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April 19, 2019

CFTC Cancels April 23 Open Meeting

Washington, DC — The Commodity Futures Trading Commission has cancelled the Open Meeting scheduled for Tuesday, April 23, 2019. The matters under consideration are being resolved through the Commission’s seriatim process.





April 19, 2019

CFTC Approves a Final Rule to Provide Exception to Annual Privacy Notice Requirement 

Washington, DC — The Commodity Futures Trading Commission (CFTC) today approved a final rule to revise a CFTC regulation that requires certain futures commission merchants, retail foreign exchange dealers, commodity trading advisors, commodity pool operators, introducing brokers, major swap participants, and swap dealers to provide annual privacy notices to customers. The final rule revises CFTC Regulation 160.5 to remove the requirement to provide these annual privacy notices when certain conditions are satisfied.

CFTC staff worked with staff from the Consumer Financial Protection Bureau (CFPB) to ensure that the final rule is consistent with rules recently finalized by the CFPB.  In addition, CFTC staff consulted with the Securities and Exchange Commission, the Federal Trade Commission, and the National Association of Insurance Commissioners on the revisions.

The final rule is effective 30 days after publication in the Federal Register.



Opening Statement of Commissioner Brian Quintenz before the CFTC Energy and Environmental Markets Advisory Committee


“Gold Plating to Nowhere”

April 17, 2019

Thank you Commissioner Berkovitz for convening today’s meeting of the Energy and Environmental Markets Advisory Committee (EEMAC).  I am delighted to join you and my fellow Commissioners for the Committee’s first meeting in over three years and its inaugural meeting since it was reconstituted last year.  Before we begin, I would like to welcome the Committee’s new members and thank them for so generously giving us their time and expertise.

This Committee plays an invaluable role in advising the Commission about areas essential to our core mission, including ensuring that producers, merchants, and users of energy and environmental products are able to reliably access the derivatives markets to manage and hedge their commercial risks.  There is a packed agenda before us today and I look forward to hearing all three panels’ discussion of the developments and challenges associated with physical commodity derivatives trading.

I am looking forward to hearing from the CFTC’s own Chris Goodenow of DMO’s Market Intelligence Branch to discuss two very impressive research reports regarding liquefied natural gas (LNG) developments and the impact of U.S. tight oil on NYMEX WTI futures.  Over the past ten years, the United States has gone from being a net importer to a net exporter of LNG.  Natural gas production has increased dramatically, accompanied by a similar growth in financial trading.  I do not believe this transformative growth in domestic natural gas production could have occurred without the robust derivatives markets we have in the United States, which enable exploration and production companies to effectively manage their commercial risks.  Both these reports demonstrate how liquid futures markets with prices reflective of market fundamentals, including supply and demand forces, support real economic growth.  They also reflect CFTC staff’s ongoing commitment to better understand the relationship between futures markets and the underlying cash markets.

Today’s final panel will focus on an issue critical to well-functioning derivatives markets:  the availability of clearing services for commercial end-user clients.  As I have noted previously, I have serious concerns that the current implementation of the supplementary leverage ratio (SLR) is limiting clients’ access to clearing and further encouraging FCM consolidation.

Most recently, the Office of the Comptroller of the Currency, Board of Governors of the Federal Reserve System and the Federal Deposit Insurance Corporation proposed a new approach for calculating the exposure amount of derivatives contracts under the agencies’ regulatory capital rule.[1]  The Proposal would move away from the current exposure methodology (CEM), replacing it with the standardized approach for counterparty credit risk (SA-CCR) methodology for purposes of calculating risk-weighted assets under the capital rule.  The Proposal also incorporates a modified version of SA-CCR into a firm’s SLR calculation.  The implementation of SA-CCR for both risk-weighted assets and SLR calculations will have a profound impact on the derivatives markets, particularly with respect to commercial end-users.

With respect to the SLR calculation, the Proposal continues to require a clearing member FCM to include in its leverage calculation the full exposure resulting from its guarantee of a client’s trade, without reducing this exposure by the amount of segregated margin posted by the client, and then counts this margin as a source of leverage against which additional capital should be held.  This thinking ignores the fact that segregated margin will always be used to absorb client losses before the central counterparty looks to the clearing member to absorb any residual losses.

Moreover, the clearing member cannot use the margin to leverage itself under any circumstance.[2]  As a result, segregated margin is not just risk-free.  It is actually more than risk-free—it is always risk-reducing. This policy is like requiring a bank to hold capital against both a mortgage loan and the house. If the goal of the leverage ratio is to calculate the clearing member’s most accurate amount of leverage, then it should never count segregated client margin.

I joined a comment letter along with some of my fellow Commissioners highlighting our significant concerns that unless the treatment of client margin changes, clearing member firms will continue to limit the provision of clearing services to clients.  In a recent study, 72% of client clearing service providers stated that the current leverage ratio disincentivizes providing client clearing services.[3]  Moreover, 70% of clients who were able to maintain their clearing services agreements stated restrictions had been placed on their cleared derivatives activity.[4]  Including an initial margin offset in a firm’s SLR calculation would have a meaningful impact on a firm’s ability to continue to offer client clearing services.  One comment letter to the Proposal estimated that including an offset for initial margin would decrease banking organizations’ client clearing exposures by 37%.[5]

Let me say that I appreciate the fact that a question was included in the release about this topic, which I believe shows the Prudential Regulators’ willingness to listen to fellow regulators, market participants, and data analysis. Unfortunately, this question only represents one small step forward for process, whereas, in other areas, the Proposal contains giant leaps backward for policy.

With respect to calculating counterparty credit risk and risk-weighted assets for commodity derivatives, the Proposal would potentially increase transaction costs and diminish market liquidity for commercial end-users.  This potential outcome arises in part because the Proposal takes the Basel Committee’s already arbitrary and inflated supervisory factors for the various commodity asset classes and “gold plates” them, proposing the highest supervisory factor across all energy commodities.  The Basel Committee did at least distinguish between electricity and oil/gas commodities, assigning the latter a much lower supervisory factor compared to the 40% charge for electricity contracts.  While I have significant concerns with the quality of the data analysis, or perhaps total lack thereof, which led to this arbitrary Basel Committee decision as it is, I am shocked that, with just as little explanation, the Proposal uniformly applies electricity’s grossly inflated supervisory factor of 40% to the entire energy hedging set.  The result is an enormously punitive treatment of oil and gas derivatives transactions that, according to some commenters, would increase a bank’s exposure calculations under SA-CCR with an end-user counterparty by up to 460%.[6] Increased exposure calculations will result in higher capital charges to the bank, which, in turn, the bank will likely pass along to the end-user in the form of higher transaction pricing.

Gold plating a bad idea does not magically transform it into a good idea. By way of analogy, if you build a ship out of gold, it looks great in dry dock.  But when you put that ship in the water, it becomes the world’s most expensive scuba diving attraction.

I believe the Proposal should revisit the supervisory factors for all types of commodities to ensure they are appropriately calibrated to the actual risks of the underlying commodity and the maturity of the derivatives contract.

Similarly, in order to ensure that end-users’ exposures to bank counterparties are not over-inflated, I hope the Prudential Regulators consider recognition of non-cash collateral arrangements under SA-CCR, like asset liens.  Alternative collateral arrangements are frequently used in derivatives transactions with end-users and are effective means of reducing the bank’s exposure.  The recognition of these risk-reducing arrangements would increase the risk-sensitivity of SA-CCR and reduce the possible increased transaction costs passed on to commercial end-users by bank counterparties.

