisis to move to
another rate. And the rate that has been selected through a
combination of regulators and industry is called SOFR, the
Secured Overnight Financing Rate, which is based upon how banks
actually do their overnight funding or their dated funding,
their lending funding, their repo funding. It is a much more
stable rate. It has now been tested.
And now to answer your question, there has been a lot of
development on it. Our exchanges at the CME and ICE have
launched a future based on this, so there will be some pricing
point references for the new rate, and they had great success
in the development of that. An organization called ISDA, the
International Swaps and Derivatives Association, is working on
protocols that the marketplace will use for how the transition
works. And there is a timeline. We are in a very critical
phase, but I must say, every milestone that has been set has
either been reached on time or early so far. The public-private
partnership to move away from LIBOR is working very well. There
are more mountains to cross, but we have crossed many so far,
and I am optimistic we will get there within the next several
years.
Ms. Spanberger. Thank you very much. I yield back.
The Chairman. Thank you. Now, I will recognize Mr.
Crawford, for 5 minutes.
Mr. Crawford. Thank you, Mr. Chairman, and Mr. Giancarlo,
Chairman, thank you for being here.
I am going to frustrate my staff a little bit and go off
script. I had some questions I was going to ask you, but
something is on my mind. We have had this conversation before,
and I probably wouldn't have asked it this way 2 or 3 years
ago. But being that you are starting a new phase in your life,
I am going to ask you to speculate, which I wouldn't ordinarily
ask.
But you mentioned this before that you visited farmers and
ranchers. You have walked rice fields and you have been out
there. And one of the things that I hear from my farmers back
home is just really a fear in participating in the market. And
so, to me, what we have lost, and the irony of the fact that
this is the Agriculture Committee and this is the kind of thing
that we are supposed to be talking about, to provide a level of
support to our farmers and ranchers who provide the very food
and fiber that we rely on. But we have blocked them, in effect,
from participating in what is the quintessential capital market
and the free market tool that they should be using to secure
their production.
And so, when I suggest to farmers, you really need to rely
on a hedge instrument, primarily I suggest options because the
fixed cost and nature of options and you don't have to make
margin calls and there is a level of security there. And they
are just afraid. And what that contributes to is greater
volatility. And what it points to, and you mentioned this
before, we have algorithms, we have hedge funds, and we have
all those other things that keep farmers from participating and
being a part of price discovery, which they relied on up to
really just not that long ago. But they are afraid to get in
it.
And I wonder if you could offer some suggestions or some
reassurance on how we get farmers back in the market, creating
that liquidity, and stabilizing the market basket?
Mr. Giancarlo. Thank you for that, and let me free think on
this, because it is the essential question. You put it very
well. These markets serve two purposes for our commodity
producers, to hedge their price risk, for the most part, and to
provide a stable price point so even if they are not engaged in
the markets, when they go to the grain elevator, when they sell
their production, they are looking at a price point that comes
out of the exchanges, and that is where they are negotiating
price on, and they want to know it is a reliable price. They
want to know these markets are not manipulated. Whether they
have been manipulated by old-fashioned bad guys, or whether
they have been manipulated by algorithmic trading or other new
technologies in the markets. And that is what keeps us up at
night at the agency is thinking about how are our markets
changing, and are they changing in a way that is distorting
either that price discovery point or the ability to hedge
production? And they are changing rapidly, just like everything
else in our lives, whether the way we hail a taxi today or book
a hotel room. Our markets are going through that same digital
transformation. And it is a force much bigger than any of us.
It is not like we are going to get out there and say, ``Stop,
these markets have to stay analog,'' because we will get run
over. We can't stop it. What we have to do is understand it.
And we have to stay in pace with it, and then see if there are
distortions, where they are, and take steps to address it.
Which is why we need this new authority so we can be involved
in all these technologies.
But farmers and ranchers are smart people. I mean, they
know things are changing. They can sense it all around them.
Sometimes when I talk to them, I feel like I am talking to
somebody who could be a car driver driving a Ford Pinto down a
2019 highway, and getting passed by by much faster vehicles,
vehicles that can turn on a dime, can stop on a dime. And
that's what these algos allow their users to do. It is not just
about high frequency trading. It is about the sheer ability of
them to change and morph and use artificial intelligence to
learn from what else is going on in the market. I mean, it is a
really dynamically rapidly changing market, and the challenge
is us keeping pace, which is why we have brought in a world-
ranked Chief Economist. It is why we have created a market
intelligence unit. We really need to focus on understanding the
evolution of these markets and coming up with some answers to
whether there is manipulation, whether there is still a fair
deal for the individual user of these markets. And options are
a way that I have seen a number of ag hedgers use and use
successfully. But, the old-fashioned futures product is still a
good product as well.
I stated for you a lot of concerns, but in spite of those
concerns, I fundamentally believe our markets remain sound. In
fact, the use of our markets has only grown, not diminished.
They have become global markets, just as our ag products are
global export products. Our futures markets are used by users
year-round. Argentinean wheat growers use the price out of
Chicago. Brazilian cattle farmers use the live cattle product.
I mean, our markets have only grown in global stature, despite
all these changes.
It is a complex area. It has been my great pleasure to
focus on it for the last 5 years, but these challenges are not
going away. They will remain, and they will grow. Challenges
and opportunities, I should say.
Mr. Crawford. Let me thank you for your years of service,
and to you and your family, I wish you all the best in the
future.
Mr. Giancarlo. Thank you, Mr. Crawford.
The Chairman. I now recognize the gentleman from New York,
Mr. Maloney, for 5 minutes.
Mr. Maloney. Thank you, Mr. Chairman. Nice to see you
again, Chairman Giancarlo.
Last year, we heard from the former Chairman, Chairman
Gensler, and your Chief Innovation Officer. We heard from you a
couple weeks later on the subject of cryptocurrencies, and you
touched on this with my colleague from Georgia. But I wanted to
invite you to say another word on this subject. There is a lot
about it I don't understand, but I am very interested in it,
and I am interested in the issues that it poses for capital
formation and risk transfer. I am interested in the impact that
it has on the capital and derivative markets.
Like you, I believe it is transformational and presents an
enormous opportunity, but it comes with some opportunities to
screw it up as well. I am hoping you could say a word: there
was broad agreement last year that the CFTC has a greater role
to play here, and that is going to require some changes to the
Commodity Exchange Act. Can you say a word about that, and what
changes we should be considering to the CEA?
Mr. Giancarlo. There could be some changes in terms of
jurisdiction, as mentioned before. Our existing tools, though,
allow us to oversee areas of cryptocurrency derivatives. As you
know, we have cash settled cryptocurrency derivatives that have
come through our process and have worked quite well. In fact,
the San Francisco Fed did a study that said that more than
anything else, it was the launch of CME's bitcoin future that
popped the bitcoin bubble. And I take great satisfaction in
that, because the knock on regulators coming out of the last
financial crisis is that they didn't see the bubble building,
and they did nothing. Well, in the first post-crisis bubble
that we saw in 2017 in bitcoin futures, it was actually a
market-based product overseen by our agency that did more than
anything to perhaps correct that bubble. And so, I think that
is an area of some satisfaction.
We do find the issue of physically settled bitcoin more of
a challenge, because it comes down to where are those bitcoins
housed in a physically settled bitcoin. And the way our statute
works is that while we have oversight over clearinghouses, when
it comes to actual custody, it is usually done through state-
based organizations, banks or trusts. And so, physically
settled presents more novel challenges for us which we are
working through, through a number of applications right now.
I am not sure we need new legislation in that area, but it
is something that if we did, we would certainly come to----
Mr. Maloney. Just because I have limited time, you wouldn't
make any changes to the CEA?
Mr. Giancarlo. I do think we do need to think about the
spot-based exchanges, but for derivatives, I don't have any
recommendations to make at this time.
Mr. Maloney. And what about the potential for a race to the
bottom, if the U.S. doesn't lead in this and we see
international markets regulating in an inferior way? And could
you also say a word about how we can assure people that this is
something that is good for them, for their families? There is a
tremendous lack of understanding about the nature of
cryptocurrencies. Some of the press around it has been quite
scary in terms of its ability to kind of facilitate wrongdoing,
the old silk road website, the rest.
