The Commodity Futures Trading Commission has announced the creation of LabCFTC, a multui-faceted hub for the agency’s engagement with FinTech innovators.
The new initiative is aimed at promoting responsible FinTech innovation to improve the quality, resiliency, and competitiveness of the markets the CFTC oversees. Located in New York LabCFTC will also look to accelerate the Commission's engagement with FinTech and RegTech solutions that may enable the it to carry out its mission responsibilities more effectively and efficiently.
“LabCFTC is the agency’s focal point to promote FinTech innovation and fair competition by making the CFTC more accessible to FinTech innovators and serving as a platform to inform the CFTC’s understanding of new technologies,” the announcement says. “Further, LabCFTC will be an information source for the Commissioners and the CFTC staff on responsible innovation that may influence policy development.”
Acting Chairman J. Christopher Giancarlo touted the new resource in a speech before the New York FinTech Innovation Lab last month.
“So much of our world today – from information to music to manufacturing to transportation to commerce and, now farming, has undergone a digital transformation,” he said. “And, it should be no surprise to anyone that our capital, commodity and futures markets are going through the same digital transformation.”
Automated trading now constitutes up to 70 percent of regulated futures markets, he explained. Similarly, automated trading now makes up approximately 80 percent of cash equities markets and 70 percent of foreign exchange spot markets.
“Other breaking digital innovations present equal regulatory challenges,” Giancarlo said. They include “big data” capability to enable more sophisticated data analysis and interpretation, artificial intelligence to guide highly dynamic trade execution, “smart” contracts that value themselves and calculate payments in real-time, behavioral biometrics that can detect and combat online fraud, and distributed ledger technology, more commonly known as blockchain.
“We are seeing a powerful convergence, as the costs of launching new ventures applying these technologies have dropped enormously, while the speed and scalability with which they can be brought to market have increased dramatically,” Giancarlo said. “The world is changing. Our parents’ financial markets are gone. The 21st century digital transformation is well underway. The digital technology genie won’t go back in the bottle. Nor should it.”
“Yet, despite these 21st century innovations, the CFTC remains stuck in a 20th century time warp,” he added. “Most of the CFTC’s rulebook for listed futures was written for 20th century analog markets, in which trading pits in Kansas City, Minneapolis, New York and Chicago conducted open outcry trading with colorful shouting and distinctive hand signals. Today, those trading pits are dormant, largely supplanted with electronic trade execution by remote software algorithms and, increasingly, artificial intelligence. Yet, CFTC oversight is still founded on recognition of such occupations as “floor traders” and “floor brokers.” The CFTC remains an analog regulator of rapidly digitizing global markets.”
Government must “transform and modernize its information technology and how it uses and delivers digital services,” he said.
The launch of LabCFTC as the focal point of CFTC FinTech policy consideration and engagement with FinTech innovators is among the efforts underway to modernize the agency. “Simply put, LabCFTC is intended to help us bridge the gap from where we are today to where we need to be: Twenty-First century regulation for 21st century digital markets,” Giancarlo said.
LabCFTC includes two core components. The first, “Guidepoint,” is “a tool for innovators to efficiently communicate with the CFTC to seek specific regulatory guidance about proposed applications of new technologies.”
In each case, a member of the LabCFTC team will act as a “case officer,” a single point of contact, drawing on resources and coordinating with expertise across the CFTC.
“What we hope to offer is timely, meaningful and useful feedback on the regulatory context of proposed FinTech innovations,” Giancarlo said. “This feedback may include information that, particularly at an early stage, could help innovators save time and money by helping them understand relevant regulations and the CFTC’s approach to oversight.”
Through GuidePoint, innovators may receive feedback on:
existing law, CFTC regulation and policy;
the application of the CFTC regulatory framework to a proposed innovation;
publicly available information about current proposals and initiatives by CFTC;
information about CFTC organization, processes, and points of contact; and
updates on the status of an inquiry and review process.
The other core component of this initiative is called “CFTC 2.0,” designed “to strengthen the agency’s understanding of new technologies, and to adopt them in support of our essential mission overseeing derivative markets.”
The CFTC will establish an internal FinTech/RegTech innovation lab “to better understand new technologies and to identify potentially useful applications.”
“We will look to explore ways to use FinTech to enhance CFTC functions and duties,” Giancarlo said. “For example, we might collaborate with other authorities on leading development of best practices to support the development of ‘regulator nodes’ on distributed ledgers, or experiment with collecting or distributing existing CFTC reports through blockchain technology.”
The futures and swaps markets “are rooted in the last century, and we now oversee trading that occurs almost exclusively on screens where transactions happen faster than the blink of an eye,” said CFTC Commissioner Sharon Bowen regarding the Launch of LabCFTC. “In light of this historical technological change, we must be prepared to change how we conduct our oversight and stand ready to adjust our rules in order to ensure the same level of fair competition and customer protection that the American public depends on now.”
The initiative, she said, “is yet another reason why the CFTC needs an expanded budget,” Bowen added. “With this type of transformational change, we need to invest in people and technology to understand and police this ever-changing marketplace.”