It is official. Acting Commodity Futures Trading Commission Chairman J. Christopher Giancarlo may soon drop the “acting” qualifier from his title.
The decision to nominate him as full chairman, an expected one, was announced by President Donald J. Trump this week. Giancarlo now awaits Senate confirmation.
Giancarlo was nominated by President Obama on Aug. 1, 2013 and confirmed by the Senate to a term expiring in April 2019. He was designated as acting chairman on January 20.
He previously served as the executive vice president of GFI Group Inc., a financial services firm. Before that, he was executive vice president and legal counsel of Fenics Software and was a corporate partner in the New York law firm of Brown Raysman Millstein Felder & Steiner.
Giancarlo wasted no time in starting to mold the CFTC to his vision. In a March 15 speech at the annual International Futures Industry Conference in Florida, he detailed “a new direction forward” for the agency."
“The American people have elected President Trump to turn the tide of over-regulation,” he said. “In that spirit, the CFTC must reinterpret its regulatory mission.”
Doing so, means pursuing a three-part agenda: first, contributing to American economic growth by reducing regulatory burdens, improving market intelligence and embracing FinTech innovation; second, enhancing U.S. financial markets by addressing trading liquidity risk, fixing the CFTC’s flawed swaps rules and engaging effectively with overseas regulators.”
The third element: “rationalizing our regulatory footprint by getting back to regular order, focusing on our core mission, and running a tighter ship.”
“America’s derivatives markets are struggling, in some cases, under the weight of flawed and excessive regulation,” Giancarlo said. “ Our markets today are more fragmented, more concentrated, less liquid and less supportive of economic growth and renewal than in the past. The overly prescriptive regulation of American derivative markets is a part and parcel of the over-regulation of the U.S. economy that thwarts revival of American prosperity.”
On Feb. 24, 2017, Trump issued an executive order directing federal agencies to designate a Regulatory Reform Officer and establish a Regulatory Reform Task Force. The goal is to reduce excessive regulatory burdens.
Although the CFTC is not strictly bound by the Executive Order, Giancarlo announced the launch of Project KISS (as in “Keep It Simple Stupid”). It will be an agency-wide review of CFTC rules, regulations and practices to make them simpler, less burdensome and less costly.
“Let me be very clear, this exercise is not about identifying existing rules for repeal or even rewrite,” he said. “It is about taking our existing rules as they are and applying them in ways that are simpler, less burdensome and less of a drag on American economy.”
Among the pending reforms is an organizational restructuring. Elements of the market surveillance branch, currently housed in the Division of Market Oversight will move to the Division of Enforcement. “This realignment will strengthen our mission to identify and prosecute violations of law and regulation, such as spoofing, manipulation and fraud,” Giancarlo said.
Other elements will be reorganized within DMO as a new market intelligence branch, the function of which is to understand, analyze and communicate current and emerging derivatives market dynamics, developments and trends—such as the impact of new technologies and trading methodologies.
By separating the two units—surveillance within DOE and market intelligence within DMO—the CFTC will ideally sharpen its surveillance capability while increasing knowledge of evolving market structures and practices.
Another reform is the creation and appointment of a Chief Market Intelligence Officer, reporting directly to the Chairman. The CMIO will engage with industry participants, other regulators and the new Market Intelligence Unit. The CMIO will also be tasked with helping the public understand risk transfer markets.
The new position will help activate the agency’s “latent capability for market intelligence, giving us better insight into the needs of participants in the futures and swaps we oversee,” Giancarlo said.
To embrace FinTech developments, the CFTC, as proposed by Giancarlo, will create an “Innovation Initiative.”
The CFTC must be a leader in adopting the “do no harm” approach to financial technology similar to the U.S. approach to the early Internet,” he said. “We must cultivate a regulatory culture of forward thinking. We must open wider our CFTC agency doors and regulatory minds to benefit from FinTech innovation. We must welcome the support of knowledgeable and experienced market professionals inside and outside of the federal government to help make the CFTC a 21st century regulator for today’s rapidly changing markets.”
In January, Giancarlo instructed staff to do a review of FinTech innovation issues including those arising from a range of new digital technologies. The review, soon to be completed, is focused on three main issues:
How should the CFTC leverage FinTech innovation to make it a more effective regulator?
How can FinTech innovation help identify CFTC rules and regulations that need to be updated for relevance in 21st Century digital markets?
What is the right role of the CFTC in promoting US FinTech innovation in CFTC regulated markets?
As the “super-regulator” body created by Dodd-Frank to address systemic issues, the Financial Stability Oversight Council should be highly concerned that there is sufficient trading liquidity in the marketplace to support systemic resiliency and economic growth. Since the passage of Dodd-Frank and progression of Basel III, banks have been prompted to significantly increase their regulatory capital and leverage ratios by raising more equity in relation to their total assets. These measures prioritize bank capital reserves over investment capital, balance sheet surplus over market-making and bank solvency over economic growth and opportunity.
The result, Giancarlo said, is a market in which traditional dealers can support little risk, a situation that, in itself, nurtures another type of system-wide risk: liquidity risk, a first order concern for market regulators like the CFTC.
“As a voting member of FSOC, the CFTC must use its authority and influence to address the question of whether the amount of capital that bank regulators have caused financial institutions to take out of trading markets is at all calibrated to the amount of capital needed to be kept in global markets to support increased commercial lending and the overall health and durability of U.S. financial markets,” Giancarlo said.
“The time has come to recalibrate bank capital requirements to better balance systemic risk concerns with healthy economic growth and American prosperity,” he added.
Giancarlo also pledged to fix “the CFTC’s flawed swaps trading rules and the “fundamental mismatch” between the CFTC’s swaps trading framework and the distinct liquidity, trading and market structure characteristics of the global swaps market.
The CFTC’s “flawed swaps trading implementation” has caused numerous harms and “fragmented global markets into a series of distinct liquidity pools that are less resilient to market shocks and less supportive of global economic growth,” he added. The agency’s approach “has unnecessarily impeded banks’ financial risk hedging activities essential for ready extension of credit to the private sector…Our regulatory framework must help to attract, rather than repel, global capital to U.S. trading markets.”
The CFTC must also place its own house in order and right-size its regulatory footprint. “The era of Dodd-Frank implementation at the CFTC is now drawing to a close,” he said. “It is time for the agency to resume normalized operations and practices.” That means “a return to greater care and precision in rule drafting, more thorough econometric analysis, less contracted time frames for public comment and a reduced docket of new rules and regulations to be absorbed by market participants.”
Normalizing operations at the CFTC should also mean streamlining the work of its divisions of Market Oversight, Swap Dealer and Intermediary Oversight and Clearing and Risk. Those divisions must work cooperatively with parallel federal market regulators, like the Securities and Exchange Commission,” Giancarlo said. Where appropriate, they should look to delegate responsibility to the National Futures Association, the exchanges and the other self-regulatory organizations in matters where they are able to act effectively.
A similar balance is appropriate for the CFTC’s Division of Enforcement. It must also look to benefit from cooperation and, where appropriate, deference to civil and criminal capabilities of other federal and state regulators and enforcement agencies.
“The last step in right-sizing the CFTC is to be realistic about our agency budget and Congressional appropriations,” Giancarlo said. “We must run a tighter ship operationally.”
To that end, he has launched a comprehensive budget and spending review as a first step prior to engaging with the White House and Congressional appropriators over future agency funding.
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