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CFTC Technology Advisory Committee Meeting

Commodity Futures Trading Commission

Technology Advisory Committee Meeting

Wednesday, February 26, 2020

Key Topics & Takeaways

Opening Statements

Commissioner Brian D. Quintenz

In his opening statement, Quintenz explained that the discussion would focus on topics such as streamlining audit trail requirements and cutting regulatory costs for market participants. Quintenz added that there would be a discussion on the marketplace developments for stablecoins. He highlighted the International Swaps and Derivatives Association’s (ISDA) common domain model (CDM) and how swap trade reporting can be improved while still satisfying Commodity Futures Trading Commission (CFTC or the Commission) requirements. Quintenz continued that there would be panel discussions on cryptocurrency insurance standards as well as the possibility of a digital currency self-regulatory organization (SRO). He added that he is a proponent for a private sector, multi-platform-based solution that furthers market integrity through an SRO-like organization. Quintenz concluded by stating that the TAC would vote on the cybersecurity subcommittee’s recommendation for the CFTC to issue a statement of support for the Financial Services Sector Coordinating Council (FSSCC) cybersecurity profile. He said that the adoption of this proposal by the Commission would amplify the statements of support issued by several other federal agencies.

Commissioner Rostin Behnam

In his opening statement, Behnam thanked Commissioner Quintenz, the staff and the panelists. He added that the dialogue provides benefits for the Commission to keep pace with evolution in the market.

Commissioner Dan M. Berkovitz

In his opening statement, Berkovitz stated that discussion concerning the role of technology in the marketplace is important and that the discussion panels are timely for the work of the Commission.

Panel Presentations

Panel I: FIA on Audit Trail

Natalie Tynan, Associate General Counsel, Head of Technology Documentation Strategy, FIA, said that the members comprising FIA’s working groups include perspectives from designated contract markets (DCMs), futures contracts markets (FCMs) and others. She said that the working group submitted a letter to the CFTC Division of Market Oversight (DMO) and Division of Clearing and Risk (DCR) recommending that: 1) the Commission amend Part 38.552 to remove specific elements of an adequate transaction database; 2) amend Part 38.553 to eliminate DCM audit trial requirements; 3) confirm that DCMs maintain tier one data on behalf of FCMs and other trading partners; and 4) require that DCMs amend their rules to confirm FCMs do not have to maintain records or orders transmitted directly to DCM trading systems by direct access customers. She added that the working group is not recommending modifications to existing recordkeeping requirements under regulations 131 and 135.

Tammy Botsford, Executive Director and Assistant General Counsel, J.P. Morgan, added that the working group is recommending a principles-based approach, as opposed to a prescriptive approach, because of the uncertainty of trading in the future. She also said that breaking tier one and tier two data apart would help streamline the retention process for DCMs as well as cut duplicative costs. Botsford explained that prioritizing resources and dialogue for data integrity efforts would add more value as opposed to spending such resources on audits of duplicative data.

Mark Fabian, Vice President, Market Regulation, ICE Futures U.S., explained that tier one data is labeled as such if it is captured and maintained by the DCM’s, while the tier two label is applied to all other data.

Andrew Vrabel, Executive Director, Global Head of Investigations, CME Group, stated that the industry would benefit from the elimination of non-value adding work as well as the reduction of multiple redundancies for audit requirements. He opined a principles-based approach would be beneficial. Vrabel concluded by recommending that DCMs maintain tier 1 data to satisfy core principle and that regulatory obligations be made subject to regulations 131 and 125.

Q&A

Berkovitz asked about attempts to quantify the costs associated with the audit trail reviews, duplications, and the necessary infrastructure. Fabian said that they have not attempted to quantify these costs, but that eliminating the audit requirements would help analysts at firms focus on targeted work or other investigative work. Botsford echoed that the audits take analysts away from their daily responsibilities.

TAC member Larry Tabb, TABB Group, asked if the elimination of the requirements would still allow DCMs to backtrack in the process of identifying the genesis of problems in the market. Fabian said that DCMs do not natively have tier two data and currently have to go to FCMs to get that information. Therefore, he said that regardless of these changes, the DCMs would still have to go to FCMs for the tier two data.