Now, can you say a word about sort of concerns about a race
to the bottom, number one, and number two, about just how we
assure people that this is something that is good, not bad?
Mr. Giancarlo. Yes. We have the challenge of both a race to
the bottom with some jurisdictions. We also have a race to the
top with some jurisdictions. France, for example, has just put
forward a very forward-looking new law, the PACTE Act (Plan
d'Action pour la Croissance et la Transformation des
Entreprises), on encouraging coin offerings to take place under
French law. And there are a number of other jurisdictions.
Germany is looking at one right now. I think both are
challenges to the United States, in that this may develop
offshore in a way that would be hard for us to control and our
citizens could be taken advantage of in a race to the bottom
with jurisdictions. But, there is also a challenge that other
jurisdictions will come up with some really good protocol,
legal protocols, that will attract business that we will then
miss out for the United States.
The reason why I think cryptocurrencies, crypto-assets are
here to stay is because a good portion of the globe, maybe \1/
3\ or more, does not have a functioning currency. And you are
already seeing new payment systems outside of our bank-based
payment systems take place in places like southeast Asia and
others, and I can see how crypto-assets could be perceived in
many parts of the world as far more stable than the nominal
currency used by their governments.
If you visit parts of the developing world, their local
currency may be sufficient to buy vegetables in the local
market. But if you want to buy a Toyota, they won't accept the
local currency. They are going to require a hard currency like
the dollar or the euro. And yet, I could see where those
jurisdictions could go to a crypto-asset based currency.
We are in a dollar-based jurisdiction. We don't often think
about challenges to the dollar. But, long-term, there are many
parts of the globe that are searching for something that is
electronic, that is stable, that is mobile telephone-based, and
I can see where you could see crypto-assets taking off in many
parts of the globe.
Mr. Maloney. Thank you. I yield back, Mr. Chairman.
The Chairman. Now I recognize the lady from the Virgin
Islands, Ms. Plaskett, oh, I am sorry, Mr. Rouzer.
Mr. Rouzer. That is all right, Mr. Chairman. Thank you
much.
Mr. Chairman, let me add my voice to those who have thanked
you for your service. It has been very, very commendable, and I
really appreciate you being here today.
Late last year, you proposed a significant overhaul of the
swaps trading rules. I know this is an area you feel very
strongly about and have worked very hard to be thoughtful and
deliberate in your approach.
I am interested in two particular aspects of your
testimony, the reliance on staff interpretations and guidance,
and the potential impacts to liquidity during a crisis.
First question, can you elaborate on which parts and how
much of the SEF trading rules are dependent on staff
interpretations and guidance, and then why should we be
concerned about that?
Mr. Giancarlo. Thank you very much. Broadly, whenever
regulators operate through no-action relief or staff guidance,
that makes it easy for large institutional players in the
markets to hire the lawyers necessary to parse through that no-
action relief and know what they can do and what they can't do.
But it makes it very hard for new entrants in the market that
may not have those types of big law firm resources to go and
know where the law is. And that it is always better to have our
rules clear and easily understandable.
Our SEF regime right now is held up in a whole range of key
areas by a series of no-action relief, by a series of staff
guidance, and in many cases, by simply staff forbearance of
enforcing some of the rules. And so, my SEF proposal would be
to incorporate all those into the proper text of the rule and
to make it clear. But it also would make our system, as I
believe Congress intended it to be, much more flexible in
approach. The current rule-set really flies in the face of the
clear instruction of Congress. For flexibility, it is very
prescriptive, and it is overly based upon the listed futures
market.
But, more broadly, our markets compete on a global basis
day in and day out with foreign markets. Why shouldn't we have
the best regime? I have always said the goal is not to have
either the most regulation or the least regulation. That is a
false argument. We should have the best regulation. We should
have regulation that attracts new entrants, new business
models.
Since our rules went into effect, we have had no new
entrants come into this space. We have had no new trading
protocols. We have had no innovation. As Americans, to have no
innovation just goes against our nature. It goes against who we
are. And I would like to bring innovation back to this area of
the market.
Mr. Rouzer. There are some market participants, obviously,
that suggest proposed changes would impose significant cost on
them. What are your views on rather than having a major
overhaul, having more of a targeted approach?
Mr. Giancarlo. Yes. There are those who believe we can take
around the edges and just take some of that no-action relief
and codify it. But we are still left with a regime that is
overly prescriptive, a regime that is based upon the wrong
model, which is a listed exchange model, and a regime that
would really squelch innovation as the current regime has done.
Mr. Rouzer. Moving on, I have a couple other topics I want
to hit real quick. Last week, the CFTC's Energy and
Environmental Markets Advisory Committee meeting included a
discussion about the SA-CCR (Standardized Approach to
Counterparty Credit Risk) proposal, its impact on energy
derivatives. I am a little bit concerned about that because
many of the advisory committee participants indicated that if
the proposal was not changed, it would reduce the ability of
energy companies to hedge their risk, and the resulting
volatility would be passed on to rate payers. Can you explain
what these energy firms are concerned about, and share your
thoughts on the matter?
Mr. Giancarlo. I am really glad you asked that question,
because it is a very important matter and it is one that is
right before us right now, and the time to fix this is now.
Global standards emerged in the wake of the financial
crisis on dealer capital, and we are a great supporter of
those. I believe in those reforms. But in some cases, U.S.
regulators have gold-plated those international standards, and
added additional requirements on top of them. In the case of
what is called the supplementary leverage ratio, our U.S.
Prudential Regulators at the Fed, the FDIC, have gold-plated
those standards, and the OCC have gold-plated those standards
by adding an additional 40 percent capital requirement on
energy. And not just the more volatile energy products, but
also in some relatively stable price points like natural gas.
And this gold-plating is not borne out by any type of data that
shows it is necessary. What is increasingly clear is that it is
going to have a cost all the way down the energy food chain and
impact consumers, institutional and residential consumers of
energy with additional costs that are really not borne out by
systemic risk concerns.
It is an area that our Energy and Environment Markets
Committee explored. We looked at some very good data, and my
fellow Commissioners and I, on a bipartisan basis, Republicans
and Democrats, have written to our fellow regulators asking
them to reconsider this gold plating so that we don't impact
our U.S. energy consumers and energy users.
Mr. Rouzer. Thank you very much. My time has expired.
The Chairman. Thank you very much. I now recognize the
gentlelady from Iowa, Mrs. Axne.
Mrs. Axne. Thank you, Mr. Chairman, and thank you, Mr.
Giancarlo, for being here. It is a pleasure to meet you on what
appears to be some of your last days in this position, so it is
a pleasure to meet you.
You just heard I am from Iowa. My apologies, I just came
from another event with some folks from Iowa downstairs, with a
lot of them in agriculture.
I want to express that I am concerned, and of course,
Iowans are concerned about agriculture and where we are at, and
certainly our farmers are concerned. And the recent Ag Economy
Barometer Report in March was, I am sure you know, at 133, down
from 136 in February. And when farmers were asked if they were
less optimistic about the future, 52 percent agreed that they
were.
I understand why they feel this way, of course. They are
facing uncertain trade markets and in China in particular, of
course, they are looking at a lot of alternative trading
partners. We are losing those businesses. And of course, we are
waiting for those tariffs to stop and for trade negotiations to
conclude.
I want to ask you in thinking about these things about our
futures, and would you agree that the uncertainty over tariffs
and trade agreements brings volatility into the commodity
prices and our futures markets?
Mr. Giancarlo. Yes.
Mrs. Axne. And the longer the trade agreements linger
unresolved, will it have a negative impact on the stability of
our markets?
Mr. Giancarlo. It certainly impacts volatility in the
markets.
Mrs. Axne. I appreciate that. And of course we have seen a
devastating increase in small refinery exemption waivers from
the Renewable Fuel Standard, and that absolutely affects our
ethanol supply in Iowa. And are you seeing impacts from that in
the futures market?
Mr. Giancarlo. We certainly are seeing the impacts in
ethanol from the recent flooding that has been devastating for
the area. And, transportation costs have had an increased
impact.
One of the things we do at the Commission is we look at our
commodity prices daily, and we do a weekly recap every Friday.