I look forward to hearing from the panelists today about how the Proposal could impact their ability to effectively hedge the risks of their core businesses, either through reduced access to clearing, higher transaction costs, or a diminished willingness of bank counterparties to engage in uncleared swap transactions.


[1]   Standardized Approach for Calculating the Exposure Amount of Derivative Contracts, 83 Fed. Reg. 64,660 (proposed Dec. 17, 2018) (hereinafter, the “Proposal”), available athttps://www.federalregister.gov/documents /2018/12/17/2018-24924/ standardized-approach-for-calculating-the-exposure-amount-of-derivative-contracts.
[2]   17 C.F.R. §§ 1.20-1.30 (futures); 17 C.F.R. §§ 22.2-22.7 (cleared swaps).  These rules require FCMs to separately account for, and segregate as belonging to the client, all money, securities, and property received from a client as margin. The FCM cannot re-hypothecate the margin to leverage the bank and must maintain the collateral in cash or certain other very low risk, highly liquid assets, such as U.S. government and municipal securities “with the objectives of preserving principal and maintaining liquidity.” 17 C.F.R. §1.25.
[3]   Incentives to Centrally Clear Over-the-Counter Derivatives:  A Post-Implementation Evaluation of the G20 Financial Regulatory Reforms, Basel Committee on Banking Supervision, the Committee on Payments and Market Infrastructures, the Financial Stability Board and the International Organization of Securities Commissions 24 (August 7, 2018), http://www.fsb.org/wp-content/uploads/P070818.pdf.
[4]   Id.
[5]  Joint Comment Letter from International Swaps and Derivatives Association, Inc. (“ISDA”), the Securities Industry and Financial Markets Association (“SIFMA”), the American Bankers Association (“ABA”), the Bank Policy Institute (“BPI”), and the Futures Industry Association (“FIA”) at 12 (March 18, 2019), https://www.isda.org/2019/03/18/industry-response-to-standardized-approach-for-counterparty-credit-risk-sa-ccr.
[6]  Comment Letter from Coalition for Derivatives End-Users at 5 (March 18, 2019).



Opening Statement of Chairman J. Christopher Giancarlo before the Energy and Environmental Markets Advisory Committee


April 17, 2019
A warm welcome to all of the EEMAC members, presenters and participants, both here and on the telephone.  It is good to have you all with us.

As a former Chair of EEMAC, I am particularly pleased to see the important work of this committee continuing under the very capable hands of Commissioner Berkovitz.

In my brief remarks today, I want to focus on two issues.

Supplementary Leverage Ratio

The first is the Supplementary Leverage Ratio (“SLR”).

The SLR is a global capital requirement for banks.  It is size-based rather than risk-based and is designed to restrain bank balance sheet activity (namely lending).  It requires large U.S. banks to set aside roughly five percent of assets for loss absorption.  This is intended to supplement risk-based capital requirements like the Common Equity Tier 1 Ratio.  Banks that hold clearing customer client margin in the form of cash through their affiliate futures commission merchant (“FCM”) clearing services must also set aside the requisite five percent SLR

Unfortunately, the SLR is being applied to an entirely different activity – swaps clearing – that is itself intended to steer risk away from bank balance sheets.  Applying the SLR to clearing customer margin reflects a flawed understanding of central counterparty (“CCP”) clearing.

The current implementation of the SLR is biased against derivatives.  It does not take into account the fact that outstanding derivative contracts in a portfolio can offset each other and thus reduce the potential risk exposure.  It incorrectly treats the notional size of a derivative contract as representative of the total potential risk of that contract.  It ignores the exposure-reducing effect of margin for clearing firms.

This Commission fully supports U.S. and global swaps reform efforts to move customer margin off the balance sheets of bank FCMs and into CCPs. Yet applying a capital charge against that customer margin works against the swaps clearing mandate by treating FCMs as having retained balance sheet exposure.

This Commission has consistently advocated for adjustments to the SLR in its current form.  Back in 2016, Chairman Massad, Commissioner Sharon Bowen and I called for reworking the SLR formulation to reduce its disincentives to the use of derivatives and central clearing.

I am pleased that the Commission continues to speak in a bipartisan voice regarding the SLR.

Importance of Energy Derivatives

The second issue I want to touch on has to do with the importance of derivatives for the energy markets.

Last year I had the good fortune to visit West Texas.  For those of you who do not know, West Texas is the epicenter of a stunning accomplishment of American exceptionalism – the shale revolution.  This is one of the greatest economic success stories the world has ever seen.  Because of it, the United States has become one of the world’s largest energy producers.[1]  This has changed, not just the structure of global energy markets, but global geo-politics as well.

As I explained in my remarks in West Texas, our newfound energy independence is the result of a unique combination of factors, especially American entrepreneurship and free enterprise.[2]  One key factor was the role that financial hedges and commodity derivatives played in enabling the industry and its financial backers to withstand the cartel squeeze by Russia and the Organization of the Petroleum Exporting Countries (“OPEC”).

Without the ability to efficiently hedge depressed energy prices and variable costs of production, America’s shale producers may well have succumbed to OPEC’s concerted efforts and failed to secure our country’s growing energy independence.  Instead, American shale producers not only survived, but became more efficient, more productive, and more innovative than their overseas competitors.  They are a shining example of the ability of American free market capitalism to benefit future generations of Americans.

I look forward to your discussion of the topics on the agenda today, particularly the availability of clearing and other services in the energy derivatives markets.  As we confront the challenges ahead, we will look to the thoughtful discussions of advisory committees like yours.

And, again, thank you Commissioner Berkovitz for organizing this meeting.

[1] See Osamu Tsukimori, U.S. to Overtake Russia as Top Oil Producer by 2019 at latest: IEA, Reuters, Feb. 26, 2018, available at: https://www.reuters.com/article/us-energy-iea/u-s-to-overtake-russia-as-worlds-biggest-oil-producer-by-2019-latest-iea-idUSKCN1GB0C6.

[2] Remarks of CFTC Chairman J. Christopher Giancarlo at the West Texas Legislative Summit, Angelo State University, San Angelo, Texas (Aug. 2, 2018), available at: https://www.cftc.gov/PressRoom/SpeechesTestimony/opagiancarlo51.





April 11, 2019

CFTC Chairman Gives Remarks at FSB Meeting on LIBOR Reform

Washington, DC — Commodity Futures Trading Commission (CFTC) Chairman J. Christopher Giancarlo joined Randal K. Quarles, Chair of the Financial Stability Board (FSB) and Vice Chairman of Supervision, Board of Governors of the Federal Reserve System, UK Financial Conduct Authority CEO Andrew Bailey, and Deputy Governor Bank of England Sir David Ramsden for an FSB Roundtable discussion to highlight the need for continued progress to reform major interest rate benchmarks.

Chairman J. Christopher Giancarlo gave the following remarks at the public session of the meeting:

“I want to commend Chairman Quarles and staffs of the FSB, the FED and the CFTC for their work in putting together this roundtable discussion.  It is as timely as it is important.

Two years ago, it was the CFTC’s privilege to host another FSB roundtable.  Its agenda was an overall review of the global implementation of the swaps market reforms agreed by the G-20 in Pittsburgh in 2009.

Today, we are here to consider progress in another post-crisis work stream: this one a public-private work partnership developing protocols for the move away from LIBOR to alternative risk-free, benchmark interest rates.

For the past few years, many of the authorities present at this roundtable have been warning market participants of the high likelihood that LIBOR will no longer be available after 2021 for use as a reference benchmark for the global markets.

