CFTC Commissioner J. Christopher Giancarlo outlined how CFTC market regulation can advance from an "analog time warp" into a "21st century digital transformation."
At a speech before the American Enterprise Institute Commissioner Giancarlo asserted that the CFTC maintains practices and a culture that are "indifferent to today's financial technology revolution," and with "swaps rules [that] stifle technological innovation." Commissioner Giancarlo argued that:
- U.S. regulatory frameworks, in contrast with those of global regulators, "are widely seen as complex, conservative and, in some respects, opaque with limited regulatory initiatives directed towards FinTech";
- swap execution facility final rules pursuant to the Dodd-Frank Act "were poorly designed and overly engineered, disproportionately modeled on the U.S. futures markets and biased against both human discretion and technological innovation";
- "[d]espite an emerging world of automated, non-human decision-making, CFTC market supervision and enforcement still turns on human states of mind underlying the traditional legal concepts of foreseeability, mens rea and failure to supervise";
- proposed CFTC Regulation Automated Trading ("AT") has "broad scope, hazy objectives and several significant inconsistencies" and "contains the notorious requirement that proprietary source code used in trading algorithms be accessible at any time to the CFTC and the U.S. Justice Department without a subpoena"; and
- regulators "do not have sufficient quality data from which to piece together a comprehensive picture of swaps counterparty dynamics and exposures in global markets," despite the fact that a "great amount of hard work and effort has gone into gathering swaps market data, including establishing swap data repositories ('SDRs') under the Dodd-Frank Act."
Moving forward, Commissioner Giancarlo urged the CFTC and other regulators to:
- Embrace Innovation: Regulators must ensure that: (i) their rules "first, do no harm" to blockchain and "other promising Fintech innovations;" and (ii) they engage in a "constant dialogue with innovators";
- Stand Up for Intellectual Property: "The CFTC must continue to obtain a subpoena to access the source code of market participants" because "[d]oing otherwise damages the integrity of the Commission and antagonizes its traditional relationship with market participants." Moreover, regulators must enhance system security;
- Repurpose Rules for a Digital Age: Regulators must "reconsider and repurpose our analog rules for today's digital markets." In particular, the "CFTC must allow market participants, including SEFs to conduct business as they believe is best suited to meet their customer needs and not as regulators arbitrarily see fit";
- Unburden the U.S. Economy: U.S. regulators must review their rules to determine whether they advance or restrain economic progress. In particular, the CFTC should "return the Office of the Chief Economist (OCE) to historic levels of capacity and econometric productivity"; and
- Champion American Markets: Regulators must: (i) oversee markets in a "holistic fashion"; and (ii) advocate for markets in "broader policy making consideration with other U.S. and overseas regulators, including central banks and prudential regulators."
Commissioner Giancarlo emphasized that:
Tired, old command and control government solutions are bumping up against the new flexible, digital economy. 21st century markets require 21st century regulation. It is time for government agencies like the CFTC to embrace innovation, champion intellectual property, repurpose its rules, unchain the U.S. economy and stand up for American markets.
Commentary / Steven Lofchie
This is a broad and well-reasoned set of criticisms and recommendations. They come from inside a major regulatory agency, even if from the minority party at the agency. Commissioner Giancarlo's perspective deserves both acknowledgment and response.
One reason this critique is so powerful is that it stands in stark contrast to recent speeches by other regulators that seem more enthusiastic about giving themselves kudos than they do in engaging in self-criticism. For example, here is a link to a recent speech by OCC Comptroller Curry on the state of banking regulation (including our comment on that speech). Now compare that optimistic view of the effect of banking regulation with a March 2015 report on the absence of any bank start-ups published by the Richmond Federal Reserve Bank, which noted that the "collapse in new bank entry has no precedent during the past 50 years, and it could have significant economic repercussions." Perhaps the Richmond Federal study was overly pessimistic, but the study did rest upon real numbers that seem troubling. It would be encouraging if the various regulators would grapple with: (i) numbers presented that are pessimistic, as equally as highlighting those numbers that are favorable; and (ii) third-party criticisms that may differ from their own views of their own performance.
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