CFTC TAC Meeting
Commodity Futures Trading Commission (CFTC)
Technology Advisory Committee (TAC) Meeting
Tuesday, February 23, 2016
Key Topics & Takeaways
-
Regulation
Automated Trading (Reg AT):
- Participants expressed concern regarding certain
aspects of the proposal, including whether its scope and definitions
appropriately capture the risks the Commission is seeking to address, and
whether requirements on access to proprietary source codes are over-reaching.
- Participants stressed that the Commission should
focus on international coordination, and “not get ahead” of their foreign
counterparts.
- Commission staff stated they would be considering
the re-establishment of the TAC’s data reporting subcommittee, which
participants supported.
- Panelists cautioned that requiring additional
data fields and more granularity may actually serve to exacerbate data quality
problems, not help.
- Panelists instead recommended the Commission
focus on addressing issues and problems with current data sets before seeking
to add on additional fields.
- Participants highlighted the potential benefits
of technology, including increased transparency, cost reduction and operational
efficiency.
- It was noted that the interaction between
regulatory and legal frameworks and new technology will be a key consideration
moving forward.
Opening Remarks
In his opening
remarks, Chairman Massad explained that the proposed regulation of
automated trading (Reg AT) is intended to focus on “principles-based industry
practices to mitigate operational risks and minimize the potential for
disruptions or other problems, and includes requirements for pre-trade risk
controls and other types of measures,” but noted it is not intended to
“describe the parameter or limits of such controls.”
On swap data and reporting, Massad noted that the Commission is
engaged in efforts aimed at enhancing the quality of the data and ensuring
greater consistency. He highlighted that there currently exists a
significant amount of variation in how different market participants report the
same fields to swap data repositories (SDRs), as well as how the SDRs then
transmit such information to the CFTC, and that the Commission is dedicated to
identifying a where standardization or clarification is needed.
Lastly, in regards to blockchain, Massad expressed that the
Commission is interested in learning of the potential benefits or improvements
this technology may bring to the derivatives market, as well as any possible
disadvantages or limitations.
Commissioner Bowen
Commissioner Bowen, in her opening
remarks, noted the “[r]emarkable changes caused by the rise of algorithmic
trading and the positive impact that […] automated and algorithmic trading will
have on market stability.” Bowen went on to state that she would be
interested in hearing from market participants as to whether the Commission’s
Reg AT proposal is “failing to address specifics of algorithmic trading that
pose systemic risk or undue risk to ordinary investors,” and that the
Commission is willing to craft appropriate regulations to rectify any
overreaching or under-reaching aspects.
In regards to swap data reporting issues, Bowen emphasized that
the Commission’s rules rely on accurate data, which requires the development of
robust, widely accepted standards. She went on to caution that “[u]ntil
all of our key data is standardized and easily usable for analytics and
surveillance, we cannot say that the Dodd-Frank regime is complete.”
Commissioner Giancarlo
In his opening
remarks, Commissioner Giancarlo noted several concerns in regards to the
Commission’s current Reg AT proposal, including whether the costs of compliance
outweigh the benefits, and whether requiring registrants to provide proprietary
source codes for inspection by the CFTC or US Department of Justice, at anytime
without a subpoena, is appropriate. Giancarlo further explained that Reg
AT is a “regulation scheme” that does not necessarily address the significant
policy issues arising in the “digital revolution of modern markets.”
Giancarlo highlighted that the TAC continues to address key issues
impacting data quality, including field standardization and data
validation. Giancarlo next emphasized that “[a] key challenge to swaps
market analysis is the lack of global standardization,” pointing out that
“[m]arket participants vary widely in how they report the same data fields to
SDRs that in turn differ in how they report to the CFTC.” Giancarlo went
on to express his concern that “the CFTC and its overseas regulatory
counterparts acting by themselves will continue to struggle to achieve the
important objective of full visibility in the swaps counterparty
exposures.” In order to address this concern, Giancarlo recommend a
“concerted and cooperative effort by regulators, market participants,
commercial technology vendors and academia, that draw on the emerging fields of
big data analysis, network science and financial cartography.”
Lastly, Giancarlo recognized the enormous potential and impact of
recent innovations on financial markets, noting that “regulators must cultivate
and embrace new technologies, such as the blockchain.”
Panel I: CFTC Proposed Rule: Regulation
Automated Trading
Staff from theCFTC’s Division of Market Oversight (DMO)
began the panel discussion with a brief overview of the purpose and design of
Reg AT. Staff explained that the proposal was drafted with the intention
to reduce risk and increase transparency in automated trading, and took a
“multilayered” approach to risk control. Staff further clarified that the
proposed Reg AT is meant to provide flexibility around the design and
calibration of pre-trade risk controls and self-trade implementation
tools. Lastly, staff expressed interest in feedback on the key defined
terms which establish the scope of the proposal, including “algorithmic
trading” and “direct electronic access,” as they are “fundamental in that they
define who is in, who is out and what activities are covered by proposed Reg
AT.”