And we look at all the impacts that are triggering volatility,
whether they be tariff issues, whether they be political risks,
whether they be weather-related risk, and it is not ours to
determine whether the price is right, but we are always
searching to see what are the shocks are to the marketplace,
and how is the market processing those inputs to make sure that
the price establishment is fair, so that producers can rely on
the price signals that come out of our markets and trust that
they are accurately reflective of all the externalities that
are impacting those markets.
Mrs. Axne. I appreciate that. Thank you.
Moving forward, while prices for resilient biofuel, for
example, have increased by 19 percent, ethanol futures were
down for June by about one percent for 2019. And as we know in
Iowa, we just talked about where ethanol goes, that is where
corn goes.
Mr. Giancarlo. Yes.
Mrs. Axne. And as of, I believe, April 23, speculators held
a net short position of 322,215 futures and options, which is
the U.S. Commodity Futures Trading Commission data that they
reported. And this figure, obviously, measures the difference
between bets on a price increase and wagers on a decline, and
that has been the most negative, as I know you are aware, since
2006.
Are you concerned about the impact that U.S. trade and
policy decisions are having on the markets you oversee?
Mr. Giancarlo. Yes. Let me distinguish, again, part of our
discipline is not to determine whether a given price is a good
price or a bad price for producers. I know prices affect
producers, right? But as a markets overseer, what we are
looking to see is whether that price discovery mechanism is
accurate. It may be accurately setting a low price, which may
be disappointing to many, but if it is an accurate price
determination, then we have done our job.
And so, we are always looking at the range of
externalities. We are looking at factors, and analyzing whether
the market is doing the right job of establishment, including
the different roles of different participants in markets,
whether they be speculators, whether they be natural hedgers,
whether they be large merchandisers. We are always looking at
the different roles of different participants, and I am
confident that the market is providing its essential function
of working through all those inputs to come out with an
accurate price point. Now, we know that prices have been
falling in many commodity markets for American producers for
the last several years, and in some cases, may be almost
reaching an economic crisis point for many. But our job is to
make sure whatever the price is, it is fairly arrived at and
our markets are doing their job pricing it.
Mrs. Axne. I appreciate that. I have lots of questions I
would love to ask you, but let me just close. Obviously, we
also have ag land that is declining in prices, so I look at all
these variables as creating volatility for our futures. And I
would ask you, as I go back this weekend again and talk to the
farmers in my district, what should I tell them about their
confidence in the markets right now?
Mr. Giancarlo. Well, you can tell them they should have
confidence in the markets. Now, they may not like the price
signal coming from the market. I understand that. My experience
with meeting America's farmers and ranchers is an enormous
amount of respect and sympathy for the challenges they face. I
think they have some of the most challenging jobs in our
country. But I believe our markets are sound and operating
effectively.
Mrs. Axne. I will let them know. Thank you.
The Chairman. Thank you, and now I recognize the gentleman
from Florida, Mr. Dunn.
Mr. Dunn. Thank you very much, Mr. Chairman, and thank you,
Mr. Giancarlo, for your time and effort here, not just today,
but also in your agency.
You have written extensively about the importance of
derivative markets and how it protects consumers from price
fluctuations in every day items. I believe you have found a
balance between smart regulation and over-regulation, over-
burdensome regulation, and our country is better for that
attitude. It is not just bankers who suffer, it is actually the
farmers and ranchers who depend on the stability of those
derivatives to make a living.
And I know that you have worked with SEC, Chairman, to
prioritize to the coordination and harmonization of the rules
that you share, swaps and hedges. And I wonder if you could
describe for us the to-do list you have worked on, what you
have checked off, and also what you are facing now, going
forward?
Mr. Giancarlo. Yes. When I came into the chairmanship 2
years ago, one of the true disappointments I had was that there
was no harmonization effort ongoing between our two agencies.
And yet, there are so many places where our agencies have
either overlapping or very close jurisdiction that require
almost a continuous process.
And so, Chairman Clayton and I, in one of our very first
meetings, we sat down together and said, ``Let's create an
ongoing harmonization process, both in our policy areas, but
also in things like our enforcement areas,'' things like our
response to new emerging technologies like cryptocurrencies.
And so, we have a number of ad hoc working groups. One is to
look at policy harmonization, rule harmonization, and for that
we have each nominated members of our Commission. In the case
of our agency, it is Commissioner Brian Quintenz, and at the
SEC it is Hester Peirce, who lead this process of looking at
policy harmonization.
Our heads of enforcement have a regular ongoing meeting to
talk about enforcement cases, and we have done more partnering
with the SEC on enforcement matters in the last 2 years than
has been done in the history of our two agencies.
And then also in the area of new emerging things like
cryptocurrencies, we have coordinated virtually every step we
have made. We just last week put out an advisory to retail
participants in cryptocurrencies to warn them about some of the
risks in this area, and it was coordinated between our two
agencies.
We have an unprecedented level of cooperation.
Now, in terms of actual policies, there are several
challenges. One is in areas where our rules are set and their
rules are set, and they may have different approaches. How do
we bring them closer together? We are working on that in a
number of areas that would require us to make some changes, for
them to make some changes, and I am hoping that we are on the
verge of doing that very soon.
The other area is in new policy matters. For example, the
SEC right now is working on some capital rules and margin
segregation rules. And we have already put our rules in place.
We have been working with them to bring their rule-set closer
to where ours is, so that when they go final with it, it is
much more harmonious. And you will also see some action on that
with any bit of luck even before I leave the Commission, but
certainly sometime this summer I would imagine those would be
finalized.
Mr. Dunn. Thank you very much for that. I also want to
thank you for the improved economic analysis that you have made
a cornerstone of your time as Chairman. I think good data can
solve a lot of disagreements.
Regarding that, as we contemplate the reauthorization of
the CFTC, are there any statutory changes that would help
support you with this high-quality research and analytic work
on economics at the Commission?
Mr. Giancarlo. Yes. No statutory changes, but I think that
the future for the agency is to become what I call a
quantitative regulator. We have to be able to do data analysis
on par with the most sophisticated firms operating out of
Silicon Valley in California, whether they be Facebook or
Google. We have to be able to do data analysis on billions and
billions of data sets and on trillions of dollars of markets to
truly take our place as the foremost global regulator of
derivatives. And that is the future for us, and that is
something that involves a long-term conversation with Congress,
both in terms of funding, and how do we get there? But if we
are going to do our job in these markets, we have to move
ourselves from an analog approach to data to a highly digital,
highly sophisticated, highly data automated process. The type
of work that Facebook and eBay and Amazon do every day, we need
to be able to that same type of analysis of data in our
marketplaces.
Mr. Dunn. Well, thank you for your commitment to that, and
we look forward to working with your Commission to make that
happen.
Mr. Chairman, I yield back. Thank you.
The Chairman. All right, thank you. Now I will recognize
the gentlelady from the Virgin Islands, Ms. Plaskett.
Ms. Plaskett. Thank you very much, Mr. Chairman, and thank
you, sir, for being here this morning.
I wanted to ask you about something that was alluded to
earlier, blockchain, but in the context of automated trading,
which is growing and has contributed to some of the market
disruptions and some automated trades aren't reflective of the
true value of companies, but are actually related to the speed
at which those transactions occur.
Since probably more than half of the trading in agriculture
futures is automated, what is the status of regulated automated
trading, and when can we expect to see or should there be any
action from the Commission in this area? That is the first
part.
And then the second part would be how blockchain may affect
this automated trading, and is that a mechanism by which you
can be more reflective and monitor what is happening in this
area?
Mr. Giancarlo. Right. My predecessor, Chairman Massad,
under his watch put forward a proposal called Regulation AT,
which stands for automated trading. By some estimates, that
proposal would have required over 2,000 automated trading firms
to register with the CFTC. It also would have given the CFTC
the authority to take control of their source code behind their
trading mechanisms without a subpoena. I did not support that
regulation. I thought it was overly broad. I didn't think we
had the resources to take on 2,000 new registrants, and quite
frankly, I thought that taking the source code without a
subpoena was, frankly, unconstitutional. I didn't support that,
and I have been clear that I don't support it today.