Today there is growing evidence of a shift in sentiment among market participants from “why are we moving away from LIBOR” to “how do we adopt SOFR”.  That is critical progress.

In fact, judging by timelines set out in the ARRC’s phased implementation plan, we are making good progress here in the U.S. as well as in other currency jurisdictions like Sterling and Swiss Franc, where the transition is well under way.

It was less than a year ago that CME, and then later, ICE, launched SOFR-futures contracts.  Already in 2019, average daily volume is over 100,000 contracts – a roaring success for a brand new index. If one goes purely by press reports, then one will likely form the impression that SOFR’s development has been slow; but from the CFTC’s perspective, the markets are making steady progress.

There is broad consensus that development of SOFR swaps markets will follow SOFR futures. Our expectation is that in the next 12 months, both these markets – SOFR futures and swaps, as well as related debt markets – will hit critical levels where liquidity begets liquidity.

Thanks to the work of the ARRC, major legal and operational steps necessary for the switch from LIBOR to SOFR-based rates  have been identified that are critical for the switch from LIBOR to SOFR-based rates for derivatives, loan products, mortgages, retail loans and others.  Institutions represented at this roundtable today, and many others, are participating actively in various working groups to define the issues and design and implement solutions. One specific project we would like to highlight is the hugely important work by ISDA on new fallback language and triggers, both pre- and post-cessation, for OTC derivatives. We would like to make sure that all market participants participate in the protocol to adopt the new language.

All this is hard work.  We in the official sector would be remiss, indeed, ungracious not to acknowledge the commitment and effort of market participants to work on these issues.  And, so we do express our acknowledgement to them.  Yet, we also assert our determination that progress must continue through to completion of the move away from LIBOR to SOFR.

From the official sector perspective, we collectively stand ready to provide any guidance, relief, and other support required. While there is strong interest in addressing regulatory hurdles, we are also open to suggestions on regulatory tools to incentivize transition to SOFR-based benchmarks.

As for the CFTC, we are active participants in the efforts of the FSB’s OSSG and the US ARRC.  We also have our own initiative focused on regulatory and related issues through the work of the Benchmark Reform Subcommittee of the CFTC’s Market Risk Advisory Committee, sponsored by my fine colleague, Commissioner Russ Behnam.  That subcommittee is chaired by Tom Wipf, Vice Chairman of Institutional Securities at Morgan Stanley, who will speak to us shortly.

At the end of the day, markets exist to serve the need of end users – American families, corporates, municipalities and others. These users are exposed to the greatest risk if we do not fix this market vulnerability – reliance on an index which has clearly outlived its economic relevance as a benchmark.  The authorities represented in this roundtable and the market institutions assembled today remain committed to this effort.  Together, we can get this done.”


Remarks of CFTC Commissioner Rostin Behnam at the ISDA 34th Annual General Meeting, Grand Hyatt Hong Kong, Hong Kong 


Sowing the Seeds of Success in 2020

April 9, 2019

[Delivered in Hong Kong April 10, 2019] 


Thank you for the kind introduction; it is a great pleasure to be here.  I want to thank Eric Litvack, Scott O’Malia, and the International Swaps and Derivatives Association (“ISDA”) for inviting me to join you today.  Before I begin, please allow me to remind you that the views I express today in these remarks and discussion to follow are my own and do not represent the views of the Commodity Futures Trading Commission (the “CFTC” or “Commission”) or my fellow Commissioners.

I last had the pleasure of addressing ISDA members in late October or autumn of last year during the 2018 ISDA Annual Japan Conference.[1]  Six months later, it is now spring.  Like many cities across the globe, spring is a time of renewal and beauty in Washington, D.C.  Part of Washington’s splendor this time of year is due to the gift of 3,020 Japanese cherry trees to the American people over 100 years ago from the Mayor of Tokyo, Yukio Ozaki.  Mr. Ozaki offered the gift as a gesture to recognize the growing relationship between the Japanese and American people.

More personally, the blooming of the cherry trees represents an exciting time for me.  To coincide with the cherry blossom bloom, the first Sunday of April always marks the annual Cherry Blossom Ten Mile Run.  The race course weaves through the city’s captivating monuments, including the Tidal Basin where Thomas Jefferson sits among a cloud of blossoms.  I have run that course every year that I’ve called Washington, D.C. my home.

Before coming to Hong Kong, I spent a few days in Tokyo, spending time at the Japanese Financial Services Agency (“JFSA”), and visiting market participants including Tokyo-based ISDA members.  Unfortunately, arriving in Tokyo Saturday evening meant that I missed the Cherry Blossom Ten Miler for the first time in eight years.  However, I had my own cherry blossom run this year – in Tokyo.  As I ran around Tokyo Sunday and Monday morning, the beautiful blossoms gave me a sense of familiarity and comfort.

Seeing cherry blossoms blooming in Japan for the first time, I recognized subtle and not so subtle differences in the trees, specifically their size and shape as compared to the ones I have grown familiar with in Washington.  The cherry trees in Washington are situated close together around a discreet part of the city.  As a result, many of the trees, over the course of their lives, have developed a distinct shape and size.  In contrast, I noticed that many of the cherry trees in Tokyo, despite having the same beautiful blossoms and familiar smell, are far larger, having a much wider canopy, spreading broadly like a bird’s wings.

It occurred to me as I ran in Tokyo that these similarities and differences recall Mayor Ozaki’s original gesture, and personify, in many ways, the current relationship among U.S. and Asian financial regulators.  As we all have taken different approaches in implementing the G20 reforms since the financial crisis, cherry blossoms are a good reminder that despite our differences, the foundations and driving principles are the same.  Regional differences, shaped by culture, climate, and history should not cloud the core similarities we all share and have invested in.  It’s these commonalities that are driving a fresh look at cross-border harmonization that will, in my mind, lead to safer, stronger, and more transparent markets across the globe.

In October, I talked about the collective strength within the CFTC, brought by the expertise and diversity among its five member-commissioners, and the collective strength in the global collaborative efforts among regulators and market participants in addressing challenges such as benchmark reform, initial margin phase-in, cross-border regulation, Brexit, and emerging financial technologies.  In considering those issues, I acknowledged that an uncomfortable level of uncertainty cannot deter us from taking action.  As American aviation pioneer Amelia Earhart once said, “The most difficult thing is the decision to act, the rest is merely tenacity.”

As we enter the second quarter of 2019, I’m pleased to say that our various jurisdictions chose to act.  We have persisted towards resolving LIBOR and the “big bang” that will be the final phases of the uncleared margin rules.  In the U.S., the Commission and the prudential regulators are actively addressing the possibility of a “no-deal Brexit” by putting measures in place to provide certainty and working with our international counterparts to preserve the stability of trade execution and clearing relationships.[2]  We’ve continued to re-evaluate the reforms put in place in the wake of the financial crisis and to consider whether they remain fit for purpose in addressing new and emerging risks.  To that end, conversations continue to evolve and build consensus around cross-border regulation of swap dealing activities.  The Commission also has continued the important work of considering the effectiveness of our rules governing swap execution facilities (“SEFs”), issuing both a rule proposal on SEF regulation generally and a request for comment regarding the practice of “Post-Trade Name Give Up.”[3]

As I have said before, regulators should avoid becoming overconfident in the systems we’ve built and remain nimble in our reconsideration of past policies and practices and vigilant as we prepare for the challenges to come.  I believe we are on the right course as we prepare for 2020 and beyond.