Richard Gorelick, CEO, RGM Advisors
Gorelick expressed specific concern regarding the source code
provisions within Reg AT, which would require market participants to turn over
intellectual property (IP) to the government if asked for in a simple document
request. Gorelick stated that such a requirement was unprecedented,
unreasonable and “violates standards of due process.” He went on to state
that “[g]overnment agencies must make a reasonable showing of cause, and get a
subpoena to gain access to intellectual private property,” and expressed
concern that such an action “would set a dangerous precedent with foreign
governments, such as China, who have sought to obtain source code on US firms.”
Gorelick went on to note that many of the requirements in Reg AT
were designed to create safeguards, policies and procedures “around things that
are already prohibited by law,” and expressed concern that the cost of
implementing and complying with the new rules will limit the ability of smaller
firms to remain competitive.
Chris Hehmeyer, Chairman, National Futures Association (NFA)
Hehmeyerhighlighted the importance of appropriately tailoring
definitions in the Reg AT proposal to avoid being overly broad and requiring
entities to become subject to NFA oversight that might not necessarily be
intended or appropriate.
Steven A. Joachim, Executive Vice President of Transparency
Services, FINRA
Joachim stressed the importance of coordination between regulatory
agencies and self-regulatory organizations in overseeing automated spaces, as
they are “cross-product and cross-market.” He further stressed that while
it is important to recognize respective differences between markets, “it is
important to get the core concept so that the SEC, the CFTC, FINRA, are all
working and coordinating our actions in a way that will move the market forward
and our visibility of the markets more insightful and more accurate.”
Larry Tabb, Founder & CEO, TABB Group
Tabb asked whether requirements on IP source codes being held in a
repository would create risks or change the way market participants think about
writing algorithms. Gorelick answered that it would likely effect firms’
willingness to participate in the futures market, if it would risk exposure of
turning over their IP to government agencies without due process. He
explained that firms lose their ability to protect their IP when placed in the
hands of a third party, creating competitive risks and raising cybersecurity
concerns. Hehmeyer agreed that the question of due process is something the
industry must give serious thought to, and queried what would be the benefit of
having “trade secrets always available” versus obtainable via subpoena.
Chairman Massad explained that while he appreciated concerns
regarding source codes, the Commission has had access to and held other types
of confidential information in the past, noting that “protecting
confidentiality of information is incredibly important to what we do and to the
markets.”
Bryan Durkin, Chief Commercial Officer, CME Group
Durkin posited that, given the extensiveness and complexity of the
rulemaking, whether it would be beneficial to break out certain aspects of the
proposal – namely separating out registration requirements from this regarding
risk controls. Durkin expressed concerns that as drafted, registration
requirements under Reg AT would apply more broadly than anticipated by the
Commission, and more consideration may be necessary.
Gary DeWaal, Special Counsel, Katten Munchin Rosenman LLP
DeWall suggested that the definitions in Reg AT could be adjusted
to be less prescriptive, as whether a group of market participants falls
subject to registration requirements under the proposal does not necessarily
mean all entities that pose risk of disruptive trading practices will be
captured. Further, he noted that the Commission would not want to draft
requirements too narrowly, to exclude systems developed in the future.
DMO Staff next provided clarification regarding the proposal’s
treatment of pre-trade risk controls, noting that while the proposal addressed
pre-trade controls at the AT-person, clearing futures commission merchant (FCM)
and designated contract market (DCM) levels, the Commission did not mean the
design and calibration of controls must be coordinated; rather such actions
would depend on the entity type, and the respective risks each perceive.
DeWaal noted that the Singapore Exchange, which had previously
been very strict in defining pre-trade risk controls, has recently proposed
modifications to its rules which are much less prescriptive. He noted
this was done to avoid the “danger of being too specific,” which might serve to
discourage innovation and give the Commission less flexibility in dealing with
best practices in the future.
Commissioner Bowen summarized her understanding of the panelists’
concerns, stating that the Commission may have “been overly prescriptive and
that we have not necessarily captured the risks that are posed by these types
of trading activities.”
Panel II: Swap Data Standardization and
Harmonization
Daniel Busca, Deputy Director, Data and Reporting Branch, DMO
Busca provided an overview of Commission staff’s “Request for
Comment on Technical Specifications for Certain Swap Data Elements” stating
that “this is just one step in the iterative process to resolve the
inconsistencies in SDRs report swaps.” Busca further noted that the TAC
is considering the re-establishment of its “data standard” subcommittee, which
several panelists later supported.