What I do support, though, is what Chairman Massad was
trying to get at in that regulation, which was better insight
and understanding of the role of automated trading. Whether it
be that subset that is high frequency, or generally the use of
automated trading mechanisms in our market. I believe that is
the right thing to do, and that is why we have created our
Market Intelligence Branch. And our Market Intelligence Branch
just released a study on the role of automated trading in our
markets. And that study found that they don't materially
contribute to volatility in the market. I think that was an
important piece of work.
But we have much more analysis to do on the role of
automated trading in the markets, and I know our Technology
Advisory Committee is going to take up what should be the path
forward for the agency with regard to automated trading.
Ms. Plaskett. And what are your thoughts on that?
Mr. Giancarlo. Well, I don't believe in a registration
scheme. What I do believe in is market intelligence. I don't
believe you can hold back technology, but what we need to know
is where those technology changes--if they are manipulating the
market, if they are distorting the market, where they are. And
that is where the search has to be. But we don't yet have
evidence that they are either distorting or manipulating.
Ms. Plaskett. And do you believe the blockchain is a
mechanism by which that can be monitored or reviewed?
Mr. Giancarlo. Yes. I have said this many times. I think
blockchain could be for regulators a quantum leap forward in
how we understand markets, how we digest information. And so, I
am a big supporter of the use of and the development of
blockchain in the regulatory process.
Ms. Plaskett. In utilizing blockchain it is often attached
in discussions to cryptocurrency and bitcoins. Outside of
cryptocurrencies, are there any new other asset classes that
have come into the market since Dodd-Frank has been put in
place, and what are those and how should we in this Committee
be looking at those?
Mr. Giancarlo. Our markets have a great track record of new
innovation. Some of it is in new versions of old fashioned,
different commodity products. Some are launched and don't gain
traction and disappear. There recently was an attempt at a new
cotton contract. It is a very old staple, but it was a new
contract. It didn't gain the traction that its promoters
wanted, but it is an example of some of the new products that
we see.
We continue to see new types of crypto-assets coming to the
market. I am not familiar, though, with any technological
innovation is similar to those that have come about in the last
2 years, but it won't surprise me if there is something right
around the bend that we haven't seen.
Ms. Plaskett. Before my time runs out, there was an
exchange I had this morning regarding aluminum, a disruption
that may be perceived in the aluminum market, which are not
entirely related to the tariffs that the President has put on.
I know the Secretary, Wilbur Ross, acknowledged that there
may be antisocial, as he put it, behavior in the marketplace
related to Midwest premium and aluminum. Can you elaborate on
that?
Mr. Giancarlo. Yes. We monitor that very carefully for
areas of manipulation, and we have been looking at aluminum for
years. There have been concerns about that, but we have not
found manipulation in the market. There are concerns about the
way the index--used by some of the index providers--is
constructed, but not from the point of view of manipulation,
but from the point of view of the way it is constructed and
whether it leads to the most accurate pricing point.
That is an area that is actually outside of our
jurisdiction. We do not regulate the formulation of benchmarks.
We only oversee where there may be manipulation that it would
affect one of our derivative markets.
Ms. Plaskett. Thank you, and I yield back. Thank you, sir.
The Chairman. I now recognize the gentleman from South
Dakota, Mr. Johnson, 5 minutes.
Mr. Johnson. Thank you, sir. I do want to save a couple of
minutes for us to talk about the SA-CCR method, Mr. Giancarlo,
but I want to give you an opportunity for 1 minute or 2 to talk
a little bit more about Brexit. In the interest of time, the
Chairman had to cut you off, to round out your answer a little
bit and end with any sense of whether or not the end-users
could be impacted by Brexit.
Mr. Giancarlo. Well, I think that if London is
substantially destabilized as the global processing center for
over-the-counter swap derivatives, which is an enormous market,
whether measured in notional or even net terms. There is
something like 17 to 20 net notional of derivatives cleared in
London. That is something that would work its way all the way
into the real economy. It would affect interest rates. It would
affect everything in the real economy. We are very concerned
and very focused, and we have taken a bit of a leadership role
on this area at the Financial Stability Oversight Council of
alerting them to concerns we have as to the destabilization of
London. If that business were to leave London, it is a question
of where it would migrate to and how that would be done.
We view the dollar and dollar-based instruments as a global
currency and global instruments. We believe our markets are
export markets, so we don't seek to dictate where the market
servicing reside. If the dollar is truly a reserve currency,
then clearing of dollar-based instruments can take place in
London. But if London is displaced in that role, then we do
have a concern as to where that goes.
Mr. Johnson. Is there speculation about the two or three
most likely homes?
Mr. Giancarlo. Well, as the Chairman noted, there certainly
have been efforts out of Europe to force relocation of some of
that to the continent. London is unique in its skills, in its
historic and in its common law-based regime and in its ability
to innovate. I am not sure there is any place else in Europe
that quite matches it, and we will have a concern as to the
migration of that business because American financial
institutions play such an outsized role in those markets.
We are also concerned about efforts by our colleagues in
Brussels to expand their jurisdiction over institutions outside
the EU. As I say, we have a long history of successful
oversight of our domestic clearinghouses. Our domestic
clearinghouses did not fail during the financial crisis, and
some of that was due to strong oversight by the Commission that
I have the honor to serve.
We would be very concerned about a new regulator without a
track record of regulating these markets suddenly asserting
their jurisdiction here in the United States.
Mr. Johnson. Yes, I think that is well said.
I do want to shift back to the SA-CCR proposal, and I was
impressed by the letter that you and your colleagues sent. I
share your concerns with regard to the proposed rule and its
impact on the supplementary leverage ratio.
I was just mystified that you had to send it at all. To me,
it is as clear as day that the proposed rule, if not changed,
the real negative impact won't be to the big banks or the big
boys and big girls that sometimes are made out to be bogeymen,
but rather to low volume traders, manufacturers, community
banks, producers.
I know you have had some conversations with Vice Chair
Quarles. Do you get the sense we are making any progress?
Mr. Giancarlo. It is not for me to criticize any other
agencies. I know how challenging it is to run an agency. But in
my conversations with the head of those agencies, they
understand the issue. The challenge is in moving a rule change
through and the bureaucracy and the challenge of doing that. I
can sympathize with that. I know it is. But as I said earlier,
the time is now. We have to get this right now. And no other
important economy outside the United States has done this gold
plating the way we have. There is no need to do it.
Mr. Johnson. Very well said. Thank you for your time today,
sir.
Mr. Chairman, I yield back.
The Chairman. Thank you very much, and now I recognize the
gentleman from Indiana, Mr. Baird.
Mr. Baird. Thank you, Mr. Chairman, and Chairman Giancarlo,
we really appreciate you being here today, and appreciate your
testimony.
I understand that your tenure with the CFTC is ending in
the next few months, so what I want you to know is very
important to Hoosiers, and I can assure you that farmers and
small business owners greatly appreciate all that you and
everyone else at the CFTC has done to ensure that a robust
derivatives market is available to Indiana business owners and
farmers who want to really manage their risk.
I have heard the statistics about reductions in the FCMs,
or future commission merchants, including that nearly half have
left the business in the last 2 decades. And so, I am concerned
about the lack of FCMs, particularly those that have previously
served our small end-users, especially those rural communities
and agricultural producers.
So, my question is really two questions here maybe. What
role does an FCM play in this derivatives ecosystem, and then
what is the impact of fewer FCMs on market participants,
especially our farmers and ranchers?
Mr. Giancarlo. Well, the short answer to your question,
FCMs play a vital role in connecting end-users to our
marketplaces. They are the gateway from the farmer in his cab
who is looking to hedge his harvest time price risk to that
futures market. They play a vital role.
And the impact of lessening FCMs is not being felt by large
firms, by large manufacturers. DuPont doesn't have a problem
getting Goldman Sachs FCM to serve their business. It is the
very farmers and ranchers that you are talking about where the
diminishment of the FCM business is really playing out.
Ten years ago there were several dozen smaller FCMs that
were focused on agriculture customers, serving their needs. Now
that business is increasingly being concentrated in Wall Street
banks, and quite frankly, they don't have the skills, they
don't have the reach, they don't have the interest in serving
those smaller agriculture and commodity producers that need to
hedge risks.