A new Chairman will lead the Commission into 2020.  The current expectation is that Chairman Giancarlo will depart before completion of the SEF overhaul and before putting a complete slate of cross-border rule proposals before the Commission to initiate the formal rulemaking process.  I expect that his successor, Dr. Heath Tarbert, who currently serves as Assistant Secretary for International Markets at the U.S. Department of Treasury, will be equally bold in his approach to finalizing and fine-tuning our regulatory landscape as it applies domestically and abroad.

During Dr. Tarbert’s March 13th nomination hearing before the United States Senate Committee on Agriculture, Nutrition, & Forestry, in addressing questions about completing the financial reform efforts, Dr. Tarbert stressed the importance of ensuring that “the seeds of the next crisis are not sown in response to the last one.”[4]  For example, he noted that as we push more derivatives to centralized clearing, we need to make sure that those clearing houses are safe and sound and have the risk management practices that they need.  I wholeheartedly agree and am equally committed to ensuring that we don’t weaken our rules to undermine safeguards put in place by our predecessor commissioners.

Turning back to where we are today, I’d like to deliver some brief remarks before sitting down with Mr. O’Malia for a less formal discussion.  I think it’s best to provide some updates on how the Commission has been addressing our greatest challenges of the moment—LIBOR, margin, approaches to cross-border regulation, and SEF reform—and where we may be heading towards 2020.

The State of LIBOR Transition

No issue embodies the need to embrace change like the transition from the London Interbank Offered Rate (“LIBOR”) and other “IBORs” to alternative risk-free rates (“RFRs”).  With no guarantee of LIBOR’s continuation beyond 2021 as a representative benchmark, developing alternatives that are fit for purpose has launched our industry into uncharted territory.  Since the LIBOR manipulation scandals first came to light amidst the financial crisis, there has been a slow building hum of activity in pockets around the globe as regulators, international bodies, and market participants identify alternative RFRs and develop transition plans.  We’ve chosen to act; but we need to be tenacious in approach because what we’ve learned over this last decade is that the pervasiveness of LIBOR gave us a false sense of stability.  We did not anticipate that the underlying market for LIBOR submissions would dissipate or that structural vulnerabilities would inspire widespread misconduct.  Our collective overconfidence in the system we built led us to this point in transition.  We must now address how most fallback language in underlying contracts simply either does not anticipate or does not adequately address a situation where LIBOR will be permanently unavailable.[5]  Fortunately, ISDA, at the request of the Financial Stability Board’s Official Sector Steering Group, is leading the effort and updating the definitions of USD LIBOR and other IBORs used in derivative contracts to include new fallbacks and is planning to publish a protocol to allow market participants to include fallbacks within legacy contracts to address benchmark cessations.[6]

In the United States, a group comprised of market participants called the Alternative Reference Rates Committee or “ARRC” convened to (1) identify an alternative RFR for use primarily in derivatives contracts; (2) prepare a plan to facilitate the acceptance and use of the selected alternative RFR on a voluntary basis; and (3) consider best practices for contract design to ensure that contracts are resilient to a possible cessation or material alteration of existing or new benchmarks.[7]  In 2017, the ARRC identified the Secured Overnight Financing Rate or SOFR as its recommended alternative to USD LIBOR.  SOFR Futures began trading at the Chicago Mercantile Exchange (“CME”) and ICE Futures Europe, in May 2018 and October 2018, respectively.  In the ten months since launch at CME, SOFR Futures have traded the equivalent of nearly $4 trillion in notional value with cumulative volume exceeding 2 million contracts.[8]  LCH and CME began clearing SOFR-based over-the-counter (“OTC”) overnight index and basis swaps in July 2018 and October 2018, respectively.[9]  Just last month, trading in SOFR-linked swaps surged with about $13.6 billion changing hands, a number that is almost twice its previous high from January 2019.[10]

As SOFR gains significant liquidity, the ARRC is promoting the use of SOFR on a voluntary basis and recommending more robust fallback language in new contracts referencing LIBOR.[11]  As I explained back in October, neither the Federal Reserve nor U.S. regulators will mandate an alternative RFR for use in new contracts or in fallback language.  Authorities do stand ready to facilitate these efforts by helping to avoid market dislocations, but our policies, mandates, and missions do not always support requiring compulsory industry standard setting or change through regulation.  However, we can best minimize basis risk, ease hedging, and avoid market fragmentation if we take a common approach.[12]

For my part, as the sponsor of the CFTC’s Market Risk Advisory Committee (“MRAC”), I convened the full Committee last July to focus on benchmark reform.[13]  Following the meeting, the Commission established the Interest Rate Benchmark Reform Subcommittee (“Subcommittee”) to provide reports and recommendations to the MRAC regarding efforts to transition U.S. dollar derivatives and related contracts to SOFR and the impact of such transition on the derivatives markets.[14]  Towards a goal of providing input and recommendations to the MRAC relating to policy changes that may impact LIBOR reform, the Subcommittee aims to: (1) remove hurdles to the transition to SOFR; (2) provide incentives for market participants to transition to SOFR; and (3) avoid the inadvertent creation of a safe harbor in policy changes the Subcommittee recommends.[15]  To further its efforts, the Subcommittee intends to focus on three work streams covering initial margin, clearing, and disclosures.  In a few short hours, the Financial Stability Board will host a benchmark reform roundtable at the CFTC’s offices in Washington, D.C., where the MRAC will present an update on its work.

Initial Margin—Engineering Implementation

September 2020 marks the deadline for the final step in the five-step phase-in period for the exchange of initial margin, or “IM,” referred to as the “IM big bang.”  Trade associations, including ISDA, estimate that over 1,100 additional counterparties and 9,500 relationships with new documentation requirements will result from the IM big bang.[16]  Since April of 2018, the Working Group on Margin Requirements (“WGMR”) Monitoring Group, which includes representatives from more than 20 regulatory authorities around the globe,[17] has put forth and completed a stocktaking exercise and internal report to the Basel Committee on Banking Supervision (BCBS) and the International Organization of Securities Commissions (IOSCO) on the implementation status of the margin standards focused on the 2020 phase-in.

On March 5, 2019, BCBS/IOSCO issued a statement addressing two areas of challenge identified by the Monitoring Group.[18]  First, BCBS/IOSCO recognized that the impending replacement of interbank offered rates such as LIBOR may require market participants to amend legacy contracts, potentially creating new contracts subject to margin requirements that would have otherwise been out of scope.  To address any uncertainty, which may have discouraged market participants from amending such contracts, BCBS/IOSCO clarified that amendments to legacy derivatives made solely to address interest rate benchmark reforms do not require the application of the margin requirements for the purpose of the BCBS/IOSCO framework.  Second, BCBS/IOSCO recognized that the remaining phases will bring a large number of financial and other end users into the scope of the IM requirements with the attendant difficulties associated with beginning to exchange IM with a large number of counterparties.  Accordingly, BCBS/IOSCO highlighted that the framework does not specify documentation, custodial, or operational requirements if the bilateral IM amount does not exceed the framework’s €50 million IM threshold.   Essentially, while covered entities are expected to act diligently when their exposures approach the threshold, they may continue to trade without compliant documentation and relevant arrangements in place until they exceed it.