Srinivas Barngarable, Deputy Director, Data
Management Branch, CFTC Office of Data and Technology
Barngarablenext discussed the CFTC’s efforts towards international
coordination of swap data and reporting standards. He highlighted CFTC
involvement in CPMI/IOSCO efforts, noting that: 1.) CPMI/IOSCO is currently
reviewing comments in response its first consultation on “other data elements”;
2.) final guidance on Unique Transaction Identifiers (UTIs) is expected by late
spring; and 3.) an additional consultation on Unique Product Identifiers (UPIs)
is expected by the end of the year.
Marisol Collazo, Managing Director and CEO, DTCC Data Repository
LLC
Collazo next discussed importance of data validation and
reliability, noting them to be key tenants necessary for achieving data
completeness and accuracy. Collazo highlighted that data reliability is
currently highest in areas where existing processes, such electronic
confirmations, are already in place – specifically in credit and interest rate
swap markets (where a high percentage of fields are electronically
confirmed). Conversely, she noted, reliability decreases where reporting
requirements and fields are imposed on products where they are not part of
existing market conventions or practices.
In regards to the reporting of data events, Collazo explained that
such events should impact reporting only where they “reflect price forming
changes as it relates to the opening or closing of a transaction,” such as a
new trade, new execution, novation or termination. On the contrary,
Collazo cautioned that not all “events” should impact reporting requirements –
for example, middleware providers who perform compression or allocations, as
these actions occur on “data events” and occur for other market purposes.
Lastly, Collazo stressed the importance of ensuring that
information is “readily available or accessible” in order to execute proposed
standards. Collazo expressed that she does not currently believe the
requisite information is readily available, and that regulators and market
participants must work to narrow regulatory objectives and discuss alternative
solutions for audit traceability, “such as linking trades when it relates to
compression between the predecessor and successor identifiers, trade identifiers.”
Bruce Tupper, President, ICE Trade Vault & ICE eConfirm
Services
Tupper highlighted the importance of harmonization as other
jurisdictions’ reporting regimes are also developing, noting that there has
been a “very broad expansion of data, and what it’s led to are these very large
sets of data that are unmanageable.” Tupper suggested that the goal
should be to work with the current data fields, and understand how they can be
standardized and validated in order to give the Commission useful, uniform data.
Jonathan Thursby, President, Global Reposity Services, CME Group
Thursbynoted that it is important for the Commission to ensure
regulatory timelines are coordinated, as many organizations will have reporting
obligations in multiple jurisdictions. Thursby then expressed his desire
to see the Commission expand past efforts towards data harmonization in the
credit markets to other asset classes.
Derek Kleinbaur, Operations Manager, Bloomberg SDR LLC
Kleinbaurexpressed the need for the ability to link certain swap
transactions for reporting purposes, including for situations involving package
transactions and compression events. He further recommended leveraging
information already being reported upstream by other entities, including swap
execution facilities (SEFs).
Supurna VedBrat, Managing Director, Co-Head E-trading & Market
Structure, BlackRock
VedBrat further stressed the importance of linkability, as the
lifecycle of a transaction may occur across different entities and have certain
aspects stored in separate SDRs, for example, in the case of allocations or
compression. VedBrat then stated that the industry must give thought to
the types of life cycle events of a swap, how to treat them, and how to
translate or transmit that information “both downstream and upstream.”
Pierre Lamy, Managing Director, Goldman Sachs
Lamy stated that efforts should be made to normalize the currently
reported data sets before seeking to introduce further elements, as this may
“compound the problem of data quality.”
Brad Levy, Managing Director and CEO, MarkitSERV
Levycautioned that further expansion of data reporting may be too
granular, though additional fields would be helpful in some instances. He
expressed that the industry should give thought to whether adding additional
granularity will provide value, and consider whether it would be more
beneficial to create value of the available data already being reported, which
may have what regulators and market participants are looking for.
Commissioner Giancarlo wondered whether we are facing a “big data”
problem, and if the answer would be to utilize better analytics to review
current data sets, rather than seeking more data, or adding more granularity.
Lamy agreed that the Commission should consider whether it is
sufficiently leveraging currently available data, noting that a significant
impediment to doing so is the lack of data standardization. He further
expressed concern that problems will continue should regulators seek to develop
their own standards, despite the work underway at the Committee on Payments and
Market Infrastructures (CPMI) and the International Organization of Securities
Commissions (IOSCO).
