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Created in reaction to the 2008 financial markets meltdown, the Dodd-Frank Act may no longer have a role to play. So said Acting Commodity Futures Trading Commission (CFTC) Chairman J. Christopher Giancarlo to attendees at the 42nd Annual International Futures Industry Conference in Boca Raton, FL this week. Rather, he noted, “the time has come to look forward — It’s now been a long time since the 2008 financial crisis. Much of the regulatory work in the past half dozen years has been to implement Congress’ crisis response – the Dodd-Frank Act. Therefore the regulatory approach, both at the CFTC and across the federal government, was in a sense backward looking.”

Looking forward

Giancarlo, nominated by President Donald Trump to become permanent chair, reported that until now, “so much policymaking, rulemaking, and thought have been directed at building a regulatory superstructure that ostensibly would prevent another 2008-style crisis that we’ve lost sight of the emerging challenges just ahead and what is the right regulatory response.”

To that end, he outlined a new agenda for the CFTC, consistent with the goals of the Trump Administration, that reinterprets its regulatory mission as:

  1. Fostering economic growth;
  2. Enhancing US financial markets; and
  3. Right-sizing the CFTC’s regulatory footprint.

To achieve this, Giancarlo outlined the following plan:

1) Reduce regulatory burdens

Giancarlo announced the launch of the CFTC’s Project KISS (Keep It Simple Stupid), an agency-wide review of CFTC rules, regulations and practices to make them simpler, less burdensome and less costly. Project KISS, he said, will be open to “sensible” public comment, adding, “let me be very clear, this exercise is not about identifying existing rules for repeal or even rewrite. 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 the American economy.

2) Become smarter regulators

To foster economic growth, the CFTC must regulate smarter, said Giancarlo. To do so, he explained, the CFTC must develop a more holistic understanding of the overall openness, transparency, competitiveness and soundness of the markets it oversees. To achieve that, the CFTC will immediately restructure as follows:

  • Roll elements of the market surveillance branch, currently housed in the Division of Market Oversight (DMO), into the Division of Enforcement (DOE). The intent is to strengthen the Commission’s mission to identify and prosecute violations of law and regulation, such as spoofing, manipulation, and fraud, while fostering increased efficiencies through knowledge sharing and cross training under unified leadership; and
  • Reorganize other elements within DMO as a new market intelligence branch, designed to understand, analyze, and communicate current and emerging derivatives market dynamics, developments and trends – such as the impact of new technologies and trading methodologies.

According to Giancarlo, this bifurcation of surveillance within DOE and market intelligence within DMO will sharpen the CFTC’s surveillance capability and knowledge base.

In addition to these restructures, Giancarlo intends to create a new position Chief Market Intelligence Officer (CMIO), reporting directly to the CFTC Chairman. The CMIO will engage with industry participants, other regulators, and the CFTC’s new Market Intelligence Unit. The intent is to improve the Commission’s “latent capability for market intelligence, giving us better insight into the needs of participants in the futures and swaps we oversee.” In addition, the CMIO is expected to help the public understand risk transfer markets and these markets’ benefit to ensure they understand why the policy reforms Giancarlo proposes “are vital to economic growth.”

3) Embrace FinTech

In this, Giancarlo intends that the CFTC keep pace, or even ahead of technological change in an increasingly digital marketplace. The CFTC, he said, “must be a leader in adopting the ‘do no harm’ approach to financial technology similar.” This includes:

  • Leveraging FinTech innovation;
  • Identifying and updating CFTC rules and regulations for 21st Century digital markets; and
  • Determining the CFTC’s role in promoting US FinTech innovation in CFTC regulated markets.

4) Enhance US financial markets

First on the CFTC agenda to enhance US financial markets is to calibrate bank capital charges. In this, Giancarlo intends the CFTC use its authority to address the question of whether the amount of capital bank regulators require financial institutions to take out of trading markets is calibrated to the amount of capital that must be kept in global markets to “better balance systemic risk concerns with healthy economic growth and American prosperity.”

5) Fix Swaps Rules

Because, Giancarlo said, reduced hedging leads to reduced lending, he intends to fix “the CFTC flawed swaps trading rules… (to create) a better regulatory framework for swaps trading.” Revised rules would be designed to permit market participants to select the manner of trade execution best suited to their swaps trading and liquidity needs, not the federal government. The intention, he explained is to “attract, rather than repel, global capital to US trading markets…(and) better align regulatory oversight with inherent swaps market dynamics.”

6) Build cross-border comity

The CFTC will continue to work positively with its overseas regulatory counterparts while embracing the Trump Administration’s executive order to advance American interests in international financial regulatory negotiations and meetings. According to Giancarlo, this means” the CFTC should be an active participant in international bodies, like IOSCO, in which it pursues policies that are most appropriate for American markets. Undoubtedly,” he added, “other national regulators approach their international engagement in a similar fashion. This approach is realistic and is most likely to lead to prosperity-enhancing policy breakthroughs across markets here and abroad.”

7) Small is good

Now that the era of Dodd-Frank implementation at the CFTC is drawing to a close, Giancarlo 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. It also means that the CFTC will embrace President Trump’s directive that each federal agency minimizes the costs borne by their regulation.”

Therefore, the CFTC will refocus on its core mission: fostering open, transparent, competitive and financially sound markets for the trading of derivatives by:

  • streamlining the work of the CFTC’s Market Oversight, Swap Dealer and Intermediary Oversight and Clearing and Risk divisions in performing the oversight that only they can perform over markets, intermediaries and market participants;
  • working cooperatively with parallel federal market regulators, like the Securities and Exchange Commission; and, where appropriate; and
  • delegating responsibility to the National Futures Association, the exchanges and the other self-regulatory organizations (SROs) in matters where SROs are able to act effectively.

This is not, Giancarlo reiterated, a license to steal. Rather, he warns those “who may seek to cheat or manipulate our markets: you will face aggressive and assertive enforcement action by the CFTC under the Trump Administration. There will be no pause, let up or reduction in our duty to enforce the law and punish wrongdoing in our derivatives markets.”

Still vigilant despite budget cuts

Like FINRA, the SEC, and other financial industry regulatory bodies, it is the CFTC’s intent to keep an eye out for compliance errors and omissions (or outright wrongdoing!). They will continue to scout out bad actors acting badly.  So you should still be prepared. But be prepared at the right price! Noncompliance can be costly, but compliance solutions don’t have to break the bank. Patrina is offering a 90-day, FREE trial of its comprehensive 8-module compliance solution. And that’s just the tip of our iceberg!

Let’s talk (212-233-1155). Ask about Patrina’s comprehensive compliance solutions and compliant data capture, file storage, and records archiving specifically designed for the financial services community. We’ve got you covered.

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