You have your finger on a concern that has been a great
concern. It has been a bipartisan concern. I mean, I have
spoken to Commissioner Berkovitz and Commissioner Behnam, my
two Democratic colleagues, as well as Commissioners Stump and
Quintenz on this very subject, and it is something we are all
very concerned with at the CFTC.
Now, there has been a number of reasons for that. Some of
that has been the low interest rate environment. I mean, shame
on some of those FCMs that built their business model on a bit
of the carry trade on higher interest rates. We have had a
prolonged interest rate burn, and that has hurt their business
model. Some of it was sheer fraud and manipulation. I am
thinking of Revco, I am thinking of Peregrine Financial, and I
am thinking of MF Global, for mishandling of their business
model that are no longer in business.
But some of it simply is that we are in an age where
consolidation and cost mitigates the bigger firms to have the
economies-of-scale to operate in this market, and it is very
hard for the smaller FCMs to work. And that is one of the
reasons why we have created something called Project KISS, to
simply look at our rules and see if we can make them more
straightforward, less costly, less burdensome, so that smaller
players continue to operate these markets and make a reasonable
profit to make it worthwhile to continue to compete in the
business.
Mr. Baird. Thank you. You really have great insight,
because you answered my third question as well.
But I might move on to another point. I thought I would
give you an opportunity. I know you have made a real effort to
get out to know the rural community and the farmers and the
ranchers, and so would you want to just make a comment or two
about the topics and the agenda that was at the Agriculture
Commodity Futures Conference in Kansas, just to give us a feel?
Mr. Giancarlo. Yes. One of the things we looked at was the
dwindling number of FCMs and whether we could do our part to
perhaps lessen some of the burden for them.
We also heard from our large agriculture chains at CME that
talked a little bit about how their algorithm works, and that
is of great concern to a lot of producers, to understand better
the markets they participate in.
And then we also talked about the role of these markets in
setting price for spot markets. It is interesting and it is
something folks don't readily understand. It is actually the
derivative markets that set the price that takes place in the
cash or the spot market, and that is why the job we do is so
vital to make sure our markets serve in a way that is free of
manipulation that they provide accurate prices. When a farmer
takes his production to the elevator or wherever the point of
sale is, he knows the price he is getting is a fair price.
Mr. Baird. Thank you very much, and I yield back.
The Chairman. Thank you, and now I will recognize the
gentleman from Kansas, Mr. Marshall.
Mr. Marshall. Yes, good morning, Chairman, and if I ask you
a question that you have already answered, you will have to
forgive me. This has been the typical morning, running back and
forth to another committee hearing.
First question: Could you just maybe provide a little bit
more information, specific examples of how you are committed at
the CFTC to focus on the agriculture sector? Just to
communicate a little bit more with my folks back home.
Mr. Giancarlo. Well, so I will start with our very recent
Ag Commodity Futures Conference, which took place in Kansas
City, but not just any Kansas City, but Overland Park, Kansas.
Mr. Marshall. And the K of that K State was Kansas State.
Mr. Giancarlo. And the K in that K State----
Mr. Marshall. Just in case anyone would think it was
Kentucky or some other state that started with a K.
Mr. Giancarlo. Indeed, it was Kansas State. And we held the
first, as far as I understand, we have done a little bit of
research, the first time ever we held any CFTC advisory
committee meeting outside of Washington with all five
Commissioners also in that same K State, Kansas, in Overland
Park last month.
But that is just two very formal things. What we tried to
do is really readjust the tone at the top. It is understandable
that in the wake of the financial crisis and when Dodd-Frank
charged the CFTC to implement a lot of reforms of the global
swaps market, that the agency's attention went to these big
institutional financial markets, based in Wall Street and
London. But what I have tried to do is take us back to our
roots in agriculture, with, as I say, tone at the top.
The reason I talk about the 27 states that I have now
visited, is because as Chairman, it is important to let people
know that it is worthwhile for the Chairman. It is worthwhile
for other Commissioners. It is worthwhile for all of us at the
Commission to keep our focus on agriculture, to understand
these issues and how it affects America's commodity producers.
And so, it is tone at the top. It is--the tone that comes from
a phone call from me down to one of our analysts that is
looking at the live cattle contract to say when was the last
time the exchange looked at that? What questions are you
answering, because I just came back from a meeting--it may have
been South Dakota, it may have been in Kansas--with ranchers,
and they are concerned about the delivery point. They are
worried about other features of the contract. What are we
doing? Can I get--can you meet with me next week?
And it is that type of constant asking questions, letting
the entire agency know that agriculture remains front of mind
for all of us, from the top of the agency all the way down to
the bottom.
Mr. Marshall. To me, it kind of reminds me of fundamentals
in sports. We talk about blocking or tackling, and agriculture
is still the blocking, the tackling, the fundamentals of what
you all do, and it is so important to my providers back home,
my producers, as well you guys as a management tool to almost
like an insurance product, in many cases.
Mr. Giancarlo. Congressman, can I just say one quick thing?
Mr. Marshall. Absolutely.
Mr. Giancarlo. In our seal, you see in the center of our
seal a plow, and in our Kansas office, we have in our lobby
area that exact same plow which was purchased in a sale on a
Kansas farm that was owned by one of our Kansas City employees.
And when people come in our office, they have no doubt about
the fact that agriculture is front of mind for us, because
there is that plow right in the center of our lobby area.
Mr. Marshall. That is a great story. It reminds me of a
story. My brother has the tractor that my grandfather traded in
a team of mules for back in the 1950s, so it is a great part of
our history.
Let's go back to the big event at Kansas State University,
CFTC event in Kansas City. My producers were asking me about
spoofing, and I have to be honest. I wasn't aware at what
spoofing was, and maybe you can elaborate what it is, and is it
prevalent? How it is impacting the market? Maybe just give me a
little insight on spoofing.
Mr. Giancarlo. Yes. Spoofing is one of a dozen or so
practices that have been present in markets since the beginning
of markets, and have always been considered to be inappropriate
behavior. In some markets, they are banned. In other markets,
they are shunned. But spoofing is the practice of a market
participant posting a series of buy orders or sell orders that
they have no intention of ever fulfilling in. It is just to
attract other market participants to move in a certain way, and
then as soon as they do, those bids and offers disappear.
Dodd-Frank made them illegal in our markets, and we have
pursued that authority with gusto by the agency. I prosecuted a
number of spoofers, and take our new authority quite seriously.
Mr. Marshall. How common is it?
Mr. Giancarlo. The more successful we are at prosecuting
them, I am hoping it becomes less and less common.
Mr. Marshall. Thank you so much. Mr. Chairman, I yield
back.
The Chairman. I thank the Member. Now I will recognize Mr.
Bost, for 5 minutes.
Mr. Bost. Thank you, Mr. Chairman.
Mr. Chairman, as we have talked about in length today with
you, this Committee has voiced its growing concerns over the
European Union's proposed legislation which would attempt to
apply the EU law to U.S.-based clearinghouses, which are
already very competently supervised by your agency.
I wanted to start by saying thank you, first, for all your
work in that area, and this was a concern of mine though back
in 2015, and I appreciate your efforts to forge a new consensus
on these difficult cross-border issues. But can you share with
us more detail about what you understand the joint statement
that you signed with the EU on March 13 to mean, and what, if
any, action the CFTC or the European Commission agreed to
furtherance of this statement?
Mr. Giancarlo. That statement was done after the European
Union adopted its law, and I met with our colleagues in
Brussels, and they said, ``Well, our law is passed.'' And I
said, ``Well, where do we go from here?'' And they now have
what is called their Level 2 text where they negotiate the
technical details. And I said we would like to participate in
that process, but we will only participate on the basis that
the starting point for discussions is our 2016 agreement, which
we reached with the European Union. It was a notable
accomplishment by my predecessor, Tim Massad, and it was one
that we believed should stand the test of time. We never
expected 18 months later we might be in a position to
renegotiate it. And as I told my European colleagues, where I
come from, a deal is a deal and you don't get to renegotiate it
18 months later.