Panel III: Blockchain and the Potential
Application of Distributed Ledger Technology to the Derivatives
Market
Sandra Ro, Head of Digitization, CME Group
Ro began the panel by giving an introduction on framework and uses
of blockchain technology. She highlighted certain benefits of blockchain,
including interoperability, auditability, transparency and the fact that in
most cases, it is open source (though this is issue is subject to some current
debate, she noted). Ro next explained potential risks, including whether
such technology has limited use cases, as well as certain security
concerns. Ro also highlighted that existing regulatory and legal
frameworks may create impediments, and stressed that blockchain must work
across global jurisdictions.
Brad Levy, Managing Director and Chief Executive Officer,
MarkitSERV
Levy next discussed the specific application of blockchain
technology to derivatives markets. He noted that such technology may
currently be used to reduce some operational risks and costs, and perhaps
market and liquidity risk in the future. Levy also envisioned the
possibility that blockchain may be used for balance sheet and collateral
management in the future. He stressed the importance, however, of making
sure technology is adopted at an appropriate pace, and that a great deal of
thought must still be given to addressing security and regulatory
concerns. Levy explained that regulators must balance oversight with
innovation in this regard.
Robert Sams, CEO, Clearmatics
Sams next described how distributed ledger technology (DLT) could
be viewed an alternative to CCPs in derivatives markets. He explained the
DLT could be used to address issues associated with contract valuation,
variation margin, initial margin and custody and netting (though the CCP
function of guaranteeing both sides of a transaction would not be possible, he
noted). Sams expressed that this technology could serve to transform and
revitalize the OTC marketplace, providing additional transparency.
James Slazas, CFO, ConsenSys
Slazasdelivered a presentation on the “etherium blockchain,” and
discussed how the technology can be utilized to provide solutions to certain
issues facing financial institutions. Slazas highlighted that the
transparency and accessibility of such technology could be developed to give
regulators a “dashboard” view to the different types of swap transactions
occurring and the types of collateral being associated with it, among other
points.
Ro cautioned that while this technology may serve useful in terms
of collateral management, some regulatory questions must be answered, including
what happens in the event of a default or a bankruptcy, what regimes would
cover the tokenized assets, and if they’re in transit from one jurisdiction to
another, whether the tokenized assets become recognized under law.
Clifford Lewis, Independent Director, Eris Exchange
Lewisnoted that the cost of clearing continues to be a major
challenge in the industry, especially for smaller market participants and
end-users. He expressed that DLT may be a way to provide serious cost
savings to these market participants and is something that should be explored.
Collazo agreed that there are some areas where the use of the
technology could serve to “solve some problems and create some efficiencies,”
but emphasized that there must be governance standards in place which address
issues including cybersecurity and customer identity protections.
Evelyn Fuhrer, Managing Director, Promontory Financial Group
Fuhrercautioned that a high degree of standardization and
commonality would be required in order to effectively utilize DLT. She
recognized, however, the significant benefit for regulators in being able to
access information on a real-time basis, should the utilization of the
technology continue to advance. Levy furthered this point,
stating that the regulators themselves could be part of the DLT network as a
“node” with special access, as a participant.
Balancing Regulatory Benefits of Technology
Tabb next highlighted that DLT has the potential to significantly
shorten settlement cycles, but expressed concern that this may pose some “real
challenges on the collateral side.” Sams agreed that blockchain could
radically reduce settlement time, but noted that timing interval will differ
depending on the market and its settlement needs.
Chairman Massad expressed that the Commission would “want to make
sure we’re at least not standing in the way of new technological developments,
and potentially encouraging technological developments that can be
beneficial.” He next asked panelists to describe what they believe the
application of blockchain technology might be moving forward.
Slazas stressed the potential regulatory benefits of the
technology, highlighting that there would be the opportunity for real-time
access to data and transparency into markets.
Decentralized Clearing
Sams stated his belief that the industry is on a path towards
decentralized clearing, and expressed interest in exploring whether the CFTC
would recognize a “decentralized clearing network” as a designate clearing
organization under Dodd-Frank, or alternatively, whether it might fall into an
exempt category. Lastly, Sams noted that the technology should be
considered and to help inform current regulatory debates in the OTC landscape.
Levy expressed that in 1 to 3 years, he believed there would be
significant improvements to operational efficiencies in some areas, including
data and collateral management. He noted, however, that the most
significant impacts of blockchain technology, including on liquidity, will
likely take 10 to 15 years to occur.
DeWaal noted that a move towards this technology will require the
Commission to adapt some of its current rules at some point, and wondered how
markets will operate during a period of technological transition.
Commissioner Giancarlo closed by noting the need for to regulators
“take account of what we’re hearing here and look at our regulations and see to
what extent do they favor an old model of data recording, ledgering,” and
determine whether affirmative steps must be taken to revisit standards and
allow for “this very important technology can develop and lead to whatever it
is going to lead to.”
More information about this event can be accessed here.