To be clear, the CFTC is currently considering the March 5th BCBS/IOSCO guidance.  We are engaging with the U.S. prudential regulators and anticipate issuing additional information relevant to clarifying the timing of the documentation period.  In the interim, the Commission continues work with the WGMR monitoring implementation.  The various concerns expressed by stakeholders such as those put forth by ISDA and SIFMA (the Securities Industry and Financial Markets Association),[19] are being closely monitored.  The CFTC remains committed to implementing its IM rules consistent with their original intent in a feasible manner.  We continue to engage and provide leadership in the WGMR towards identifying and implementing the most effective solutions.

Cross Border—Making Progress

Six months ago, Chairman Giancarlo released his white paper on cross-border swaps regulation in which he shared his vision for updating the Commission’s current guidance-based cross-border application of its swap regime to a rule-based framework with greater regulatory deference to third-country regulatory jurisdictions that have adopted the G-20 swaps reforms.[20]  Some of the suggested improvements include: (1) expanding the use of the CFTC’s exemptive authority for non-U.S. central counterparties (“CCPs”) that are subject to comparable regulation in their home country and do not pose “substantial risk” to the U.S. financial system; (2) exempting from SEF registration non-U.S. trading venues in jurisdictions that have adopted comparable G20 swaps reforms; and (3) reconsidering the criteria for determining when non-U.S. persons’ swap dealing activity poses a “direct and significant” risk to the U.S. financial system requiring swap dealer registration with the CFTC.[21]

As I’ve pointed out, the prior Commission’s decision in 2013 to address cross-border swaps regulation through agency guidance as opposed to regulation was intended to ensure that it would leave future CFTC leadership with the flexibility to fine-tune and adapt its approach to cross-border swaps regulation as the remainder of the global regulatory landscape evolved.[22]  I agree with the Chairman that it is an appropriate time to take stock of our global reforms and work together towards greater recognition of and deference to each other’s regulatory adoption and implementation of the G-20 reforms and approach to swaps regulation.

Last month, the Chairman announced that Commission staff was preparing the first formal proposals for rulemakings aimed at effectuating reforms outlined in his white paper, and stated his intention to put these proposals before the full Commission for formal vote before his departure.[23]  As described by the Chairman, one proposal will address the registration of non-U.S. CCPs clearing swaps for U.S. persons.[24]  Among other things, this proposal will provide for an alternative registration framework for non-U.S. CCPs that do not pose a substantial risk to the U.S. financial system.  These CCPs would still be able to offer customer clearing to U.S. person through futures commission merchants (“FCMs”).  Within this framework, the CCP’s home country regulator would continue to have supervisory primacy, with the CFTC more narrowly focused on U.S. customer protection.

The proposal will also provide an option for non-U.S. CCPs to be exempt from CFTC registration as a derivatives clearing organization or “DCO.”  In contrast to the current CFTC approach, this proposal would permit exempt DCOs to offer customer clearing to U.S. eligible contract participants through foreign clearing members that are not registered as FCMs.[25]

Another proposal will address the registration and regulation of non-U.S. swap dealers and major swap participants.[26]  As described by the Chairman, this proposal will shift the focus to the risk that non-U.S. swap dealing activity poses to the United States in a manner that ensures that our swap dealer rules only apply where the activity poses a “direct and significant” risk to the U.S. financial system, consistent with section 2(i) of the our governing statute, the Commodity Exchange Act (“CEA”).[27]

I look forward to engaging with my fellow Commissioners, fellow global regulators, and the public as we consider Chairman Giancarlo’s proposals.  I will remain vigilant as we reconsider the Commission’s past interpretation of the extraterritorial reach of our statutory and regulatory swaps authority.  Such authority is limited to activities outside the U.S. where such activities have a “direct and significant connection with activities in, or effect on” U.S. commerce or are evasive.[28]  As we explore what it means to have a “direct and significant connection” to the U.S. financial system in terms of risk, we must be diligent in our analyses of relationships and interconnections among markets and market participants as well as appropriately deferential to risk mitigating factors.  We must also remain vigilant and consider how any decisions we make could apply to new and emerging risks.  And as always, whatever interpretation we pursue must not run counter to clear Congressional intent.[29]

SEFs—Some Needed Seeds of Change

The Commission also has continued the important work of considering the effectiveness of our rules governing SEFs.[30]  Targeted SEF reforms can help market participants by providing certainty and eliminating unintended consequences.  Last November, the Commission publicly voted to propose for public comment various amendments to the rules applicable to SEFs, which appear in part 37 of our rules.  Despite reservations, I voted in favor of publishing the proposal for comment.[31]  I fully recognize that our existing part 37 rules are not perfect and that we need to hear from market participants regarding how we can improve the regulatory framework for SEFs.

We received more than 50 comments from market participants, and many of them drill down deeply on the rule and its implications.[32]  CFTC staff is busily reviewing and considering the comments.  The comments express many concerns – they echo the numerous concerns that I raised at the open meeting and many additional concerns as well.

One concern that we have heard repeatedly is regarding how the proposal will interact with any action that the Commission takes to reform our current cross-border rules and guidance.  Let me provide at least some reassurance here.  The CFTC has worked hard to address existing challenges in cross-border trading.  The Commission issued U.S./EU trading venue recognition in late 2017.[33]  Just last month, the Commission issued similar trading venue recognition for Singapore.[34]  My understanding is that, even in the unlikely event that the Commission was to approve a final SEF rule that exactly mirrors the proposal, the Chairman does not expect the SEF proposal to impact SEF registration exemptions already in place for EU and Singapore trading venues.[35]  I am hopeful that this is the case.  But if we change the SEF rules significantly, there will be work to be done.  Obviously, we have determined that the EU and Singapore swap trading venue regimes subject SEFs in those jurisdictions to comparable, comprehensive supervision and regulation on a consolidated basis.[36]  If we have a re-imagined SEF regime like that set forth in the SEF proposal, it will be necessary to revisit these determinations.  The Chairman’s statements give assurance that, when this analysis is done, the Commission will find that these regimes are still comparable.

At the open meeting regarding the proposal, I expressed the concern that some products may be more appropriately traded off SEF.  I also raised the possibility of unintended consequences – it seemed to me that tying the trade execution requirement to the clearing requirement could actually discourage voluntary central clearing.  Many of the commenters, including ISDA, expressed similar concerns, and argued that “there should be an independent determination as to whether or not a particular swap possesses adequate liquidity to be trading on a SEF and that such determination should be made separate from the clearing determination.”[37]  I also appreciate ISDA’s suggestion that the Commission’s Market Risk Advisory Committee could provide assistance in making MAT determinations.[38]  I believe that the MRAC, with its broad range of market participants, would be an excellent forum for further discussion of how to improve the existing made-available-to-trade process.

Looking at SEF reform as a whole, though, I have a broader over-arching concern.  Over and over, market participants tell me that targeted changes need to be made to the SEF regulatory regime.  They also tell me that they have spent a great deal of resources to build systems and businesses that comply with our existing SEF rules.  Asking market participants to make fundamental changes amounting to an overhauling of the entire system should only be done in circumstances where there is a regulatory concern that necessitates – demands – action.

In 2008, the lack of transparency in the over-the-counter swaps market contributed to the financial crisis because both regulators and market participants lacked the visibility necessary to identify and assess swaps market exposures and counterparty relationships.[39]  Expansive regulatory reform was necessary.  We are in a more mature regulatory position now and we should target our reforms to provide clarity and certainty for market participants, and to make improvements that add value to the existing framework.  To that end, there are a number of changes that I believe just about everyone agrees upon.  Most SEFs currently operate under multiple no-action letters granted by the CFTC’s Division of Market Oversight.  While the purpose of this targeted relief was often to smooth the implementation of the SEF framework, codifying or eliminating the need for existing no-action relief would provide market participants with greater legal certainty.  We should not allow issues with the broader vision of the SEF proposal to distract us from more targeted changes, like codifying no-action relief or making targeted improvement of the MAT process or permissible methods of execution.  But we also should remember that we do not need to accept the broader vision of the SEF proposal in order to provide market participants with the certainty they need and the SEF market they deserve.