But we will participate in those discussions on the basis
that the starting point is the 2016 agreement, and that is
really what was reflected in the statement that we put out with
the Europeans. And it was important to send a signal to our
colleagues back at home, our exchanges and our clearinghouses,
that while we are good corporate citizens on a global stage, we
will always negotiate in good faith. We are clear as to where
we think the starting point of the next phase is.
Mr. Bost. Well, one idea that I have long supported is
reciprocal recognition of rule-sets, so the market participants
on both sides of the regulatory border are afforded similar
relief. Do you think that reciprocal recognition of equivalent
rules is important to the cross-border regulation framework?
Mr. Giancarlo. I do, and I believe actually that is what
was implicit in the 2009 Pittsburgh Accords where global
authorities of the G20 agreed to adopt certain agreed reforms,
but to do so in a way that was appropriate for their local
jurisdictions, but a way that was comparable with one another.
And I believe that where a jurisdiction, be that Europe,
Britain, Singapore, Hong Kong, et cetera, have adopted the core
reforms, done so in a way that is suitable for their market,
but provided they reach the same outcomes as our reforms, then
we should defer to them for supervision of their markets, and
they should defer to us for supervision of our markets. And I
extend that to our approach to clearinghouses as well,
clearinghouse supervision.
Mr. Bost. Thank you, and thank you for giving testimony
today. With that, I yield back.
Mr. Giancarlo. Thank you.
The Chairman. Thank you very much, Mr. Bost.
I want to thank you, Chairman, for your excellent,
excellent testimony here this morning, and it is a testament to
your brilliance, your intellect, your experience. And I want
you to know that particularly our Subcommittee may want to have
you on call. I am very serious about that, because we are faced
with some very, very serious issues, and you have a wealth of
experience that will be sorely missed. We are going straight
ahead into some very serious issues. We are going to try to get
light inside of some of the darkness, so that we can lift
particularly agribusiness, this most important industry. It is
all of our commodities. It is the food we eat, clothes we wear,
our energy, our shelter. All the basics. It is the fundamental
arm of our trade policies. And so, it is very important that
everyone knows that an important part of this Subcommittee is
going to be an ongoing look, taking a look at all the aspects
of our financial markets and their disrupters, especially
Brexit. And as you can see from the questions on the Committee,
this is a primary concern, and we cannot allow our leading
market participators and our clearinghouses, our banks, our
entire financial system that deals with cross-border to be
regulated by a foreign entity, as we have discussed here today.
And I also plan to bring to the Subcommittee's attention
credit. The credit situation, particularly facing our farmers,
biofuels, the energy situation, and developing the rural areas
toward prosperity in this country. And this is particularly
timely as we know from the meeting at the White House with the
President the other week, we are seriously looking ahead now to
rebuilding and reenergizing our crumbling infrastructure, and
we have to make a centerpiece of that our rural communities.
And of course, all these issues will be based on how we
keep our agribusiness up front.
And we are going to also look at the issue of the specific
tariffs that are having such an impact on our commodities,
cotton, pecans, peanuts, poultry, particularly in China.
Mr. Giancarlo. Yes.
The Chairman. These are areas we will look at under the
commodities section of what we are doing.
And then, so significant, this whole issue of
weatherization, climate change. We have to find out and bring
to this Committee the experts, the scientists, to give us their
information. We have had, for example, farms in Georgia, my
home state, that haven't had a crop since 2015, largely because
of the back to back storms. Then we have the problem of trying
to find a way to get the help right now. We haven't even gotten
the help for the emergency aid to our farmers. It is tied up.
We have to be bold and try to look at some other ways to make
sure. We may need a private fund, a set aside fund that doesn't
have to go through the regular appropriations process, the CR,
because it is tied up in political winds. Somebody doesn't like
this part, and who suffers? I have farmers down there not
getting their aid. This isn't good.
This is a great country. It is America, and we respond to
our people, but we have not responded to the needs of our
farmers. And we are going to look at this credit situation, and
we are going to examine the impact that this is having, and we
are going to fix this problem so that we will never be in the
shape where we can't get the direct aid financially quickly,
and on time to our farmers.
And our mission in this Committee, which I consider a very
important Subcommittee, we are the financial arm for the
Agriculture Committee, and we are dedicated to bringing God's
light on each of these challenges and bringing the help to our
nation's agriculture businesses as they need it.
And so, I am very serious about having you on call because
of your knowledge, particularly as we reach some of the issues
we have discussed here. Thank you again. I thank the Committee.
And with that, I may say under the Rules of the Committee,
the record of today's hearing will remain open for 10 calendar
days to receive additional material, and supplementary written
responses from the witness to any questions posed by a Member.
This hearing of the Subcommittee on Commodity Exchanges,
Energy, and Credit is adjourned. Thank you for your time.
[Whereupon, at 11:55 a.m., the Subcommittee was adjourned.]
[Material submitted for inclusion in the record follows:]
Submitted Letter by Hon. David Scott, a Representative in Congress from
Georgia
April 30, 2019
Ms. Sarah Summerville,
Director,
Office of Minority and Women Inclusion,
U.S. Commodity Futures Trading Commission,
Washington, D.C.
Dear Ms. Summerville:
I write to request information regarding the current representation
of minorities and women on staff at the Commodity Futures Trading
Commission (``Commission'' or ``CFTC'') and programmatic efforts and
initiatives aimed at increasing diversity, especially in management
level positions. Our country's diversity is one of its greatest assets,
and I believe it is important that public and private sector workplaces
reflect this diversity. Surveys and interviews with leading businesses
and their executives have found that diversity in knowledge,
perspectives, ideas and experiences fosters innovation, and has had a
positive effect on an organization's success and financial
performance.\1\
---------------------------------------------------------------------------
\1\ Forbes Insights, ``Global Diversity and Inclusion: Fostering
Innovation Through a Diverse Workforce'' (July 2011), https://
i.forbesimg.com/forbesinsights/StudyPDFs/
Innovation_Through_Diversity.pdf; Anna Powers, A Study Finds That
Diverse Companies Produce 19% More Revenue, Forbes, June 27, 2018,
https://www.forbes.com/sites/annapowers/2018/06/27/a-study-finds-that-
diverse-companies-produce-19-more-revenue/#2e09fe6a506f.
---------------------------------------------------------------------------
The CFTC's Equal Opportunity Employer & Diversity Statement
recognizes that workplace diversity and inclusion are critical to the
agency's success,\2\ and espouses a commitment to supporting the
recruitment and maintenance of a truly diverse CFTC workforce. Current
data suggest that the Commission may be falling short on those
commitments, and in turn, undermining the agency's success. This is
especially true with respect to management-level positions. For
example, according to the most recent publicly-available CFTC
Management Directive 715 Report, as of Fiscal Year (``FY'') 2017, among
the CFTC's 705 employees, 298 were women (42%), 117 were African-
American (17%), 69 were Asian-American (10%), 18 were Hispanic-American
(3%), and 6 were considered ``Other'' (1%).\3\
---------------------------------------------------------------------------
\2\ CFTC, Equal Opportunity Employer and Diversity Statement,
https://www.cftc.gov/WebPolicy/EEOStatement/index.htm.
\3\ CFTC Management Directive 715 Report for FY17 (Table A1),
https://www.cftc.gov/sites/default/files/2018-06/md715reportfy17.pdf.
The ``Other'' category includes Native Hawaiian or Pacific Islander,
Native American or Alaska Native, and ``two or more races.''
---------------------------------------------------------------------------
The employee breakdown is considerably less diverse at management
levels. In FY 2017, the CFTC's 148 senior level employees (Grades 15
and above) included 49 women (33%), 14 African-Americans (10%), 10
Asian-Americans (7%), and 5 Hispanic-Americans (3%).\4\
---------------------------------------------------------------------------
\4\ CFTC Management Directive 715 Report for FY17 (Table A3-1),
available at: https://www.cftc.gov/sites/default/files/2018-06/
md715reportfy17.pdf.
---------------------------------------------------------------------------
The underrepresentation of minorities and women at the CFTC is
consistent with the findings in various reports that document the lack
of diversity in the financial services industry and Federal financial
agencies. In 2017, the U.S. Government Accountability Office (``GAO'')
published a study on trends in management representation of minorities
and women in the financial services industry.\5\ GAO found the
following:
---------------------------------------------------------------------------
\5\ U.S. Government Accountability Office, Financial Services
Industry: Trends in Management Representation of Minorities and Women
and Diversity Practices, 2007-2015, Nov. 2017, https://www.gao.gov/
products/GAO-18-64.
