CFTC Commissioner Rostin Behnam provided his perspective on 2018 priorities for the Market Risk Advisory Committee ("MRAC").
In an address before the FIA/SIFMA Asset Management Group at the Asset Management Derivatives Forum on February 8, 2018, the MRAC Chair highlighted the CFTC's regulatory self-certification process for new products and the CFTC's authority under Part 40 of its regulations, including the listing of the first Bitcoin futures contracts. He expressed unequivocal support for the self-certification process, though he stated that "specifically with respect to the Bitcoin contracts, the CFTC should have exercised its existing authority to accept voluntary product submissions for review and approval – by the entire Commission, instead of self-certification."
Echoing former CFTC Chair Timothy Massad and former Commissioner Sharon Bowen, Commissioner Behnam stated that while he strongly opposed any rollbacks of Dodd-Frank initiatives, a "principles-based approach to implementation can be suitable in certain instances." He added that such an approach will not succeed absent (i) clear guidance from regulators, (ii) adequate means to measure and ensure compliance, and (iii) willingness to enforce compliance and punish those who fail to ensure compliance with the rules.
Mr. Behnam highlighted MRAC's Priorities for 2018, including:
- Reg. AT ("Automated Trading") and the MRAC's proposals to establish pre-trade risk controls. Mr. Benham stated that the CFTC must take action before an automated trading system runs amok, causing harm to market participants through a flash crash or other system failure. "In this age of technology-driven financial markets," he warned, the "question of a flash crash or automated trading system failure is not a question of if, but simply when."
- Asset Managers' concerns over the loss of pre-Dodd-Frank Part-4 exemptions. Commissioner Behnam stated that "it would be difficult to support a wholesale restoration" of the exemptions previously incorporated in Part 4 to their breadth prior to the 2012 amendments, and that the "Commission has a regulatory interest in overseeing entities that actively engage in the derivatives markets, and even more significantly, provide retail customers exposure to these markets."
- Self-reporting. The CFTC's Enforcement Division continues to employ its self-reporting strategy to incentivize disclosure of violations, ensure the CFTC's enforcement division remains vigilant in policing the markets, and encourage the members of the community to assist in bringing others to justice while teaching the younger members, i.e., the new market entrants, appropriate behavior. Commissioner Behnam stated that the CFTC must provide greater visibility to the markets regarding the background and rationale for enforcement settlements with wrongdoers.
Commentary / Bob Zwirb
Commissioner Behnam's survey of the CFTC regulatory policy contains at least one positive and one less than positive suggestion. The positive one is Mr. Behnam's insistence that the Division of Enforcement more clearly describe the misconduct and how that conduct runs afoul of the law in settlements that it reaches with respondents. Too often, the language that appears in such settlement documents is so formulaic and legally obtuse that it fails to give the public a clear idea of what went wrong and why. (see, e.g., CPO/CTA to Pay $250,000 for Supervisory Failures Related to Spoofing Violations, and Texas-Based Energy Company Settles CFTC Charges of Acting as Unregistered CPO).
The more problematic suggestion is the Commissioner's dismissal of Asset Managers' concerns over the loss of many pre-Dodd-Frank Part 4 exemptions. Subjecting SEC-regulated Registered Investment Companies to CFTC regulation, for example, which was the direct result of ending such exemptions, was never a good idea notwithstanding such funds' use of derivatives. Prior to the CFTC's abrupt change in policy, such funds, which were not implicated in the 2008 financial crisis, were more than adequately regulated by the SEC. Duplicative regulation didn't make sense when the CFTC changed that policy several years ago, and it doesn't make sense today.
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