TAC member Supurna VedBrat, BlackRock, asked about triggers to identify market abuses. Vrabel that there must be trust that DCMs would require and implement data elements to uphold the integrity of the markets.

TAC member Thomas Chippas, ErisX, asked for clarification of the intent in making the tier one recordkeeping service a commercial product of the DCM. Vrabel said that DCMs are still evaluating the regulatory and legal risks of being the recordkeeper for the entire industry.

Panel II: Stablecoins

Tommaso Mancini-Griffoli, Deputy Division Chief in the Monetary and Capital Markets Department, IMF, explained that payment depends on a stable store of value based on price stability and exchange stability. He added that the two types of monies are collateralized and non-collateralized. Mancini-Griffoli continued to explain that the factors that determine a classification for payment are demonetization, exchange pledge, backstops, settlement technology and assets. He stated that bank deposits and stablecoins differ in that stablecoins are categorized under electronic money or investment money, based on different backstops and backing assets. Specifically, electronic money is not government-backed with mixed central bank reserves, while investment money is decentralized with mixed backing assets. He added that ‘stablecoins’ is a very diverse term that captures different schemes. Mancini-Griffoli noted his concerns regarding financial stability, monetary policy control, consumer and data protection, financial integrity, and competition and efficiency in relation to the use of stablecoin.

Charles Cascarilla, Chief Executive Officer and Co-Founder, Paxos, explained that his firm had tokenized a variety of assets that include a white-label stablecoin and gold-backed token. He added that Paxos is a custodian that holds cryptocurrency, gold assets and securities, with automated tools for their securities. Cascarilla highlighted that Paxos set up a crypto operational company with a one-to-one U.S. dollar-backed stablecoin. He explained that the firm does not take credit risks and is verified by independent auditors, as well as anti-money laundering/Bank Secrecy Act (AML/BSA) compliance. He added that the stablecoin helps serve the unbanked and the underbanked and is appropriately regulated. Cascarilla emphasized that the stablecoin can be used in trading, settlements, payments, saving, commercial banking, global business, processors, and remittance providers.

Eddie Wen, Global Head of Digital Markets, J.P. Morgan, explained that J.P. Morgan is currently in the prototype phase for a stablecoin designed for instantaneous payments based on blockchain. He added that the system can be interoperable with current J.P. Morgan systems and is only accessible to AML/BSA complaint clients. Wen stated that coins can be redeemed for U.S. dollars credited to client accounts and would be used for wholesale or retail payments to make the payments system more efficient. He suggested that regulation be activities based, with minimum standards for the distributed ledger technology (DLT) network, as well as globally consistent.

Q&A

Chippas asked about coins interest rates components and the impact of a negative interest rate environment. Cascarilla said that an interest rate component would raise securities concerns and that negative interest rates are why other G-7 countries are less involved in the creation of stablecoins.

TAC member Yesha Yadav, Special Government Employee for the CFTC, asked about addressing the underlying blockchain and how to deal with errors in the systems. Cascarilla said that the main concern is with adoption and the utility of multiple interoperable chains. He added that Paxos’ risks are limited mainly to U.S. government risks and the risk that accompanies the monitoring of the movement of money from Paxos to the blockchain.

Panel III: ISDA Demonstration of the Common Domain Model

Ian Sloyan, Director, Market Infrastructure and Technology, ISDA, explained that due to various information storage practices and inconsistencies, ISDA created the CDM in order to implement a set of standards for the derivatives market. He added that the CDM is a model that can distribute code in an easy and consistent method for market participants to implement. Sloyan highlighted that the CDM could serve as an intermediary for regulators and market participants. In his presentation, he provided numerous examples of how the CDM could breakdown regulations into code and how the system would be interoperable.

Q&A

TAC member Haimera Workie, FINRA, asked if the code would become part of the signed contracts. Sloyan said that as smart contract topics mature, they would reference specific pieces of code, but code is not part of the smart contracts today

Panel IV: Crypto Insurance and Custody

Jim Knox, Managing Director, Technology & Communications Industry-Regional Practice Leader, Aon, emphasized that insurance for cryptocurrencies is critical for the crypto space to reach scale. He provided a handful of examples where uninsured crypto failures had a “chilling” effect on the market, such as monetary losses or fraud.