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Commodity Futures Trading Commission (CFTC)
Technology Advisory Committee (TAC) Meeting
Tuesday, February 23, 2016
Key Topics & Takeaways
-
Regulation
Automated Trading (Reg AT):- Participants expressed concern regarding certain
aspects of the proposal, including whether its scope and definitions
appropriately capture the risks the Commission is seeking to address, and
whether requirements on access to proprietary source codes are over-reaching.
- Participants expressed concern regarding certain
- Participants stressed that the Commission should
focus on international coordination, and “not get ahead” of their foreign
counterparts.
- Commission staff stated they would be considering
the re-establishment of the TAC’s data reporting subcommittee, which
participants supported.
- Panelists cautioned that requiring additional
data fields and more granularity may actually serve to exacerbate data quality
problems, not help.
- Panelists instead recommended the Commission
focus on addressing issues and problems with current data sets before seeking
to add on additional fields.
- Participants highlighted the potential benefits
of technology, including increased transparency, cost reduction and operational
efficiency.
- It was noted that the interaction between
regulatory and legal frameworks and new technology will be a key consideration
moving forward.
Opening Remarks
In his opening
remarks, Chairman Massad explained that the proposed regulation of
automated trading (Reg AT) is intended to focus on “principles-based industry
practices to mitigate operational risks and minimize the potential for
disruptions or other problems, and includes requirements for pre-trade risk
controls and other types of measures,” but noted it is not intended to
“describe the parameter or limits of such controls.”
On swap data and reporting, Massad noted that the Commission is
engaged in efforts aimed at enhancing the quality of the data and ensuring
greater consistency. He highlighted that there currently exists a
significant amount of variation in how different market participants report the
same fields to swap data repositories (SDRs), as well as how the SDRs then
transmit such information to the CFTC, and that the Commission is dedicated to
identifying a where standardization or clarification is needed.
Lastly, in regards to blockchain, Massad expressed that the
Commission is interested in learning of the potential benefits or improvements
this technology may bring to the derivatives market, as well as any possible
disadvantages or limitations.
Commissioner Bowen
Commissioner Bowen, in her opening
remarks, noted the “[r]emarkable changes caused by the rise of algorithmic
trading and the positive impact that […] automated and algorithmic trading will
have on market stability.” Bowen went on to state that she would be
interested in hearing from market participants as to whether the Commission’s
Reg AT proposal is “failing to address specifics of algorithmic trading that
pose systemic risk or undue risk to ordinary investors,” and that the
Commission is willing to craft appropriate regulations to rectify any
overreaching or under-reaching aspects.
In regards to swap data reporting issues, Bowen emphasized that
the Commission’s rules rely on accurate data, which requires the development of
robust, widely accepted standards. She went on to caution that “[u]ntil
all of our key data is standardized and easily usable for analytics and
surveillance, we cannot say that the Dodd-Frank regime is complete.”
Commissioner Giancarlo
In his opening
remarks, Commissioner Giancarlo noted several concerns in regards to the
Commission’s current Reg AT proposal, including whether the costs of compliance
outweigh the benefits, and whether requiring registrants to provide proprietary
source codes for inspection by the CFTC or US Department of Justice, at anytime
without a subpoena, is appropriate. Giancarlo further explained that Reg
AT is a “regulation scheme” that does not necessarily address the significant
policy issues arising in the “digital revolution of modern markets.”
Giancarlo highlighted that the TAC continues to address key issues
impacting data quality, including field standardization and data
validation. Giancarlo next emphasized that “[a] key challenge to swaps
market analysis is the lack of global standardization,” pointing out that
“[m]arket participants vary widely in how they report the same data fields to
SDRs that in turn differ in how they report to the CFTC.” Giancarlo went
on to express his concern that “the CFTC and its overseas regulatory
counterparts acting by themselves will continue to struggle to achieve the
important objective of full visibility in the swaps counterparty
exposures.” In order to address this concern, Giancarlo recommend a
“concerted and cooperative effort by regulators, market participants,
commercial technology vendors and academia, that draw on the emerging fields of
big data analysis, network science and financial cartography.”
Lastly, Giancarlo recognized the enormous potential and impact of
recent innovations on financial markets, noting that “regulators must cultivate
and embrace new technologies, such as the blockchain.”
Panel I: CFTC Proposed Rule: Regulation
Automated Trading
Staff from theCFTC’s Division of Market Oversight (DMO)
began the panel discussion with a brief overview of the purpose and design of
Reg AT. Staff explained that the proposal was drafted with the intention
to reduce risk and increase transparency in automated trading, and took a
“multilayered” approach to risk control. Staff further clarified that the
proposed Reg AT is meant to provide flexibility around the design and
calibration of pre-trade risk controls and self-trade implementation
tools. Lastly, staff expressed interest in feedback on the key defined
terms which establish the scope of the proposal, including “algorithmic
trading” and “direct electronic access,” as they are “fundamental in that they
define who is in, who is out and what activities are covered by proposed Reg
AT.”
