In a speech before SEFCON VII on January 18, J. Christopher Giancarlo, the new acting chairman of the Commodity Futures Trading Commission, laid out his priorities for the Commission as part of an agenda he termed “Making Market Reform Work for America.” These priorities include (1) enabling swaps traders to choose the method of trade execution appropriate for their trading and liquidity needs as opposed to inflexible regulator-imposed methods; (2) fixing swap data reporting to better ensure “the important objective of full visibility into swaps counterparty exposure;” (3) appropriately limiting the application of US swaps rules in cross-border transactions to achieve consistent global rules – not necessarily identical requirements; (4) encouraging financial technology innovation so that FinTech businesses working with the CFTC “have appropriate ‘space to breathe’ in order to develop and test innovative solutions without fear of enforcement action and regulatory fines;” and (5) encouraging a regulatory culture of “forward thinking” to help the CFTC buttress its effectiveness “in overseeing the safety and soundness” of rapidly evolving global trading markets. Among specific initiatives, Mr. Giancarlo indicated that the CFTC would “have more to say” about the impending March 1 deadline requiring swap dealers and other so-called “Covered Swap Entities” to post and collect variation margin with respect to uncleared swaps and security-based swaps entered into with Financial End Users (e.g., registered investment companies, private funds, commodity pools, employee benefit plans, investment advisers, future commission merchants, broker-dealers and proprietary traders). He said he is aware that “market participants continue to face hard challenges in meeting this deadline.” In addition, since Mr. Giancarlo became acting chairman, the deadline for persons to submit comments in response to the CFTC’s supplemental notice of proposed rulemaking for Regulation Automated Trading has been extended to May 1, 2017.
My View: Since I began practicing derivatives law in 1982, the so-called “white book” containing the Commodity Exchange Act and CFTC regulations has become considerably thicker, and the requirements more obtuse. Moreover, too often regulations seem drafted for a different age – let alone different technology. The CFTC’s proposed overhaul of its current recordkeeping rule – which still references microfiche – provides a stark reminder of how outdated many existing rules have become. Moreover, the Commission’s proposed Regulation Automated Trading – which in many cases replicates already existing exchange requirements and contains unconstitutional (let alone unworkable) authority for CFTC and Department of Justice staff to take trading firms’ source code without subpoena (whether proprietarily or third-party developed) – is a stark example of the type of proscriptive regulation that should not be adopted in its current form. (Click here for background on the CFTC’s latest proposal regarding Regulation AT in the article “Proposed Regulation AT Amended by CFTC; Attempts to Reduce Universe of Most Affected to No More Than 120 Persons” in the November 6, 2016 edition of Bridging the Week.) Additionally, the Division of Enforcement – while continuing to bring many important cases – has too often been distracted by investigating and bringing cases of questionable merit and theory. The CFTC’s recent action against a HK cotton merchant or dealer for not filing CFTC reports of its physical positions – when the requirement for such reports is poorly publicized by the Commission in the first place – and against JP Morgan Chase Securities for miscomputing exchange fee rebates for customers – in the face of admittedly very complicated and confusing exchange processes regarding the assessment of exchange and clearing fees – are just two examples where the CFTC’s use of its enforcement hammer seem misplaced. (Click here to access the article in this edition of Bridging the Week regarding the HK cotton trading firm, and here to access the article on JP Morgan Securities’ fine for miscalculating exchange fees rebates, entitled “FCM Agrees to Settle With CFTC Related to Purported Exchange Fees Overcharges” in the January 16, 2017 edition of Bridging the Week.) The Commission has an important mission: to help ensure that the important commodity markets under its jurisdictions function fairly and that customers are protected against fraud and other malfeasance. However, regulations should be principals-based, to allow for the rapid evolution of technology, and enforcement must be meaningful and fair. Anything less compromises the mission of the CFTC. That being said, it’s also appropriate at this time to consider the organization of the Commission. Off and on for many years, proposals have floated to create a single financial services regulator that oversees both our securities and commodity markets and participants – much as now exists in most of the developed world. Now is the time to re-evaluate these proposals and implement a path to more holistically regulate financial services in the United States.