In a speech last week before an assembly of industry executives at FIA’s annual Boca Raton conference, J. Christopher Giancarlo, nominee to be chairman of the Commodity Futures Trading Commission, promised to do his part to help reduce “regulatory burdens and flawed rules” to enhance US financial markets and right-size the agency’s regulatory footprint.
He promised to accomplish this by reducing regulatory burdens, improving market intelligence, assessing whether bank regulators have caused too much capital to be taken out of financial markets and fixing “flawed swaps trading rules.”
Mr. Giancarlo has served as acting chairman of the CFTC since January 20. He was nominated to be permanent chairman of the Commission last week by President Donald Trump. (Click here to access the White House announcement of Mr. Giancarlo’s nomination.)
During his speech, Mr. Giancarlo announced the launch of “Project KISS” – keep it simple, stupid. This project, to be administered by Michael Gill, his current chief of staff, will review all current CFTC rules with an eye not necessarily to repeal or rewrite them, but to apply them “in ways that are simpler, less burdensome and less of a drag on the American economy.”
Additionally, Mr. Giancarlo indicated that he planned to administer the CFTC as efficiently as possible – to “run a tighter ship operationally.” He also promised to regulate “smarter.” To accomplish this, he announced the transfer of elements of surveillance operations from the Division of Market Oversight to the Division of Enforcement. Other elements would remain within DMO and comprise a new market intelligence operation that would endeavor to better “understand, analyze and communicate current and emerging derivatives market dynamics, developments and trends.” A new chief market intelligence officer reporting directly to the chairman will also be appointed to help this intelligence gathering.
Mr. Giancarlo promised to use his role on the Financial Stability Oversight Counsel to help drive a debate whether too much bank capital is now required to support regulatory capital and leverage ratio requirements at the expense of promoting markets’ liquidity. He also said that swaps trading rules must be altered to “allow market participants to choose the manner of trade execution best suited to their swaps trading and liquidity needs and not have it chosen for them by the federal government.”
The Chairman nominee also promised to work with international regulators to promote “comity not uniformity.”
Mr. Giancarlo encouraged all CFTC divisions to delegate responsibility to the National Futures Associations, exchanges and other self-regulatory organizations “where SROs are able to act effectively.” He specifically stated that the Division of Enforcement should “look to benefit from cooperation and, where appropriate, deference to civil and criminal capabilities of other federal and state regulators and enforcement agencies.” However, he warned that the Division’s enforcement activities will be aggressive and assertive under his watch. According to Mr. Giancarlo, “There will be no pause, let up or reduction in our duty to enforce the law and punish wrongdoing in our derivatives markets.”
No date has yet been scheduled for the commencement of Mr. Giancarlo’s nomination hearings before the Committee on Agriculture, Nutrition and Forestry of the United States Senate.
(Click here for a partial video of Mr. Giancarlo’s appearance before FIA.)
My View: When Mr. Giancarlo spoke before FIA last week, the audience could feel a palpable fresh breeze of enthusiasm and new ideas. He deferentially paid homage to his predecessors – Gary Gensler and Timothy Massad – noting how seamless his transition was: one fifty-ish bald guy replacing two other fifty-ish bald guys. He also humbly expressed amazement at his nomination, noting the pride his immigrant grandparents would feel if still alive. And he listed a number of immediate plans and objectives – most (if not all) of which seem quite smart. He clearly sees healthy markets as promoting job growth and accordingly will do all he can to enhance liquidity. That being said, he made clear the CFTC will not tolerate violations of law under his watch. “The American people are counting on us,” he stated.
Mr. Giancarlo indicated that one thing he will do right away is to transfer elements of the surveillance function currently housed in the Division of Market Oversight to the Division of Enforcement. Since this function for the past few years has been a major referrer of enforcement actions, housing the function within the Division of Enforcement makes theoretical sense from a purely organization perspective. However, the devil is in the details. If all surveillance is intended to result in enforcement actions, Mr. Giancarlo’s goal of encouraging more open dialogue between market participants and the CFTC will not be realized if the transfer goes forward. Better to leave the function within the Division of Market Oversight with more careful discretion exercised by the Division’s Director on when matters should be referred for enforcement or not. If surveillance will have some other more specific meaning – looking for specific types of violations – perhaps it will work. It would be helpful for the Chairman nominee to provide further insight regarding his intent.
Additionally, although Mr. Giancarlo encouraged all divisions to delegate functions to SROs “where SROs are able to work effectively,” it would be especially productive if the Division of Enforcement would consider this mandate expressly when determining whether to bring an enforcement action against a potential defendant who already has been subject to a meaningful exchange disciplinary action, or is in the process of being evaluated for one. Nothing legally stops the Division from commencing “me too” actions. However, except for circumstances where an exchange sanction appears grossly inadequate, such parallel actions seem unnecessary and a serious drain on both the CFTC’s and the industry’s resources for no material additional benefit. Moreover, the threat of parallel actions may impede the effectiveness of an SRO's investigation and enforcement process in the first place!