Looking ahead to 2020, there is much to accomplish.  We are off to many good starts.  With ongoing dialogue and engagement, I believe our decisions to act will prove effective.  The tasks before us present great challenges, but we will persevere as the markets and the people they employ and serve need certainty.  I began these remarks with some thoughts on spring and the cherry blossoms as well as a quote from Amelia Earhart.  To bring us full circle, I will note that many people do not know that in 1915, the United States gave a reciprocal gift of flowering dogwood saplings to the city of Tokyo.  It took us a few years, but we delivered our own living symbol of renewal.  As for Ms. Earhart, she once remarked that, “[I]t is far easier to start something than to finish it.”  Yes, Ms. Earhart, we got it.

Thank you.

[1] Rostin Behnam, Our Collective Strength, Remarks of CFTC Commissioner Rostin Behnam at the 2018 ISDA Annual Japan Conference, Shangri-La Hotel, Tokyo (Oct. 26, 2018),https://www.cftc.gov/PressRoom/SpeechesTestimony/opabehnam11.

[2] E.g., Press Release Number 7876-19, CFTC, Joint Statement by UK and US Authorities on Continuity of Derivatives Trading and Clearing Post-Brexit (Feb. 25, 2019),https://www.cftc.gov/PressRoom/PressReleases/7876-19; Press Release Number 7896-19, CFTC, CFTC Provide Further Brexit-Related Market Certainty (Mar. 25, 2019),https://www.cftc.gov/PressRoom/PressReleases/7896-19.

[3] Swap Execution Facilities and Trade Execution Requirement, 83 FR 61946 (proposed Nov. 30, 2018); Post-Trade Name Give-Up on Swap Execution Facilities, 83 FR 61571 (proposed Nov. 30, 2018).

[4] Nomination Hearing, Nomination of Heath P. Tarbert, S. Comm. on Agric. Nutrition, & Forestry (Mar. 13, 2019), available at https://www.agriculture.senate.gov/hearings/nomination-of-heath-p-tarbert.

[5] Michael Held, Executive Vice President and General Counsel, Federal Reserve Bank of New York, SOFR and the Transition from LIBOR, Remarks at SIFMA C&L Society February Luncheon, New York City (Feb. 26, 2019), https://www.newyorkfed.org/newsevents/speeches/2019/hel190226.

[6] Press Release, ISDA, ISDA Publishes Final Results of Benchmark Fallbacks Consultation (Dec. 20, 2018), https://www.isda.org/2018/12/20/isda-publishes-final-results-of-benchmark-fallback-consultation/.

[7] Alternative Reference Rates Committee, Frequently Asked Questions (Version: Jan. 31, 2019), https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/ARRC-faq.pdf .

[8] CME Group, March Rates Recap (data as of March 1, 2019), https://www.cmegroup.com/education/rates-recap/2019-03-rates-recap.html.

[9] Press Release, LCH, LCH Clears First SOFR Swaps (July 18, 2018),https://www.lch.com/resources/news/lch-clears-first-sofr-swaps; Press Release, CME Group, CME Group Announces First OTC SOFR Swaps Cleared (Oct. 9, 2018),https://www.cmegroup.com/media-room/press-releases/2018/10/09/cme_group_announcesfirstotcsofrswapscleared.html.

[10] Daniel Kruger and Telis Demos, New Benchmark Rate, Gunning to Replace Libor, Gains Traction, The Wall Street JOurnal, Mar. 29, 2019, https://www.wsj.com/articles/hedging-rises-on-new-benchmark-rate-amid-concerns-of-quarter-end-swings-11553857201.

[11] See Alternative Reference Rates Committee, ARRC Guiding Principles for More Robust LIBOR Fallback Contract Language in Cash Products (2018),https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2018/ARRC-principles-July2018.pdf.

[12] See, e.g. Helen Bartholomew, Swaps market heading for Libor fallbacks clash, Risk.net, Feb. 27, 2019, https://www.risk.net/derivatives/6424381/swaps-market-heading-for-libor-fallbacks-clash; Michael Held, supra note 5.

[13] Press Release Number 7752-18, CFTC, CFTC’s Market Risk Advisory Committee Announces Agenda for July 12 Public Meeting (July 10, 2018),https://www.cftc.gov/PressRoom/PressReleases/7752-18.

[14] Press Release Number 7819-18, CFTC, CFTC Commissioner Behnam Announces the Establishment of New Subcommittee of the Market Risk Advisory Committee and Seeks Nominations for Membership (Oct. 3, 2018), https://www.cftc.gov/PressRoom/PressReleases/7819-18.

[15] Tom Wipf, Opening Remarks at the CFTC Market Risk Advisory Committee (Dec. 4, 2018), https://www.cftc.gov/sites/default/files/2018-12/mrac_reportbythomaswipf120418_0.pdf .

[16] Letter from ISDA, et al. to the Secretariats of the BCBS and IOSCO Re: Margin Requirements for Non-Centrally Cleared Derivatives – Final Stages of Initial Margin Phase-In (Sept. 12, 2018),https://www.isda.org/a/5evEE/Initial-Margin-Phase-In-Implementation-Joint-Trade-Association-Comments.pdf.

[17] The WGMR includes representatives from more than 20 regulatory authorities from Australia, Canada, the EU, Hong Kong, India, Japan, Korea, Mexico, Russia, Singapore, Switzerland, and the United States.  The U.S. is represented by the CFTC, the prudential banking regulators, the Securities and Exchange Commission, and the Federal Reserve Bank of New York.

[18] Press Release IOSCO MR/07/2019, Basel Committee on Banking Supervision and International Organization of Securities Commissions, BCBS/IOSCO statement on the final implementation phases of the Margin requirements for non-centrally cleared derivatives (Mar. 5, 2019), available at https://www.iosco.org/library/pubdocs/pdf/IOSCOPD624.pdf.

[19] Letter from ISDA, et al., supra note 16.

[20] Press Release Number 7817-18, CFTC, Chairman Giancarlo Releases Cross-Border White Paper (Oct. 1, 2018), https://www.cftc.gov/PressRoom/PressReleases/7817-18.

[21] Id.

[22] See Interpretive Guidance and Policy Statement Regarding Compliance with Certain Swap Regulations, 78 Fed. Reg. 45292, 46297 (July 29, 2013) (“The Commission understands the complex and dynamic nature of the global swaps market and the need to take an adaptable approach to cross-border issues, particularly as it continues to work closely with foreign regulators to address potential conflicts with respect to each country’s respective regulatory regime.”)

[23] J. Christopher Giancarlo, CFTC Chairman, Improving the Past, Tackling the Present, and Advancing to a Digital Market Future, Remarks by Chairman J. Christopher Giancarlo at 44thAnnual International Futures Industry Conference (Mar. 13, 2019),https://www.cftc.gov/PressRoom/SpeechesTestimony/opagiancarlo67.

[24] Id.

[25] Id.

[26] Id.

[27] 7 U.S.C. 2(i).

[28] 7 U.S.C. 2(i).