Richard Gorelick, CEO, RGM Advisors
Gorelick expressed specific concern regarding the source code
provisions within Reg AT, which would require market participants to turn over
intellectual property (IP) to the government if asked for in a simple document
request. Gorelick stated that such a requirement was unprecedented,
unreasonable and “violates standards of due process.” He went on to state
that “[g]overnment agencies must make a reasonable showing of cause, and get a
subpoena to gain access to intellectual private property,” and expressed
concern that such an action “would set a dangerous precedent with foreign
governments, such as China, who have sought to obtain source code on US firms.”
Gorelick went on to note that many of the requirements in Reg AT
were designed to create safeguards, policies and procedures “around things that
are already prohibited by law,” and expressed concern that the cost of
implementing and complying with the new rules will limit the ability of smaller
firms to remain competitive.
Chris Hehmeyer, Chairman, National Futures Association (NFA)
Hehmeyerhighlighted the importance of appropriately tailoring
definitions in the Reg AT proposal to avoid being overly broad and requiring
entities to become subject to NFA oversight that might not necessarily be
intended or appropriate.
Steven A. Joachim, Executive Vice President of Transparency
Services, FINRA
Joachim stressed the importance of coordination between regulatory
agencies and self-regulatory organizations in overseeing automated spaces, as
they are “cross-product and cross-market.” He further stressed that while
it is important to recognize respective differences between markets, “it is
important to get the core concept so that the SEC, the CFTC, FINRA, are all
working and coordinating our actions in a way that will move the market forward
and our visibility of the markets more insightful and more accurate.”
Larry Tabb, Founder & CEO, TABB Group
Tabb asked whether requirements on IP source codes being held in a
repository would create risks or change the way market participants think about
writing algorithms. Gorelick answered that it would likely effect firms’
willingness to participate in the futures market, if it would risk exposure of
turning over their IP to government agencies without due process. He
explained that firms lose their ability to protect their IP when placed in the
hands of a third party, creating competitive risks and raising cybersecurity
concerns. Hehmeyer agreed that the question of due process is something the
industry must give serious thought to, and queried what would be the benefit of
having “trade secrets always available” versus obtainable via subpoena.
Chairman Massad explained that while he appreciated concerns
regarding source codes, the Commission has had access to and held other types
of confidential information in the past, noting that “protecting
confidentiality of information is incredibly important to what we do and to the
markets.”
Bryan Durkin, Chief Commercial Officer, CME Group
Durkin posited that, given the extensiveness and complexity of the
rulemaking, whether it would be beneficial to break out certain aspects of the
proposal – namely separating out registration requirements from this regarding
risk controls. Durkin expressed concerns that as drafted, registration
requirements under Reg AT would apply more broadly than anticipated by the
Commission, and more consideration may be necessary.
Gary DeWaal, Special Counsel, Katten Munchin Rosenman LLP
DeWall suggested that the definitions in Reg AT could be adjusted
to be less prescriptive, as whether a group of market participants falls
subject to registration requirements under the proposal does not necessarily
mean all entities that pose risk of disruptive trading practices will be
captured. Further, he noted that the Commission would not want to draft
requirements too narrowly, to exclude systems developed in the future.
DMO Staff next provided clarification regarding the proposal’s
treatment of pre-trade risk controls, noting that while the proposal addressed
pre-trade controls at the AT-person, clearing futures commission merchant (FCM)
and designated contract market (DCM) levels, the Commission did not mean the
design and calibration of controls must be coordinated; rather such actions
would depend on the entity type, and the respective risks each perceive.
DeWaal noted that the Singapore Exchange, which had previously
been very strict in defining pre-trade risk controls, has recently proposed
modifications to its rules which are much less prescriptive. He noted
this was done to avoid the “danger of being too specific,” which might serve to
discourage innovation and give the Commission less flexibility in dealing with
best practices in the future.
Commissioner Bowen summarized her understanding of the panelists’
concerns, stating that the Commission may have “been overly prescriptive and
that we have not necessarily captured the risks that are posed by these types
of trading activities.”
Panel II: Swap Data Standardization and
Harmonization
Daniel Busca, Deputy Director, Data and Reporting Branch, DMO
Busca provided an overview of Commission staff’s “Request for
Comment on Technical Specifications for Certain Swap Data Elements” stating
that “this is just one step in the iterative process to resolve the
inconsistencies in SDRs report swaps.” Busca further noted that the TAC
is considering the re-establishment of its “data standard” subcommittee, which
several panelists later supported.