Although overall minority representation increased from
approximately 17 percent to 21 percent at financial services
firms from 2007 through 2015, representation of African-
---------------------------------------------------------------------------
Americans decreased during this period.
From 2007 through 2015, representation of women in senior
management at financial services firms remained stagnant at 29
percent.
In addition, the Democratic Staff of the U.S. House Committee on
Financial Services published a report on diversity at certain financial
services agencies in 2015 (``Report'').\6\ The Report found that, at
these agencies, minorities and women were underrepresented in their
workforces and ``significantly underrepresented'' at the senior
management level in proportion to their overall participation rates.
---------------------------------------------------------------------------
\6\ Dem. Staff Report, Comm. On Fin. Serv.,The Dodd-Frank Act Five
Years Later: Diversity in Financial Services Agencies, (Nov. 5, 2015),
https://financialservices.house.gov/uploadedfiles/fsc_dems_-
_staff_report_-_dodd-frank_five_years_later_-
_diversity_in_the_financial_services_
agencies_-_final.pdf. The Dodd-Frank Wall Street Reform and Consumer
Protection Act of 2010 (``Dodd-Frank Act'') and the Housing and
Economic Recovery Act of 2008 (``HERA'') included provisions to address
the lack of women and minority representation in the public and private
sectors of the financial services industry. Section 342 of the Dodd-
Frank Act directed the establishment of Offices of Minority and Women
Inclusion (OMWIs) across most of the Federal financial services
agencies, and required the OMWIs to develop standards to promote
diverse employment within the agencies, increase participation of
minority and women-owned businesses that enter into contracts for
services with the agencies, and assess the diversity policies and
practices of entities that are regulated by the agencies. Pursuant to
this section, the agencies required to establish an OMWI are: (A) the
Departmental Offices of the Department of the Treasury; (B) the Federal
Deposit Insurance Corporation; (C) the Federal Housing Finance Agency
(FHFA); (D) the 12 regional Federal Reserve Banks; (E) the Federal
Reserve Board of Governors; (F) the National Credit Union
Administration; (G) the Office of the Comptroller of the Currency; (H)
the Securities and Exchange Commission; and (I) Consumer Financial
Protection Bureau. Pub. L. No. 111-203, 342, 124 Stat. 1376, 1541
(2010). Similarly, Section 1116 of HERA required the FHFA to establish
an OMWI or a functional equivalent. Pub. L. No. 110-289, 1116 (2008).
The CFTC's OMWI is not required by the Dodd-Frank Act.
---------------------------------------------------------------------------
The importance of a diverse and inclusive work environment to
recruitment, retention and career development cannot be overemphasized.
In February, the CFTC received a $19 million increase in appropriations
bringing its FY 2019 budget to $268 million. With this appropriations
increase, the CFTC is able to augment its diversity and recruitment
efforts, and hire individuals for newly-created positions or mission
critical positions that have been vacant for some time. With that said,
I would like to work with your office on diversity and inclusion
initiatives to improve the statistics set forth above. In order to do
so effectively, I ask that you respond to this letter by May 17, 2019
with answers to the following questions:
1. What are the CFTC's current recruitment and retention initiatives
to ensure and increase racial, ethnic, and gender diversity
and inclusion in its workforce? How does the CFTC track and
evaluate the success of these initiatives? How does the
CFTC communicate these initiatives throughout the agency,
and in particular, to officials in recruitment and hiring
positions?
2. Does the CFTC have a strategic plan for encouraging racial,
ethnic, and gender diversity and inclusion throughout its
workforce? If so, what are the objectives, performance
goals, targets and time horizons for diversity and
inclusion efforts? Does the plan include mandatory
unconscious bias training? What metrics does the Commission
use to evaluate the effectiveness of its plan? Under these
metrics, how effective has the plan been with respect to
diversity and inclusion?
3. Do the CFTC's current initiatives include career planning
assistance for and development of lower to mid-level
employees (grades 14 and below) aimed at advancement within
the agency? If so, do these initiatives endeavor to promote
diversity at the management level?
4. In addition to workforce diversity and workplace inclusion, the
OMWI offices mandated by the Dodd-Frank Wall Street Reform
and Consumer Protection Act of 2010 (``Dodd-Frank Act'')
are responsible for increasing the participation of
minority- and women-owned businesses in contracts for
services with the agencies and assessing the diversity
policies and practices of entities that are regulated by
the agencies. Does the CFTC currently have a program for
increasing the participation of minority- and women-owned
businesses that enter into contracts for services with the
agency? If so, please describe the program, what metrics
are used to evaluate its effectiveness, and how effective
the program has been under any such metrics.
5. The CFTC's OMWI is not mandated by the Dodd-Frank Act. Would
statutory establishment of the CFTC's OMWI, putting it on
par with the OMWIs of the other financial services
agencies, better enable the CFTC's OMWI to increase
workforce diversity, workforce inclusion, and participation
of minority and women owned businesses in contracts for
services with the CFTC? If so, how?
6. How has the OMWI performed compared to the OMWIs of the other
financial services agencies? If the performance is
different, what accounts for the differences?
7. How will the CFTC's OMWI benefit from the recent increase in the
CFTC's annual appropriation? Will OMWI be able to fund new
diversity and inclusion initiatives? If so, what are they?
Thank you for your attention to this important matter.
Respectfully,
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Rostin Behnam.
______
Submitted Questions
Response from Hon. J. Christopher Giancarlo, Chairman, Commodity
Futures Trading Commission
Questions Submitted by Hon. Jefferson Van Drew, a Representative in
Congress from New Jersey
Question 1. I just want to take a moment to urge you and your
fellow Commissioners to coordinate and harmonize regulatory programs
when possible, with other regulators where there may be shared
jurisdiction--like the SEC. If you can work together not only will it
ease burdens on market participants, but it will make markets more
efficient and ultimately make our markets safer and more secure.
Can you speak a bit on this issue, where there is overlap in is
regulatory authority, and what steps the CFTC is taking to proactively
work with other regulators, such as the SEC to harmonize rules and
procedures in a clear and consistent manner?
Answer. Early on in my Chairmanship, Chairman Clayton and I
committed to having our agencies work more closely together on issues
of regulatory enforcement and rulemaking, and it set a tone from the
top. Cooperation today between the Securities and Exchange Commission
(SEC) and the CFTC in matters of enforcement work, virtual currencies,
Dodd-Frank rule harmonization, and disaster recovery testing and
planning and more is excellent.
Most recently, CFTC staff and SEC staff have worked closely to
harmonize final rules regarding capital, margin, and segregation for
security-based swap dealers with the corresponding requirements for
swap dealers. By working to align the regulatory requirements for swap
dealers and security-based swap dealers, the agencies hope to minimize
unnecessary regulatory burdens on joint registrants caused by divergent
rule sets and promote a unified market for both swaps and security-
based swaps trading. As the CFTC moves forward to finalize its own
capital regime for swap dealers, staff will continue to coordinate with
their SEC counterparts to minimize differences and harmonize the two
regulatory frameworks.
Question 2. Your 2017 Roadmap to improve swaps data reported to the
Commission indicated you planned to make two or three interrelated rule
proposals. You recently released one of those proposals and indicated
in your written testimony that it will be impacted by the future
release of two further proposals. Why weren't all three proposals
published at the same time or in a single rulemaking?
Answer. The 2017 Roadmap review focused on three areas of swaps
reporting: (i) verifying swap data accuracy by swap counterparties;
(ii) reevaluating the rules for reporting swap data to swap data
repositories; and (iii) right-sizing and harmonizing the data fields
that the Commission requires counterparties to report. Each of these
areas involves distinct legal, policy, and practical considerations.
For instance, the goal of real-time public reporting is price
transparency for market participants, while the goal of regulatory
reporting is making sure the Commission has the right data to oversee
the swaps market. We believe three separate proposals will permit a
thorough analysis of each area that will be manageable for the public
to comment on.