Itay Malinger, Co-Founder and CEO, Curv, explained that attempts to secure private keys threaten both liquidity and security. He explained the tradeoffs between liquidity and security. In his presentation, he explained how various mathematical tools and equations could help solve the tradeoffs.

Q&A

Workie asked about the intersection between insurance companies and the baseline for key management systems. Knox said insurance companies carefully measure security risks and that there is work being done to help insurance underwriters under multi-party models.

Yadav asked about the input from state regulators and about reserve requirements as well as diversification practice for insurance companies. Knox said state regulators are extremely aware and proactive. He said right now, insurance policies are limited, but in the future, there could be changes to reserve requirements if policies are based on digital assets. He added that diversification is huge for insurance companies but reiterated that there are not many insurance companies in the U.S. that provide insurance for cryptos.

TAC member Christopher Chattaway, Goldman Sachs, asked about the notion of claims filed and the balancing out capacity with premiums for insurance companies. Knox said that the companies that incurred losses were all uninsured. He added that the capacity is limited and very expensive for various digital asset insurance.

Panel V: Crypto Self-Regulatory Organizations

Jeff Bandman, Board Member, Global Digital Finance, highlighted his firm’s international work on outreach and consultation. Bandman emphasized that the organization works to fill the gaps of regulation and the law in the crypto space with the goal of setting global rules. Bandman highlighted some challenges to this mission such as inconsistent/unaligned cross border regulatory guidance, a lack of clarity, and that not all market actors are regulated. He added that priority areas for Global Digital Finance include blockchain interoperability, digital insurance, access to banking and audit standards.

Yusuf Hussain, President, Virtual Commodities Association, explained his firm’s goal to obtain SRO status. He highlighted the various requirements for SRO designation and explained that the Virtual Commodities Association structure is focused on organizational capacity building through their work on AML/BSA compliance, tax, custody, security, market integrity, insurance, examination and enforcement. He emphasized the need for a U.S. based SRO for digital assets. Hussain expressed that his firm continues to work in areas of rulemaking, surveillance, enforcement in addition to serving as a marketplace intermediary.

Brad Vopni, Founding Board Member, Association for Digital Asset Markets, said that his firm is a private self-governing association for digital asset market oversight. He stated that the organization exists to foster fair and orderly digital asset markets and provide clear standards for efficient trading, custody, clearing, and settlement of digital assets. Vopni stated that his organization developed a principles-based code of conduct for better practices and key industry standards. He added that the code is intended to define standards, promote ethical behaviors, strengthen market integrity, identify conflicts of interest, establish more robust information security, address counter-terrorism financing, as well as provide increased transparency and fairness.

Q&A

TAC member Charley Cooper, R3, asked about what type of asset the SRO would cover and whether it would broadly address digital assets or specifically cryptos. Hussain said that his organization intentionally used the term “virtual currency” for U.S. spot crypto-based currency regulation. Bandman said that crypto is the asset with the most urgent need but that he hopes to address global digital finance over time.

Chippas asked about the need for an SRO for spot crypto commodities specifically, separate from futures or derivatives. Bandman responded that there is no need to ‘reinvent the wheel’ where a supervisory framework exists. Hussain noted that the goal is to fill the gap of surveillance for the spot crypto market. Vopni said that due to uncertainty and the lack of a definition for digital assets, participants need to come together and agree to a basic set of standardized rules

Berkovitz asked about enforcement authority for a crypto SRO and if market participants believe in the need for an SRO. Hussain said that SROs are granted enforcement authority and the right to levy civil penalties on violators. Bandman said that a lot of retail and institutional participants would be encouraged by an SRO alongside CFTC supervision.

TAC Vote on a recommendation from the TAC Cybersecurity Subcommittee for the TAC to recommend to the CFTC that it join with the other noted organizations in making a statement of support for the FSSCC Cyber Profile.

TAC Chair, Richard Gorelick, Eventus Systems Inc, mentioned that this recommendation comes after multiple discussions and would align the CFTC with other regulators.

TAC Member, Tim McHenry, NFA, said this recommendation comes in response to the need for regulatory standards, adding that there is broad support for the proposal. He stated that the recommendation will provide great utility and that industry will benefit from CFTC support.

The recommendation was approved unanimously.

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