Srinivas Barngarable, Deputy Director, Data
Management Branch, CFTC Office of Data and Technology
Barngarablenext discussed the CFTC’s efforts towards international
coordination of swap data and reporting standards. He highlighted CFTC
involvement in CPMI/IOSCO efforts, noting that: 1.) CPMI/IOSCO is currently
reviewing comments in response its first consultation on “other data elements”;
2.) final guidance on Unique Transaction Identifiers (UTIs) is expected by late
spring; and 3.) an additional consultation on Unique Product Identifiers (UPIs)
is expected by the end of the year.
Marisol Collazo, Managing Director and CEO, DTCC Data Repository
LLC
Collazo next discussed importance of data validation and
reliability, noting them to be key tenants necessary for achieving data
completeness and accuracy. Collazo highlighted that data reliability is
currently highest in areas where existing processes, such electronic
confirmations, are already in place – specifically in credit and interest rate
swap markets (where a high percentage of fields are electronically
confirmed). Conversely, she noted, reliability decreases where reporting
requirements and fields are imposed on products where they are not part of
existing market conventions or practices.
In regards to the reporting of data events, Collazo explained that
such events should impact reporting only where they “reflect price forming
changes as it relates to the opening or closing of a transaction,” such as a
new trade, new execution, novation or termination. On the contrary,
Collazo cautioned that not all “events” should impact reporting requirements –
for example, middleware providers who perform compression or allocations, as
these actions occur on “data events” and occur for other market purposes.
Lastly, Collazo stressed the importance of ensuring that
information is “readily available or accessible” in order to execute proposed
standards. Collazo expressed that she does not currently believe the
requisite information is readily available, and that regulators and market
participants must work to narrow regulatory objectives and discuss alternative
solutions for audit traceability, “such as linking trades when it relates to
compression between the predecessor and successor identifiers, trade identifiers.”
Bruce Tupper, President, ICE Trade Vault & ICE eConfirm
Services
Tupper highlighted the importance of harmonization as other
jurisdictions’ reporting regimes are also developing, noting that there has
been a “very broad expansion of data, and what it’s led to are these very large
sets of data that are unmanageable.” Tupper suggested that the goal
should be to work with the current data fields, and understand how they can be
standardized and validated in order to give the Commission useful, uniform data.
Jonathan Thursby, President, Global Reposity Services, CME Group
Thursbynoted that it is important for the Commission to ensure
regulatory timelines are coordinated, as many organizations will have reporting
obligations in multiple jurisdictions. Thursby then expressed his desire
to see the Commission expand past efforts towards data harmonization in the
credit markets to other asset classes.
Derek Kleinbaur, Operations Manager, Bloomberg SDR LLC
Kleinbaurexpressed the need for the ability to link certain swap
transactions for reporting purposes, including for situations involving package
transactions and compression events. He further recommended leveraging
information already being reported upstream by other entities, including swap
execution facilities (SEFs).
Supurna VedBrat, Managing Director, Co-Head E-trading & Market
Structure, BlackRock
VedBrat further stressed the importance of linkability, as the
lifecycle of a transaction may occur across different entities and have certain
aspects stored in separate SDRs, for example, in the case of allocations or
compression. VedBrat then stated that the industry must give thought to
the types of life cycle events of a swap, how to treat them, and how to
translate or transmit that information “both downstream and upstream.”
Pierre Lamy, Managing Director, Goldman Sachs
Lamy stated that efforts should be made to normalize the currently
reported data sets before seeking to introduce further elements, as this may
“compound the problem of data quality.”
Brad Levy, Managing Director and CEO, MarkitSERV
Levycautioned that further expansion of data reporting may be too
granular, though additional fields would be helpful in some instances. He
expressed that the industry should give thought to whether adding additional
granularity will provide value, and consider whether it would be more
beneficial to create value of the available data already being reported, which
may have what regulators and market participants are looking for.
Commissioner Giancarlo wondered whether we are facing a “big data”
problem, and if the answer would be to utilize better analytics to review
current data sets, rather than seeking more data, or adding more granularity.
Lamy agreed that the Commission should consider whether it is
sufficiently leveraging currently available data, noting that a significant
impediment to doing so is the lack of data standardization. He further
expressed concern that problems will continue should regulators seek to develop
their own standards, despite the work underway at the Committee on Payments and
Market Infrastructures (CPMI) and the International Organization of Securities
Commissions (IOSCO).
