On July 31, the U.S. Treasury Department released a report on financial technology and innovation. The report is the fourth and final in a series drafted in response to an executive order issued by President Trump in February 2017. The 200-page report describes the dramatic advances in financial technology in recent years and makes more than 80 recommendations to promote innovation in financial services.
Although the report is largely focused on areas of finance outside the derivatives markets, such as payments, lending and consumer finance, it makes several recommendations that are directly relevant to FIA members. These include support for greater engagement by regulators such as the U.S. Commodity Futures Trading Commission with fintech companies, the removal of regulatory barriers to the adoption of cloud computing, and changes to government procurement practices to allow more interaction with innovative technologies and fintech startups. The report also points to the fintech cooperation agreement that the CFTC signed with the U.K.'s Financial Conduct Authority in February as an example of the government-to-government engagement needed at international level.
In addition to these specific recommendations, the report is also important in a broader sense as thought leadership for U.S. federal and state regulators as they grapple with the implications of technological change. In particular, the report explores the impact of the "digitization" of information on access to clients and their data, focusing on several thematic areas, including:
- The collection, storage, and use of financial data;
- Cloud services and “big data” analytics;
- Artificial intelligence and machine learning; and
- Digital legal identity and data security.
The report strongly endorses the benefits of innovation and aims to guide the evolution of the U.S. financial regulatory framework to ensure greater innovation and preserve the "competitive edge" for U.S. firms. "The United States must preserve its leading position in financial innovation and must engage in agile and effective regulation for a 21st century economy," the report says. "As the rest of the world takes measures to enable innovative financial products and services, the United States risks losing out by failing to provide regulatory clarity and [failing to] remove unnecessary barriers to innovation."
To this end the report recommends the development of a more flexible approach to regulation, including a "regulatory sandbox" environment, so that firms can experiment without the threat of enforcement actions that would imperil their existence. "Innovating is an iterative process, and regulator feedback can play a helpful role while upholding safeguards and standards," the report says.
The report also recommends that Congress enact legislation reforming government procurement rules to allow financial regulators to use a provision called "other transaction authority" to explore new technologies. "The nature of innovative new technologies—not yet widespread, often without direct substitutes, and materially advancing in technology in matters of weeks not months—does not fit the traditional competitive bidding and procurement processes set out by federal acquisition regulations," the report says. "Treasury recommends that Congress enact legislation authorizing financial regulators to use other transaction authority for research and development and proof-of-concept technology projects. Regulators should use this authority to engage with the private sector to better understand new technologies and innovations and their implications for market participants, and to carry out their regulatory responsibilities more effectively and efficiently."
The report also stresses the need to move toward "agile regulation" that can keep up with technological change. "Regulators must be more agile than in the past in order to successfully uphold their missions without creating unnecessary barriers to innovation," the report says. "This requires principles- and performance-based regulation that enables the private sector to adopt innovative, technology-based compliance solutions. In addition, regulators need to understand technology on the same timeline as business. To do this, financial regulators need to engage with the private sector to test and understand new technologies and innovations as they arise."
During the drafting of the report, Treasury staff reached out to a wide range of stakeholders including FIA. In its discussions with Treasury, FIA expressed support for the CFTC's efforts to support fintech, including the LabCFTC initiative. FIA also commented about the role of industry organizations in setting guidelines and frameworks for responsible and sustainable innovation in the derivatives markets, and pointed in particular to the work of FIA, FIA PTG and FIA EPTA to provide best practices for the development and implementation of automated trading technologies.