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House Agriculture Committee Hearing on the State of the CFTC

House Agriculture Committee

State of the CFTC

Thursday, March 31, 2022

Topline

  • The hearing focused heavily on digital commodities, the FTX proposal, derivatives, cyber security, and climate risk.
  • Chairman Scott said the FTX Proposal needs far more review and intends to hold another hearing on May 17 focused specifically on the FTX Proposal with the CEOs of CME and ICE.

Witnesses

  • Rostin Behnam, Chairman, Commodity Futures Trading Commission, Washington, DC

Opening Statements
Chairman David Scott (D-Ga.)

In his opening statement, Scott discussed the important role of the CFTC and expressed concern over cryptocurrency.

Ranking Member Glenn ‘GT’ Thompson (R-Pa.)

In his opening statement, Thompson highlighted two issues: the war on Ukraine and its effects on the world and the call to expand the CFTC oversight of digital commodity markets. He concluded by stating that Congress should consider further regulations to protect consumers engaged with crypto trading venues in a manner that promotes innovation, adding that the CFTC is well poised to play a major role in this effort.

Testimony
Rostin Behnam, Chairman, Commodity Futures Trading Commission, Washington, DC

In his testimony, Behnam stated that the derivatives industry population is shifting and that there has been an influx of retail participants empowered by information and technology. He then discussed the CFTC’s response to the invasion of Ukraine and said the agency is on heightened alert with respect to market functionality and resilience and fortifying the agency against cyberattacks. In discussing the agency’s current priorities, Behnam stated that the top priority of the CFTC will be the active review of Dodd-Frank rulemakings in an effort to ensure they remain fit for the purpose Congress intended, adding that the Commission will also be growing its stress testing program to help ensure resilience in absorbing both market and systemic shocks. He also discussed the importance of safeguarding the stability of the U.S. and global financial system and concluded by discussing the emerging risks of the growth and widespread adoption of digital assets, the role of derivatives in understanding, pricing, and mitigating climate-related risk, and the lack of diversity within the CFTC.

Question & Answer

Digital Assets

Thompson asked if the principles within the Digital Commodity Exchange Act, which are to foster innovation, protect market participants, reduce complexity, promote principle-based regulation, and complement existing authorities where appropriate, are the appropriate principles Congress should be considering while they explore regulating cash digital commodity markets. Behnam said yes, adding that many of the responsibilities a market structure would need are the same that are used in the derivative space. Rep. Ann Kuster (D-N.H.) asked what core customer protections are needed for a digital asset market regulatory framework. Behnam highlighted the need to use the core market structure principles from the Digital Commodity Exchange Act and the need to focus on segregation of assets, execution, and settlement. Rep. Sean Maloney (D-N.Y.) asked about Behnam’s principles-based regulations work in the context of digital assets. Behnam said market participants support principles-based regulations, which allow flexibility to support innovation and growth. Maloney asked how to balance consumer protection concerns with innovation and opportunities for communities of color in the digital asset area. Behnam said low-income and underbanked communities can benefit from this new technology but that we need to make sure market participants are interested in the technology for the right reasons, not just for speculation. Rep. Austin Scott (R-Ga.) asked how important it is to bridge the gap between the CFTC and the fintech industry, so that the CTCF as the regulator, can better understand emerging technologies and how to regulate the markets. Behnam said it is important to close the gap between the CFTC and the fintech industry in an effort to gain a better sense of risk in the market and how the market can support innovation, price discovery, and risk management. Rep. Rick Crawford (R-Ark.) asked why it is important to expand CFTC oversight of the digital assets commodities market and if there needs to be statutory language to define digital commodities and digital securities. Behnam said expanded oversight allows the CFTC to evaluate risks in the market in an effort to protect customers, reduce market stability issues, create market resilience, and support innovation. He added that there needs to be statutory language to define digital commodities and digital securities.

Derivatives

Scott asked how important is it for Congress to figure out a way to allow our derivative clearing organizations and other clearing agencies to access the Federal Reserve to secure their cash. Behnam said given the volatility we have seen in the markets, it is important to consider having Fed accounts for its central counterparty clearinghouses (CCP). Reps. Doug LaMalfa (R-Calif.) and Randy Feenstra (R-Iowa) asked how derivatives help address market disruptions. Behnam said CFTC markets serve the main purposes of risk management and price discovery. He added that the benefits of derivatives are to help producers or anyone that has commodities as part of their business see both price discovery and anticipate the risk, challenges, and cost that may come in the future. Rep. Rodney Davis (R-Ill.) asked about the idea of a direct-to-customer, non-intermediate derivatives model and how it would work with the CFTC risk management standards built around an intermediated clearing model. Behnam said risk management standards are built around an intermediated model, but they do not require an intermediate model.