Panel III: Blockchain and the Potential
Application of Distributed Ledger Technology to the Derivatives
Market
Sandra Ro, Head of Digitization, CME Group
Ro began the panel by giving an introduction on framework and uses
of blockchain technology. She highlighted certain benefits of blockchain,
including interoperability, auditability, transparency and the fact that in
most cases, it is open source (though this is issue is subject to some current
debate, she noted). Ro next explained potential risks, including whether
such technology has limited use cases, as well as certain security
concerns. Ro also highlighted that existing regulatory and legal
frameworks may create impediments, and stressed that blockchain must work
across global jurisdictions.
Brad Levy, Managing Director and Chief Executive Officer,
MarkitSERV
Levy next discussed the specific application of blockchain
technology to derivatives markets. He noted that such technology may
currently be used to reduce some operational risks and costs, and perhaps
market and liquidity risk in the future. Levy also envisioned the
possibility that blockchain may be used for balance sheet and collateral
management in the future. He stressed the importance, however, of making
sure technology is adopted at an appropriate pace, and that a great deal of
thought must still be given to addressing security and regulatory
concerns. Levy explained that regulators must balance oversight with
innovation in this regard.
Robert Sams, CEO, Clearmatics
Sams next described how distributed ledger technology (DLT) could
be viewed an alternative to CCPs in derivatives markets. He explained the
DLT could be used to address issues associated with contract valuation,
variation margin, initial margin and custody and netting (though the CCP
function of guaranteeing both sides of a transaction would not be possible, he
noted). Sams expressed that this technology could serve to transform and
revitalize the OTC marketplace, providing additional transparency.
James Slazas, CFO, ConsenSys
Slazasdelivered a presentation on the “etherium blockchain,” and
discussed how the technology can be utilized to provide solutions to certain
issues facing financial institutions. Slazas highlighted that the
transparency and accessibility of such technology could be developed to give
regulators a “dashboard” view to the different types of swap transactions
occurring and the types of collateral being associated with it, among other
points.
Ro cautioned that while this technology may serve useful in terms
of collateral management, some regulatory questions must be answered, including
what happens in the event of a default or a bankruptcy, what regimes would
cover the tokenized assets, and if they’re in transit from one jurisdiction to
another, whether the tokenized assets become recognized under law.
Clifford Lewis, Independent Director, Eris Exchange
Lewisnoted that the cost of clearing continues to be a major
challenge in the industry, especially for smaller market participants and
end-users. He expressed that DLT may be a way to provide serious cost
savings to these market participants and is something that should be explored.
Collazo agreed that there are some areas where the use of the
technology could serve to “solve some problems and create some efficiencies,”
but emphasized that there must be governance standards in place which address
issues including cybersecurity and customer identity protections.
Evelyn Fuhrer, Managing Director, Promontory Financial Group
Fuhrercautioned that a high degree of standardization and
commonality would be required in order to effectively utilize DLT. She
recognized, however, the significant benefit for regulators in being able to
access information on a real-time basis, should the utilization of the
technology continue to advance. Levy furthered this point,
stating that the regulators themselves could be part of the DLT network as a
“node” with special access, as a participant.
Balancing Regulatory Benefits of Technology
Tabb next highlighted that DLT has the potential to significantly
shorten settlement cycles, but expressed concern that this may pose some “real
challenges on the collateral side.” Sams agreed that blockchain could
radically reduce settlement time, but noted that timing interval will differ
depending on the market and its settlement needs.
Chairman Massad expressed that the Commission would “want to make
sure we’re at least not standing in the way of new technological developments,
and potentially encouraging technological developments that can be
beneficial.” He next asked panelists to describe what they believe the
application of blockchain technology might be moving forward.
Slazas stressed the potential regulatory benefits of the
technology, highlighting that there would be the opportunity for real-time
access to data and transparency into markets.
Decentralized Clearing
Sams stated his belief that the industry is on a path towards
decentralized clearing, and expressed interest in exploring whether the CFTC
would recognize a “decentralized clearing network” as a designate clearing
organization under Dodd-Frank, or alternatively, whether it might fall into an
exempt category. Lastly, Sams noted that the technology should be
considered and to help inform current regulatory debates in the OTC landscape.
Levy expressed that in 1 to 3 years, he believed there would be
significant improvements to operational efficiencies in some areas, including
data and collateral management. He noted, however, that the most
significant impacts of blockchain technology, including on liquidity, will
likely take 10 to 15 years to occur.
DeWaal noted that a move towards this technology will require the
Commission to adapt some of its current rules at some point, and wondered how
markets will operate during a period of technological transition.
Commissioner Giancarlo closed by noting the need for to regulators
“take account of what we’re hearing here and look at our regulations and see to
what extent do they favor an old model of data recording, ledgering,” and
determine whether affirmative steps must be taken to revisit standards and
allow for “this very important technology can develop and lead to whatever it
is going to lead to.”
More information about this event can be accessed here.