The Commission chose to release the first of the three anticipated
proposals now, in order to provide market participants and the public
with ample time to review and provide feedback as part of the
rulemaking process. The recent proposal is the least dependent on the
other proposals of the three anticipated rulemakings, with most of the
proposed amendments and additions being unaffected by any other planned
rulemakings. As discussed in the proposal, the Commission anticipates
re-opening the comment period for the first proposal when the other
proposals are released, in order to provide market participants and the
public with the opportunity to comment on the three proposals
collectively.
Question 3. One challenge with incorrect data on swaps is the
unknown. That is, it is difficult to know if the new prescriptive
requirements you have for verifying data will be worth the additional
costs for market participants, including end-users. In your 2017
Roadmap, you suggested that part of the problem is the number of data
fields that the rules require to be reported. Should the focus of your
reforms be on implementing consistent data elements in fewer fields
than originally required, which could reduce costs and instances of
what may be seen as ``incorrect'' data?
Answer. The 2017 Roadmap proposed to advance several complementary
swaps data reporting initiatives, including both right-sizing the
number of data elements and implementing a verification solution. The
Commission expects the future release of proposals to address the goal
of right-sizing the number of data elements. At the same time, the
Dodd-Frank Act requires swap data repositories (SDRs) to confirm the
accuracy of data with both swap counterparties. The 2017 Roadmap
therefore allowed CFTC staff to identify the most efficient and
effective solution for counterparty(ies) to meet the Dodd-Frank
verification requirement.
When the CFTC solicited comments on the 2017 Roadmap, commenters
overwhelmingly told us that they did not want phased implementations;
that implementation costs could be reduced by simultaneously
implementing the initiatives detailed in the Roadmap. The recent
verification proposal thus seeks comment on implementing changes to the
verification process with the expected future interrelated rule
proposals, including the expected proposal to right-size the number of
data elements. One drawback to simultaneously implementing
complimentary solutions is the ``unknown'' that you reference; that it
is difficult to attribute data improvements to the individual proposed
changes.
The Commission is expecting to receive many comments on the recent
verification rulemaking. We expect to receive comments on the costs and
benefits of the proposed verification solution. We will seriously
consider those comments to ensure that the final rule represents the
most efficient and effective verification solution for counterparties
to meet that Dodd-Frank requirement.
Question Submitted by Hon. Stacey E. Plaskett, a Delegate in Congress
from Virgin Islands
Question. In the United States, single stock futures are margined
under a strategy-based margin regime, with a minimum margin of 20% for
stand-alone positions. Meanwhile, competing products such as cleared
stock loan are margined under a risk-based margin regime, and over the
counter equity swaps are margined at 15%.
What is your perspective on the use of risk-based margin for single
stock futures?
Answer. The statute requires a joint rulemaking with the Securities
and Exchange Commission (SEC). We have been in discussions with the SEC
and are making progress.
The Securities Exchange Act of 1934 (Exchange Act) authorized the
Board of Governors of the Federal Reserve System to delegate its
authority over margin requirements for security futures products to the
CFTC and SEC. Pursuant to such delegated authority, any change to
margin requirements for such products requires joint action by the two
Commissions in accordance with certain conditions under the Exchange
Act. CFTC and SEC staffs are making progress on amending the
regulations that currently govern margin for security futures in order
to lower the minimum margin requirement from 20% to 15% of current
market value. This regulatory action by both Commissions would reflect
a constructive effort to harmonize security futures margin requirements
with the margin required for comparable products.
Questions Submitted by Hon. Angie Craig, a Representative in Congress
from Minnesota
Question 1. I appreciated hearing in your testimony that you took
time to visit several producers, including in my home State of
Minnesota. I understand the Agricultural Advisory Committee meeting you
held in conjunction with your Agriculture Futures Conference at Kansas
State discussed Futures Commission Merchants or ``FCMs''.
The number of FCMs has been in decline for more than 10 years. With
a smaller number of FCMs with which to do business, farmers, ranchers
and other derivative market end-users face the prospect of increased
consolidation within the industry--and potentially higher prices as a
result as they manage their risks.
What did you learn about how our agricultural end-users view
increased concentration among FCMs at the Agricultural Advisory
Committee meeting? Are you considering any policy changes to address
the issue? Do you have any recommendations for us on this topic? What
are some of the reasons for the increased consolidation within the
industry? What can we do to incentivize new entrants or greater
competition? Are there any larger market forces at play that might have
contributed to the decline of FCMs and the increased concentration of a
few big players in this space?
Answer. As I mentioned during our Agriculture Advisory Committee
meeting in Kansas, it is important that the CFTC ``ensures that the
deepest and most liquid agricultural markets in the world remain a
place where farmers, ranchers, elevators, producers and processors meet
to manage risk and discover prices well into the future.'' Our
commitment to that principle included a discussion with our advisory
committee members--end-user representatives--on the future of FCMs.
CFTC staff began the discussion with a detailed presentation on the
steady decline in the number of FCMs and what that means for end-users
seeking to access risk mitigation markets.
There are a number of reasons, including market forces and
regulatory policy that have shifted the FCM landscape. Some Committee
Members noted that the CFTC's rules related to ownership and control,
recordkeeping, and capital impose regulatory burdens fall
disproportionately on smaller FCMs that traditionally serve
agricultural and small manufacturing interests more harshly than bank-
affiliated FCMs with more substantial resources. Other compliance
costs, including staff and technology, particularly in the
cybersecurity space, have increased over recent years. Under my
leadership, the CFTC has reviewed our regulations in our ``Project
KISS'' initiative, with the goal of reducing duplicative or unduly
burdensome regulations. Part of this workstream has included trying to
``right size'' our rules for small FCMs so that they do not face the
same obligations as larger institutions.
Related, the decreasing interest rates over the last several years
have not caught up to the late 1990s/early 2000s. FCMs are earning less
interest income from the investment of customer funds. These low
interest rates make FCMs less profitable. FCMs are forced to either
increase commission costs or operate with a decreased revenue stream.
As a result, many FCMs have had to increase commission costs to
customers, causing the smaller FCMs to become less price competitive
than some of the larger FCMs with greater volumes. This also acts as a
barrier of entry to new FCMs, as they must also charge these higher
commission costs. Typically the larger FCMs have multiple lines of
business and can ``carry'' the derivatives line of business despite the
narrow profit margin.
We remain committed to ensuring that American derivatives markets
are accessible and reliable for America's farmers and ranchers. This
important work includes evaluating the FCM landscape and providing the
necessary incentives for intermediaries to offer their services to
commercial end-user customers.
Question 2. Dairy farmers in my district have raised some concerns
about the prices in the cash market for cheddar cheese. Normally there
is about a 3 spread in the price per pound between blocks and barrels,
but over the last year producers and processors in my district have
seen that spread widen to as high as 25 . The most recent spread
between barrel and block futures ran between 5 and 10 . This spread
has an impact on the price of Class III milk futures, which in-turn
impact the Federal Milk Marketing Order formula.
What has the Commission has done to make sure cheese and milk
futures are trading fairly and that troubling spreads like these aren't
a sign of manipulation?
Answer. As part of its mission to ensure that derivatives markets
accurately reflect the forces of supply and demand and are free of
disruptive activity, the CFTC conducts market surveillance of trading
in futures, options, and swaps. In addition, it conducts research on
major economic issues related to the derivatives markets and collects
and reviews market data.
The Class III milk market is the largest dairy contract at the
Chicago Mercantile Exchange and cheese prices are an influence on Class
III milk final settlements. The spot call trade is an indicator of the
most current supply and demand picture in the market and price spreads
between block and barrel cheese are watched closely.
Block-Barrel spread is currently at 4.75 /lb premium for Blocks.
This is below the 10 /lb average for the last couple of years and below
the 30 /lb highs of last June. U.S. cheese markets continue to be
burdened with record large cheese inventories. Stocks of cheese now
stand just short of 1.4 billion lb., a similar level to a year ago, at
an all-time record high level. This supply has put significant downward
pressure on cheese prices that have only recently begun to rebound.
The agency will continue to monitor ongoing talks around the United
States-Mexico-Canada Agreement (USMCA), which will open up market
opportunities for the U.S. dairy industry and producers, as well as
other supply and demand factors that influence the price of cheese.