At a meeting of the CFTC Technology Advisory Committee ("TAC"), industry representatives considered presentations by subcommittees and experts on automated and modern trading markets, distributed ledger technology ("DLT") and market infrastructure, virtual currencies, and cybersecurity.
TAC Cyber-Security Subcommittee
In a presentation titled "Preliminary Lessons Learned from COVID-19," subcommittee members concluded that responses to COVID-19 reinforced key practices and highlighted areas for improvement "in risk governance, corporate culture and technologies that need to be addressed in the longer term." The subcommittee found that "increased horizon scanning capability and extreme scenario modeling . . . are vital to assess tail end risk scenarios, such as pandemic or cyber, to understand organizational resilience and exposure." The subcommittee emphasized that "accurate inventory of assets (systems, 3rd parties, data) are essential to effective crisis response," and that "risk governance bodies must have capability to address non financial risks in a global, cross-functional, timely & practical manner."
In a presentation titled "CFTC Collection, Concentration, Storage and Securing of Sensitive Information," subcommittee members warned that the collection and concentration of data during regulatory examinations would be very useful for an adversary planning a cyberattack. Despite this risk, the presenters underscored that U.S. regulators, including the CFTC, do not have any policies governing the protection of sensitive information.
In a published statement, the CFTC recognized "the benefits provided when private sector financial institutions regulated by CFTC use a standardized approach to assess and improve their cybersecurity preparedness." The CFTC reiterated that it will continue to take a "risk-based approach" to cybersecurity and system safeguards and not rely on a single one.
TAC Automated and Modern Trading Markets Subcommittee
In a presentation titled: "Discussion of the CFTC's Proposed Rule on Electronic Trading Risk Principles" members highlighted elements of the proposed rule (see previous coverage,) including defining terms (electronic trading, market disruption, latency) as well as describing the disparity in designated market contract (DCM) rules. CFTC Chair Heath P. Tarbert said that he hopes the proposed rule would provide "the flexibility needed to allow electronic trading practices to evolve, while maintaining sound regulation."
TAC Distributed Ledger Technology Subcommittee
In a report titled "Distributed Ledger Technology Sub-Committee," members highlighted the connection between resiliency and scalability within a DLT system in derivatives. They also reported on the key features of DLT systems (decentralization, automation and verification), and the challenges inherent in "tokenization" and regulation.
Other Presentations
In a presentation titled "CBDC: Derivatives Markets Considerations," Chris Brummer (of the Georgetown University Law Center) examined the benefits of central bank digital currencies ("CBDCs"). He explained the benefits of CBDCs as (i) 24/7 movement of fiat into a "programmable money era," (ii) contactless payments and (iii) "'riskless' settlement." In response to CBDC developments, the presenter also considered whether the government should compete with stablecoins or if it should offer something simpler from which stablecoin providers can build their services.
In a presentation titled "An Analysis Comparing the Volatility of Bitcoin against Other Assets and the Impact of COVID-19 on Asset Price Correlation," Thomas Chippas (of ErisX) described the heightened volatility of Bitcoin in comparison to large-cap U.S. stocks. He noted the share price movements created by Bitcoin volatility, which are unrelated to market fundamentals and encourage greater oversight and professionally run trading venues in order to provide a reliable infrastructure for Bitcoins.
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