Getting out of our comfort zones is “front of mind” for the Commissioner in light of the innovations being seen in financial markets.
In remarks prepared for delivery at the Chamber of Digital Commerce, CFTC Commissioner Dawn D. Stump pointed out that achieving the benefits of innovation in the context of market regulation is tougher than it sounds because we are not starting with a clean slate. She commented that we are at a crossroads that requires everyone to “roll up their sleeves and do hard things.”
Can’t hang on to the past. It’s time to thoughtfully consider the hard things we all must do to get comfortable with current realities, Stump said. As financial markets adapt to new demands, market regulators must not stifle beneficial innovations by clinging to regulatory approaches of the past that may no longer be fit for purpose, Stump added. But by the same token, she added, infrastructure providers who offer the market access to new, innovative services must not dismiss the fact that they may be required to seek and comply with regulatory oversight in order to assure market integrity and customer protection.
Why is this so hard? Stump pointed out that achieving the benefits of innovation in market regulation is hard because we are not starting with a clean slate. She commented that the pace of technological development and increasing retail interest in, for example, the derivatives markets regulated by the CFTC, is driving new business models that rely less on the traditional centralization of institutional participation via intermediaries, and rather propose to fulfil these functions in a more decentralized way.
New thinking required. Novel issues in the derivatives markets require “comprehensive thinking” by derivatives regulators, Stump said. The CFTC’s current approach of relying primarily on enforcement actions to impose penalties on those with novel products and markets for their failure to register with the agency is insufficient. The Commission must acknowledge that the infrastructure it oversees is rapidly changing—and the current regulatory regime was not designed to fit the types of services that are evolving to meet the market’s demands, Stump added.
What to do. One “solution’ is to continue on the same path--to take enforcement actions against companies that develop products and business models that are outside-the-box, while knowing that existing rules governing the registration and regulation of the traditional market infrastructure are “ill-suited to the very thing that has driven their development,” and ask the companies to figure out the rules for themselves.
But Stump believes it is incumbent upon the CFTC to bridge the gap between its enforcement and oversight functions by setting more clearly defined regulatory expectations for new, innovative applications in the derivatives market infrastructure. This is harder to do but welcoming innovation in those markets historically has been at the heart of what the CFTC does, she added.
Stump is confident that the CFTC can do these hard things. According to her, the CFTC cannot be a bystander to the fundamental market changes taking place, nor should it abdicate the responsibility Congress gave the Commission to “promote responsible innovation and fair competition.” This should not be taken as a call to escape regulation but rather as necessitated by the responsible oversight the CFTC owes the marketplace, Stump added.
As these matters continue to land on the CFTC’s enforcement docket, it is urgent that the Commission provides direction to those who seek to comply with the law, Stump claimed. And then, armed with more clearly defined expectations, the CFTC can better identify those truly bad actors who seek evasion of the rules—and who deserve the full force of robust enforcement action, Stump said.
Some areas where rules may require adapting. Commissioner Stump provided a non-exclusive list of areas that may require the CFTC to adapt to innovation.
Trading platforms. The really hard thing that requires attention here, according to Stump, is to determine how to achieve regulatory objectives in a manner that still enables infrastructure providers and their customers to benefit from innovations in this area.
Clearinghouses. Here there is a need to maintain the safety and soundness of retail-focused derivatives clearing organizations that do not use an intermediary mode while at the same time encouraging retail access to the clearing infrastructure. It’s a difficult task, but we can do hard things, Stump claimed.
Brokers and counterparties. In this area, the CFTC is obligated, in Stump’s view, to explain the regulatory parameters for retail commodity transactions in digital assets such as Bitcoin operated as an unregistered futures commission merchant (FCM), and to explain the regulatory parameters such transactions and such non-traditional FCMs are expected to meet—yet, another hard thing the CFTC must tackle, Stump said.
“We all benefit from clearly defined regulatory expectations that promote compliance and strong enforcement focused on those who blatantly disregard such expectations to the detriment of your markets,” Stump concluded.
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