FTX Proposal

Thompson and Scott asked for Behnam’s thoughts on and expressed concern for the FTX proposal. Behnam said the agency is carefully and deliberately considering the proposal, recognized Scott’s concerns, and explained the agency’s process for considering the proposal, including the proposal’s current posture awaiting public comment. He stated they are working with FTX on the proposal and plan to have a staff round table discussion at the end of May. He added that, despite the novelty, every market participant deserves an opportunity to have their proposal considered. Rep. Alma Adams (D-N.C.) asked Behnam to speak to the implications of eliminating the current regime or intermediaries in the decentralized finance space. Behnam said the agency considers both the benefits and risks of proposals and will hear out the stakeholders of different proposals, in light of both possibilities and risks, while supporting responsible innovation, adding that it is possible within the given market structure that the FTX proposal could lead to more efficient trade execution and less risk in the system. Kuster asked if Behnam has consulted with Treasury Secretary Yellen on the FTX proposal. Behnam said he has not.

Diversity

Adams asked for Behnam’s strategy for increasing diversity at the CFTC. Behnam touted the agency’s Chief Diversity Officer. Rep. Shontel Brown (D-Ohio) asked how the CFTC is responding to more diverse market participation. Behnam confirmed the elimination of barriers to participation by technological innovation and said the agency is working to do extensive outreach to areas of the market and country that the agency historically has not touched.

Whistleblower Program

Rep. Jahana Hayes (D-Conn.) asked if whistleblower awards have been properly awarded. Behnam said the awards in question have been awarded, touted the significant size of the awards, but said the whistleblower program needs to be fixed. Hayes followed up by asking what has caused the success of the program. Behnam said over time, more individuals have become aware of the program and feel protected when engaging with the program.

Appropriations and Authority

Reps. Troy Balderson (R-Ohio) and Brown asked if Behnam has been able to evaluate whether the CFTC has the resources to carry out its responsibilities. Behnam said he regularly monitors this and engages with the agency’s constituency to deal with these issues and that the agency could use more resources but has the authority it needs to fulfill its mandate.

Cybersecurity

Rep. Bobby Rush (D-Ill.) asked about the existing policies Behnam recommends to protect markets from cyber attacks. Behnam says the CFTC has a system safeguards policy principle analyzing cyber and resiliency issues, adding that while the agency has the authority it needs to address cyber issues, he is concerned about third party vendors and the growing cost of technology and techniques to address these issues. Reps. Kat Cammack (R-Fla.) and Balderson asked what progress the CFTC has made in implementing the recommendations the Office of Inspector General gave during a 2020 audit with respect to mitigating cyber security risks. Behnam said the Commission continues to stay on heightened alert regarding cyber security threats, adding that the Commission is in the process of making possible changes to their systems to become more resilient.

Climate Risk

Reps. Tom O’Halleran (D-Ariz.) and Rush asked for an update on the CFTC Climate Risk Unit (CRU). Behnam explained the CRU’s efforts to address physical and transition climate risk and set out an initiative and plan to address climate risk issues. He added that the increased risk of climate change to farmers, ranchers, and manufacturers must be addressed and that his hope is to have a first step proposal of regulatory ideas to bring before the Commission. Kuster asked if there is anything Behnam would like to add to the CRU during his tenure. Behnam again said the agency is working to come up with proposals before the end of the year on how to make markets more resilient against climate change. Rep. Salud Carbajal (D-Calif.) asked how the CFTC can foster investment to promote a smooth transition to renewable energy sources and what some challenges are for renewable energies competing against oil and gas. Behnam said he will engage with stakeholders to promote innovation in the product development space and push forward in the transition, adding that the U.S. will need to lean on existing energy sources like fossil fuels to eliminate the price risk we face in dealing with climate risk and the transition to renewable energy sources. Carbajal asked about the CFTC’s recommendation to require credit rating agencies to disclose the extent to which they take into account climate risk. Behnam clarified that the report was only from an advisory committee, not the CFTC, but emphasized that the investing public needs transparency in order to efficiently allocate capital. Rep. Mary Miller (R-Ill.) asked what role the CFTC has in directly addressing climate change. Behnam said the CFTC’s markets are risk markets and that his goal is to utilize agency staff to engage with private market to support innovation for new products and development to mitigate the impacts of climate change and support the transition to a net-zero economy.

Agriculture

Rep. Kim Schrier (D-Wash.) and Feenstra asked what protections are in place to protect wheat growers by helping them hedge and manage their risk. Behnam reiterated the CFTC’s responsibility to farmers and ranchers and said the agency can utilize its existing tools to ensure that stakeholders know that U.S. futures markets remain a viable, cost-effective risk management tool.

Spot Markets

Rep. Al Lawson (D-Fla.) asked which agencies have jurisdiction over spot markets, how to address the spot market regulatory gap, and if the APEX Act is the right approach. Behnam said the CFTC does not have authority over cash markets outside of fraud and manipulation and that the APEX Act would be a unique authority for the CFTC to have, adding that the agency would need to consider what regulatory outcomes and rules would be needed. Cammack asked what Congress can do to ensure that the CFTC has spot market jurisdiction over the digital asset marketplace and does not fall under the purview of the SEC. Behnam said the CFTC needs support and guidance on how to regulate the digital assets space, protect customers, ensure market resiliency, and prevent financial market stability risks.

EU Relationship

Rep. Dusty Johnson (R-S.D.) asked where things stand on the European Union and cross-border access after Brexit. Behnam said the CFTC is in a good position with a good relationship under the Memorandum of Understanding (MOU) agreement.

For more information on this hearing, please click here.

For an archive of past SIFMA hearing coverage, please click here.