[29] See Sec. Indus. & Fin. Mkts. Ass’n. v. CFTC, 67 F.Supp.3d 373, 424 (D.D.C. 2015) (finding that Section 2(i) of the CEA, absent CFTC interpretation, provides an adequate legislative basis upon which the CFTC could enforce swap dealer rules extraterritorially).

[30] See 83 FR 61946, supra note 3.

[31] Rostin Behnam, CFTC Commissioner, Public Meeting Opening Statement of Commissioner Rostin Behnam (Nov. 5, 2018), https://www.cftc.gov/PressRoom/SpeechesTestimony/behnamstatement110518.

[32] Comments for Proposed Rule 83 FR 61946, CFTC,https://comments.cftc.gov/PublicComments/CommentList.aspx?id=2936.

[33] Press Release Number 7656-17, CFTC, CFTC Approves Exemption from SEF Registration Requirement for Multilateral Trading Facilities and Organised Trading Facilities Authorized Within the EU (Dec. 8, 2017), https://www.cftc.gov/PressRoom/PressReleases/pr7656-17.

[34] Press Release Number 7887-19, CFTC, Joint Statement of the CFTC and the Monetary Authority of Singapore Regarding the Mutual Recognition of Certain Derivatives Trading Venues in the United States and Singapore (Mar. 13, 2019),https://www.cftc.gov/PressRoom/PressReleases/7887-19.

[35] J. Christopher Giancarlo, CFTC Chairman, Keynote Address of Chairman J. Christopher Giancarlo Before the ABA Business Law Section, Derivatives & Futures Law Committee Winter Meeting (Jan 25, 2019), https://www.cftc.gov/PressRoom/SpeechesTestimony/opagiancarlo63.

[36] 7 U.S.C. 5h(g).

[37] Letter from ISDA to Christopher Kirkpatrick, Secretary, CFTC Re: Swap Execution Facilities and Trade Execution Requirement; Proposed Rule RIN 3038-AE25, (Mar. 15, 2019), https://comments.cftc.gov/PublicComments/ViewComment.aspx?id=62054&SearchText=.

[38] Id.

[39] See The Financial Crisis Inquiry Commission, The Financial Crisis Inquiry Report:  Final Report of the National Commission on the Causes of the Financial and Economic Crisis in the United States (Official Government Edition), at 299, 352, 363-364, 386, 621 n. 56 (2011), available athttps://www.gpo.gov/fdsys/pkg/GPO-FCIC/pdf/GPO-FCIC.pdf.





April 5, 2019

CFTC Staff Provides Further Brexit-Related Market Certainty

Washington, DC — The Commodity Futures Trading Commission’s (CFTC) Divisions of Swap Dealer and Intermediary Oversight (DSIO), Market Oversight (DMO), and Clearing and Risk (DCR), today announced they will grant no-action relief to provide greater certainty to the global marketplace in connection with the anticipated withdrawal of the United Kingdom of Great Britain and Northern Ireland (UK) from the European Union (EU) with or without a ratified withdrawal agreement (Brexit).

“At a time of heightened market uncertainty caused by Brexit, this Commission has worked over the past several weeks to bring clarity to participants in global derivatives markets by a series of separate actions and statements with its regulatory counterparts in other jurisdictions,” said CFTC Chairman J. Christopher Giancarlo. “Today Commission staff takes another important step to bring certainty to the global derivatives markets.”

DSIO, DMO, and DCR are providing regulatory certainty by issuing two joint staff letters. The first letter ensures that existing regulatory relief provided by DSIO, DMO, and DCR pursuant to certain staff letters affecting EU entities continues to be available for UK entities following Brexit. In the second letter, DSIO and DMO provide time-limited no-action relief to ensure the continued availability, following Brexit, of substituted compliance and regulatory relief under certain existing CFTC comparability determinations and exemption orders originally issued by the CFTC for EU entities, while CFTC staff undertakes an analysis of UK law in order to make appropriate recommendations of comparability or exemption to the CFTC.

The staff positions and time-limited relief in each of the letters will become effective if and when the UK withdraws from the EU. As of the date of this release, it is anticipated that such withdrawal may occur on April 12, 2019.

These measures show that the CFTC is committed to taking measures to ensure that the UK’s withdrawal from the EU, in whatever form it takes, will not create regulatory uncertainty regarding derivatives market activity between the UK and United States. These measures will help support financial stability and the sound functioning of global financial markets. They also will give confidence to market participants about their ability to trade and manage risk through these markets.





April 4, 2019

CFTC, KSU Announce AgCon2019 Agenda

Second Agricultural Commodity Futures Conference Convening
April 11-12 in Kansas

Washington, DC — The Commodity Futures Trading Commission (CFTC) and the Center for Risk Management Education and Research (CRMER) at Kansas State University (KSU) announced the agenda for AgCon2019. The second Agricultural Commodity Futures Conference, hosted by CFTC and CRMER, will convene April 11-12, 2019 in Overland Park, Kansas. AgCon2019 will include robust presentations and discussions from leading academic researchers, as well as distinguished voices from the private and governmental sectors. Panels and participants will explore a range of current questions and topics facing the agricultural futures markets.

CFTC Chairman J. Christopher Giancarlo and KSU President Richard B. Myers will open the conference. They will be followed by a roundtable featuring CFTC Commissioners Brian Quintenz, Rostin Behnam, Dawn D. Stump and Dan Berkovitz.

Program highlights include a keynote from Ambassador Gregg Doud, Chief Agricultural Negotiator, Office of the U.S. Trade Representative. Former CFTC Commissioners Michael Dunn and Jim  Newsome will moderate two panels.

CRMER Director and KSU Professor Ted Schroeder will share information about CRMER, and CFTC Kansas City Regional Administrator and Division of Enforcement Deputy Director Chuck Marvine will provide enforcement insight in his presentation, “How Does the CFTC Catch Bad Guys?”

AgCon2019 Panels:

Getting Your Fill: Futures Trading Matching Algorithms – Alternatives, How They Function, and Effect on Market Performance

In pit trading, brokers are able to match orders through face-to-face interactions. An electronic-trading environment, however, requires a set of rules that governs the hierarchy for matching buy orders (bids) with sell orders (offers) for the purpose of trade execution. Much debate has surfaced about the way that matching algorithms could potentially impact individual market participants, as well as overall market performance. This session will focus on reviewing the current structures for matching algorithms employed by major exchanges, how different orders are prioritized and filled, how the design of the matching algorithms may impact trade fills across-the-board or for certain segments of the market, and the ways in which matching algorithms may impact overall market performance and efficiency.

Back to Basis: Grain and Oilseed Futures Convergence – Storage-Rate Structure, Delivery Methods, and Delivery Accessibility

Prevailing economic theory suggests that adjustments to futures contract-embedded storage rates are a potential remedy for a lack of convergence. The Chicago Board of Trade’s Soft Red Winter (SRW) Wheat and KC Hard Red Winter Wheat (KC HRW) futures contracts employ a variable storage rate, while recent adjustments to the Chicago Board of Trade’s Corn and Soybeans (as well as Soybean Meal and Oil) futures contracts will implement higher fixed storage rates. This session will analyze the effectiveness of variable versus fixed storage rates, the unintended consequences of each method, and their role in addressing convergence between cash and futures prices in SRW, KC HRW, the Soy complex, and Corn. This session also will explore the current structure of the delivery process and procedures and whether that plays a part in enhancing convergence.

