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From Securities Regulation Daily, March 15, 2017
J. Christopher Giancarlo’s presidential nomination as chairman of the CFTC coincided with a wide ranging address to industry leaders where he mapped out a dramatic new direction forward for the agency while speaking at the Futures Industry Association (FIA) conference in Boca Raton, Florida. Giancarlo, who has served as the CFTC’s chairman since inauguration day, staked out a bold and far reaching agenda consistent with the directives from the Trump administration for dramatic reform of the regulatory system. In the release announcing the nomination, the White House noted that Giancarlo was unanimously confirmed by the Senate to be a commissioner back in June, 2014.
In his remarks, Giancarlo observed that much of the Commission’s focus over the past several years has been backward looking. It has been to respond to and implement measures to avoid a reoccurrence of the 2008 financial crisis with the adoption of structures and regulations mandated by the Dodd-Frank legislation. As a result, he noted, "America’s derivatives markets are struggling...under the weight of flawed and excessive regulation" and "the American people have entrusted the Trump Administration to turn the tide of over-regulation."
In mapping out a new agenda, Giancarlo underscored the need for the CFTC to reinterpret its regulatory mission by focusing on three objectives, (1) fostering economic growth, (2) enhancing U.S. financial markets, and (3) right-sizing its regulatory footprint. To accomplish the agenda, Giancarlo’s identified a number of specific Commission undertakings to pursue, which consist of the following:
Reduce regulatory burden. The agency will launch Project KISS, which stands for "Keep It Simple Stupid." This project will be an agency-wide review of CFTC rules, regulations and practices to make them simpler, less burdensome, and less costly. Pursuant to the president’s recent executive order, all Commission rules will be reviewed in an effort to reduce regulatory burdens and costs for participants in the markets.
Improve market intelligence. In an effort to become a smarter regulator, the agency will make two immediate reforms. First, it will move elements of its market surveillance branch from the Division of Market Oversight (DMO) over to the Division of Enforcement (DOE) so as to fortify efforts to identify and prosecute violations of law involving spoofing, manipulation, and fraud. Second, elements the DMO itself will be reorganized as a new market intelligence branch, the function of which will seek to understand, analyze, and communicate current and emerging derivatives market dynamics, developments, and trends.
Embracing FinTech. Earlier this year, Chairman Giancarlo directed his staff to review FinTech innovation issues and respond to the following three queries; (1) how should the CFTC leverage FinTech innovation to make it a more effective regulator?, (2) how can FinTech innovation help identify CFTC rules and regulations that need to be updated for relevance in 21st century digital markets?, and (3) what is the right role of the CFTC in promoting U.S. FinTech innovation in CFTC regulated markets? The completion of that review is expected shortly and will be the subject of further discussion in the coming months.
Trading, liquidity and calibration bank capital charges for economic growth. Since the passage of Dodd-Frank, banks have been prompted to significantly increase their regulatory capital by raising more equity in relation to their total assets. In Giancarlo’s view, this has resulted in a market where traditional dealers can support little risk, a situation that, in itself, nurtures liquidity risk, which a first order concern for the CFTC and other market regulators. Accordingly, Giancarlo believes the time has come to recalibrate bank capital requirements to better balance systemic risk concerns with healthy economic growth and American prosperity.
Fix flawed swaps rules. Giancarlo advocates for healthy markets by fixing flawed CFTC swaps trading rules. In his view, a fundamental mismatch exists between the CFTC’s swaps trading framework and the distinct liquidity, trading, and market structure characteristics of the global swaps market. As a result, global swap market participants have been driven away from transacting with entities subject to CFTC swaps regulation. In Giancarlo’s view, the CFTC must move forward with a better regulatory framework for swaps trading by allowing market participants to choose the manner of trade execution best suited to their swaps trading and liquidity rather than have it chosen for them by the federal government.
Effective international engagement. The U.S. played a leading role in formulating the reforms to the global swaps markets after the 2008 financial crisis. Giancarlo advocates for the CFTC continuing to work constructively with its overseas regulatory counterparts as it did in establishing the post-crisis regulatory swap framework. At the same time, though, Giancarlo believes that the CFTC must fully embrace the Trump Administration’s executive order to advance American interests in international financial regulatory negotiations and meetings. Additionally, it’s his view that 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.
Normalize CFTC operations. Noting that the CFTC has operated at a breakneck pace driven by Dodd-Frank’s mandate for swift rule implementation over the past six years, Giancarlo believes that the time has now come for the agency to resume normalized operations and practices. This 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.
Focus on core CFTC mission. Giancarlo believes the CFTC must reset its focus on its core mission: fostering open, transparent, competitive, and financially sound markets for the trading of derivatives. This means continuing to work cooperatively with parallel federal market regulators, like the SEC and law enforcement and, where appropriate, to delegate responsibility to the National Futures Association, the exchanges, and the other self-regulatory organizations (SROs) in matters where SROs are able to act effectively. Giancarlo also emphasized the CFTC Enforcement Division’s ongoing commitment to deter those who may seek to engage in market fraud or manipulation and to aggressively pursue wrongdoers under the Trump Administration.
Run a tighter ship. Giancarlo sees the need to run a tighter ship operationally. He recently launched a comprehensive budget and spending review prior to engaging with the White House and congressional appropriators over future agency funding. Toward this end, Giancarlo intends to utilize managerial skills and business experience to bring the best operational practices from the private sector to the CFTC.
In short, Commissioner Giancarlo believes that the American people elected President Trump to turn the tide of over-regulation and the time has come to reduce regulatory barriers to economic growth. As reflected by his remarks in Boca Raton, the CFTC must focus on its mission to foster open, transparent, competitive, and financially sound markets in ways that best foster American prosperity. With the president’s nomination to serve as the Commission’s chairman and the vote of confidence that entails, Giancarlo will be in a much stronger position to move the agency forward to achieve these broad objectives. A Senate confirmation is expected with minimal opposition.
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