Heath Tarbert, the chairman of the Commodity Futures Trading Commission, said on Oct. 30 that he plans to move forward on several major rulemakings over the next six months, including speculative position limits, swap dealer regulation, and core principles for derivatives clearinghouses.
Speaking at the FIA Expo in Chicago, Tarbert said he spent his first 100 days in office developing a mission statement and a vision statement for the agency and a five-point list of strategic goals. He also highlighted the new leadership team that he has put in place at the CFTC and he emphasized the diversity of the staff and their understanding of the industry. "I don't think you can be a responsible regulator unless you understand the industry," he said.
At the top of his list of strategic goals is to "strengthen the resilience and integrity of our derivatives markets while fostering their vibrancy." He listed four areas under this goal where he expects to focus attention: the supervision of clearinghouses, margin and capital issues, market structure, and cooperation with regulators outside the U.S. Tarbert commented that regulators struggle with the "tradeoff" between strengthening resilience and integrity on the one hand and promoting growth and innovation on the other, and he said he will "strike a balance" to avoid over-regulation.
Turning to specifics, he said he plans to "enhance and build out our division of clearing and risk," which oversees clearinghouse issues, and he added that he expects to release a final rule in the next couple of months with amendments to Part 39 of the CFTC's rules, which implement core principles for derivatives clearing organizations.
When those amendments were proposed in April 2019, they included several provisions relating to clearinghouse risk management and reporting obligations and added several new requirements regarding default procedures. Chris Giancarlo, who was CFTC chairman at that time, explained that the new requirements were developed in response to "recent events" such as the launch of bitcoin futures by two U.S. exchanges in late 2017 and a default of an energy trader at Nasdaq Clearing in Stockholm in September 2018.
Principles-based approach to digital assets
Another strategic goal on Tarbert's list is to "encourage innovation and enhance the regulatory experience for market participants." In his speech at the FIA Expo, Tarbert commented that the agency's track record of taking a "principles-based" approach to regulation will be a core element of this strategic goal. Tarbert promised to "renew" the agency's commitment to principles-based regulation, which calls for compliance with principles rather than detailed requirements, and he said the benefits of this approach were demonstrated by the resiliency of the futures markets during the financial crisis.
One area where he plans to apply this approach is in the regulation of digital assets. He described digital assets as "21st century commodities" and said he wants the U.S. to play a leading role in this new sector of the derivatives markets. "We will be coming up with an approach that allows this country to lead," he said, "because if America does not lead in this area, other countries will end up writing the rules."
Tarbert did not make any specific commitments during this speech, but earlier in the month he said at a finance summit in New York that he views ether, the second most actively traded digital asset after bitcoin, as a commodity. That would bring it under the jurisdiction of the CFTC, distinguishing it from other digital assets that are defined as securities and therefore fall under the jurisdiction of the Securities and Exchange Commission. On Oct. 21, he took a step further, telling a conference at Georgetown University in Washington that he thinks it is "likely" that a futures contract on ether will be launched "in the next six months to a year."
Two-way street on deference
Tarbert also talked about his approach to the regulation of cross-border business. He commented that the European Commission's EMIR 2.2, a proposal that would subject U.S. clearinghouses to EU oversight if they are deemed systemically important, poses a "potential challenge" to international cooperation. He said the CFTC has been in a "very good dialogue" with European regulators on this issue, but he emphasized that the CFTC's goal is to retain its authority "to regulate and supervise our own clearinghouses."
He also commented on the issue of "deference", a term used to describe the willingness of one regulator to defer to another to avoid duplication. Tarbert said he was willing to support this principle, but only if it is reciprocal. "Let me be very clear," Tarbert said. "Deference is a two-way street. We will grant deference if deference is granted in return."
Risk-based approach to swap dealer rules
Turning to the regulation of swaps trading, he said that he intends to issue a proposal in the "next few months" to clarify the application of CFTC rules to swaps trading that involves non-U.S. firms. He explained that the proposal will address concerns raised by foreign regulators about CFTC "overreach" by focusing on the risks that such transactions pose to U.S. taxpayers. If a transaction involves two foreign counterparties, the CFTC would not require swap dealer registration, he said. "In my view, something that is arranged, negotiated and executed in the U.S. but ultimately not booked in the U.S. does not pose a direct and significant risk such that we would need them to register as a swap dealer," he said.
He also said he expects to "reopen" the swap dealer capital rule "in short order" and also said he expects to propose several rules regarding swap execution facilities, including the codification of relief granted by CFTC staff and a proposal to address the practice of "name give-up."
Attention to agricultural concerns
Another key part of Tarbert's agenda is to make sure that derivatives market regulation addresses the concerns of "all Americans," including agricultural interests and other end-users, smaller financial institutions, and customers in general.
Regarding agriculture, he commented that agriculture is "the very cornerstone of the Commodity Exchange Act" and he added, "If we don't make these markets work for farmers and ranchers, then in my view they are not working." To give the agency more access to the views of this segment of the industry, he promised that the CFTC will hold an open meeting in the midwestern part of the country in April 2020. He did not provide details, but one possibility is to hold the meeting in conjunction with the annual conference that the CFTC organizes with Kansas State University in Overland Park, Kansas.
Tarbert also promised to propose a speculative position limits rule "in the next few months" that will provide the market with "clear and usable rules." He added the proposal will avoid restricting bona fide hedging practices, a key concern for end-users. In the area of customer protection, he said he expects to release a proposal "early next year" to codify "30 years of bankruptcy standards" in the agency's Part 30 rules "to ensure that customers are protected and that we don't have another MF Global."
Data protections
Tarbert sought to put to rest concerns about the agency's attempts in the past to obtain computer code for automated trading systems. Under my watch, we are not going to be taking any source code unless there is a very specific reason for it and it is subject to a subpoena," he said. He also noted that in his previous job at the Treasury department, he was involved in international trade negotiations and the Committee on Foreign Investment in the United States, an interagency committee that reviews certain transactions involving foreign investment in the U.S. In that role, he said, he worked "to protect American intellectual property" and he said he would bring that perspective to his current role.