Known Unknowns: Futures Markets’ Responses to Scheduled Market Reports – Release Timing, Access, Timeouts, and Market Reactions

Commodity futures traders often eagerly anticipate the release of scheduled market reports. Because these reports contain information about market fundamentals, they can immediately and significantly affect futures prices. This session will examine how the release of scheduled market reports impacts price discovery and market performance—focusing on the U.S. Department of Agriculture’s 2018 changes to its procedures for the release of crop and livestock reports from the National Agricultural Statistics Service and the World Agricultural Outlook Board, which changes were designed to ensure that all members of the public have access to the information at the same time. This session also will examine how algorithmic traders trade futures in response to macroeconomic news releases and whether electronic and algorithmic trading have led to an increase in volatility around the release of scheduled market reports.

Unknown Unknowns: Futures Markets’ Responses to Significant News Events

Markets are constantly absorbing information as part of the price-discovery process, and there is often debate about whether markets are overreacting or whether volatility is “excessive.” Exchanges have several tools at their disposal to curb volatility that is considered excessive—including price limits, stop logic, and trading halts—each of which has intended and unintended consequences. This session will look into “lock limit” moves (including assessments of volatility, liquidity, trade volume, and established market limits); the relationships between futures, options, and cash markets during “lock limit” moves; and other tools at the exchanges’ disposal for dealing with extreme volatility. In addition, this session will explore how markets performed when certain recent news events occurred (including Presidential tweets) and provide visualizations that will allow the audience to better understand what happened in agricultural futures markets in and around significant news events.

Hot Topics: Risk Management Across the Dairy, Pork, and Energy Sectors

Listen to experts from the dairy, pork, and energy sectors discuss how they manage risk in a world of ever-changing challenges—from international trade disputes to multiple regulators to massive amounts of data, and everything in between. In exploring similarities and differences between risk management in the dairy, pork, and energy sectors, this panel will discuss issues and ways to manage risk that will resonate with audience members from all industries. Additionally, this panel will examine where the next challenges are likely to come from and what research needs to be done to be in the best position to address those challenges.

See full agenda with moderators, panelists and registration information at AgCon2019.





April 2, 2019

Federal Court Orders Defendants to Pay More Than $2.7 Million in Connection with Commodity Pool Fraud

Washington, DC – The Commodity Futures Trading Commission (CFTC) announced today that defendants Thomas Lanzana (dba Unique Forex), who formerly resided in Pawleys Island, South Carolina, and his company Blackbox Pulse, LLC of North Bergen, New Jersey, along with Nikolay Masanko and his company, White Cloud Mountain, LLC of St. Augustine, Florida, have been permanently enjoined from engaging in conduct that violates the Commodity Exchange Act (CEA). Additionally, they have been ordered to pay $762,807.24 in restitution, as well as a civil monetary penalty of $1.95 million in connection with a commodity pool fraud investment scheme involving retail off-exchange foreign currency (forex).

The U.S. District Court for the District of New Jersey entered an order of default judgment and permanent injunction (Order) against the defendants following a CFTC Complaint filed on August 21, 2017. [See CFTC Press Release 7605-17]  In the Order, issued on March 15, 2019, Judge Madeline Cox Arleo found that the CFTC had sufficiently pled CEA violations by alleging that the defendants emailed customers account statements and links to YouTube videos showing forex trades that never happened and profits that did not exist, misrepresented that customer funds were being held in Blackbox Pulse or Unique Forex forex trading accounts when, in fact, they were not, and misappropriated customer funds.

In entering this order, the court found that the defendants fraudulently solicited and accepted funds from customers for the purported purpose of trading forex.  Further, the court found that the defendants maintained the trust of their customers by providing fabricated account statements, links to YouTube videos describing trades and profits, and sending falsified annual tax documents to customers.  The court also found that Lanzana misappropriated customer funds by using some of those funds to pay other customers, compensate Masanko for customers that he solicited, and for his personal use.

A related criminal case was filed against Lanzana in the U.S. District Court for the District of New Jersey on August 10, 2018.  See Case No. 2:18-mj-03676-MF, USA v. Lanzana.  The criminal case, which includes two counts charging wire fraud and commodities fraud, is pending before Judge Mark Falk.

The CFTC cautions victims that restitution orders may not result in the recovery of money lost because the wrongdoers may not have sufficient funds or assets.  The CFTC will continue to fight vigorously for the protection of customers and to ensure the wrongdoers are held accountable.

The Division of Enforcement thanks the United States Attorney for the District of New Jersey and the FBI Newark Division for their invaluable assistance and cooperation.

The CFTC Division of Enforcement staff members responsible for this case are Joy McCormack, Susan Padove and Stephanie Reinhart and former staff members Ava Gould and Rosemary Hollinger.


Default Judgment: Thomas Lanzana, Mansanko, Blackbox Pulse and White Cloud Mountain





April 1, 2019

Federal Court Finds Former Precious Metals CEO Robert Escobio in Contempt of Court for Failure to Pay Restitution to Defrauded Customers

Escobio Ordered to Surrender to United States Marshal Service

Washington, DC — The U.S. Commodity Futures Trading Commission (CFTC) announced today that on March 18, 2019, District Judge James Lawrence King of the U.S. District Court for the Southern District of Florida entered an order finding Coral Gables, Florida resident Robert Escobio in contempt (“Contempt Order”) for failing to pay more than $1.5 million in previously-ordered restitution to defrauded customers of Mr. Escobio’s now-defunct precious metals firm, Southern Trust Metals, Inc. (“Southern Trust”).

The Contempt Order, entered after a two-day evidentiary hearing, required Mr. Escobio to pay $350,000 in restitution within ten days, plus an additional $10,000 per month until Escobio’s restitution obligation has been satisfied.  Mr. Escobio failed to make the $350,000 payment and has been ordered to surrender to the U.S. Marshall Service for incarceration until he has fully complied.

James McDonald, Director of the CFTC’s Division of Enforcement said: “Investor protection and market integrity are two core components of the CFTC’s mission.  We will not allow defendants with apparent means to pay, like Mr. Escobio, to shirk their restitution obligations at the expense of defrauded customers.”

The Contempt Order stems from an enforcement action filed by the Commission against Mr. Escobio and Southern Trust in 2014 (CFTC Press No. 6969-14).  After trial on the merits, Judge King found that Mr. Escobio had masterminded a scheme to defraud customers relating to the purported sale of precious metals through Southern Trust.  On September 1, 2017, Judge King ordered, among other things, for Escobio to pay restitution in the amount of $1,543,892 to compensate victims of the Southern Trust’s leveraged precious metals scheme (“Restitution Order”).  The United States Court of Appeals for the Eleventh Circuit subsequently denied Mr. Escobio’s appeal of the Restitution Order on July 12, 2018.

After a two-day evidentiary hearing on whether Mr. Escobio should be found in contempt, Judge King found as follows:

The evidence shows that Escobio has more than $900,000 in assets, and that since the judgment he has benefitted from a household income of around $250,000 a year, plus the $200,000 to $300,000 in purported “loans.”  In light of these facts, Escobio’s payments totaling $3,525 do not constitute good faith compliance with the final judgment.  Not only that, the evidence shows that Escobio does not intend to comply with the Court’s restitution order and has deliberately and contemptuously refused to do so.

Mr. Escobio has appealed the Contempt Order to the United States Court of Appeals for the Eleventh Circuit.

CFTC Division of Enforcement staff members responsible for this action are Ashley J. Burden, Carlin Metzger, Heather Dasso, Venice Bickham, Joseph Konizeski, Scott Williamson and former staff member Rosemary Hollinger.

The CFTC thanks the National Futures Association and the Financial Industry Regulatory Authority for their assistance in this matter.


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