On March 6, the House Agriculture Committee held a hearing entitled, “For the Purpose of Receiving Testimony from the Honorable Rostin Behnam, Chairman, Commodity Futures Trading Commission (CFTC).” The sole witness in the hearing was CFTC Chairman Rostin Behnam.
Below is a summary of the hearing prepared by Delta Strategy Group. It includes several high-level takeaways from both panels, followed by summaries of opening statements and witness testimonies and a summary of the Q&A portion of the hearing.
Key Takeaways
The following is a summary of some of the topics explored in today’s hearing. Each is discussed in further detail in the Discussion section below.
- Today’s hearing covered topics ranging from digital assets, Basel III, voluntary carbon markets (VCMs), CFTC reauthorization, artificial intelligence (AI), and political event contracts.
- On Basel III, Chairman Behnam addressed concerns about risk management tools for derivatives end-users, emphasizing the need for collaboration among regulators to ensure access to clearing services and mitigate further consolidation of Futures Commission Merchants (FCMs). He highlighted the importance of incentivizing clearing, which many Republicans echoed.
- Chairman Behnam discussed the FIT for the 21st Century Act (FIT 21) and the CFTC’s role in regulating cryptocurrencies like bitcoin and ether. He emphasized the necessity of legislative action to define the regulatory framework.
- Addressing VCM guidance, Chairman Behnam highlighted efforts to ensure the integrity of these markets and protect farmers from manipulation. Some Democrats raised concerns about manipulation within VCMs and sought reassurance about measures to safeguard farmers from exploitation in these markets.
Opening Statements and Testimony
Chairman GT Thompson (R-PA)
- Congress is concerned that Basel III will negatively impact commodity end-users, ultimately increasing the costs of commodities for everyday Americans. Congress hopes that the CFTC continues to review these proposals and urges the Federal Reserve (Fed) to rethink these flawed proposed rules.
- The House Ag Committee has been actively engaged in crafting a regulatory framework that protects consumers, and investors and fosters American leadership in the digital asset space. The Committee looks forward to advancing the FIT 21 and appreciates the CFTC’s engagement to bring regulatory clarity to these novel assets.
- Ranking Member Scott (D-GA) and I remain committed to reauthorizing the CFTC and providing the Commission with the tools and the authorities it needs to successfully execute its responsibilities.
Ranking Member David Scott (D-GA)
- The Committee remains committed to reauthorizing the CFTC. The CFTC needs the proper amount of fiscal funding, and I am very concerned about the potential impact on derivatives markets if the CFTC is not reauthorized.
Rostin Behnam, Chairman, CFTC
- The CFTC has been more active in the digital asset space than in any other area we touch. In 2023, we brought 47 actions involving conduct related to digital commodities, representing more than 49 percent of all CFTC actions filed during that period. The lack of legislation addressing the regulatory gap in digital commodity asset spot markets has not hindered the public’s enthusiasm for digital assets, and I continue to believe Congress must act to provide clarity to this space.
- The CFTC recently issued VCM guidance, which all landowners, including America’s farmers and ranchers, can benefit from.
- The CFTC’s request for comment on AI is part of a greater vision I have had since my first days as Chairman to advance analytical capabilities through building talent, leveraging the cloud, and developing a forward-looking AI regulatory strategy.
Discussion
Basel III
Thompson (R-PA): What is the CFTC doing to ensure risk management tools will be available if Basel III is implemented as is? Behnam: I have been personally engaged with other colleagues at the Fed advocating for derivatives markets. There has been a huge growth in markets, a reduction in capacity, and a high consolidation of Futures Commission Merchants (FCMs). The Fed must move forward with Basel III and the Global Systemically Important Bank Surcharge (GSIB) Proposal, but we cannot move forward with a version that disincentivizes clearing.
Scott (R-GA): Was the CFTC ever consulted as Basel III or the GSIB Surcharge Proposal was being crafted? Behnam: No.
Scott (R-GA): What is the largest concern for derivatives end-users? Behnam: As FCM services are concentrated in the largest banks, there is a concern that large banks will no longer prioritize clearing services. Smaller FCMs who facilitate and service smaller businesses, agricultural stakeholders, and energy stakeholders cannot take on the extra capacity.
Mann (R-KS): What is the CFTC doing to ensure risk management tools stay available as Basel III discussions continue? Behnam: The CFTC is working hard to collaborate with the Fed to provide our expertise on how this proposal will impact risk management and clearing for derivatives markets.
Lucas (R-OK): Would you be willing to assist the Fed and share concerns end-users have about the Basel III Proposal? Behnam: Yes, and the CFTC has been advocating for access to clearing services.
Lucas (R-OK): How do you see Basel III impact banks’ willingness to offer clearing services? Behnam: Twenty years ago, we had 177 FCMs and now we are down to 64. There is a concentration in the top five clearing members, which are the largest banks, of over 60 percent of all customer money. We need to incentivize clearing.
Lucas (R-OK): How will the Securities and Exchange Commission’s (SEC’s) finalized Treasury Market Rule be an additional stress on clearing services? Behnam: It is potentially an additional stress. Ultimately, it is a very different market, but we need a diverse pool of clearing members.
Jackson (D-IL): Can you speak more about the consolidation of FCMs? Behnam: The CFTC is very focused on ensuring we have a diverse pool of clearing services and stopping the further consolidation of FCMs.
Nunn (R-IA): Basel III will greatly impact the agriculture community. How will Basel III exacerbate further FCM consolidation? Behnam: FCM numbers have greatly diminished, and Basel III will continue this pattern. We must incentivize clearing.
Digital Assets
Thompson (R-PA): Prometheum, who has a broker-dealer license with the SEC, recently announced that it would launch its custody service with Ether as its first asset. Accepting that ether is a commodity, what are your views on Prometheum’s plans to custody ether? Behnam: From my understanding, this was an independent decision by Prometheum. If we do have any action by the SEC, that validates Prometheum’s decision to consider ether as a security, our registrants or exchanges who list either as a futures contract sort of in non-compliance with SEC rules as opposed to CFTC rules.
Thompson (R-PA): Can you talk about the application of the FIT 21 as proposed? I am encouraged by what the FIT 21 aspires to do and what the Committee is trying to accomplish, in terms of both regulating and filling these gaps, but also thinking forward about some of these new technologies and how they fit into the existing Commodity Exchange Act.
Budzinski (D-IL): What would the CFTC’s implementation of digital asset legislation look like? Behnam: Congress needs to act to fill this gap, especially about Bitcoin and Ether, which are commodities. In terms of implementation, I am confident we would implement a regulatory structure within 12 months of the passage of FIT 21.
Duarte (R-CA): What makes bitcoin or ether fit the definition of a commodity? Behnam: Any item that does not meet the prongs of the Howie test, and is, therefore, not a security, is considered a commodity. Cryptocurrency demands legislative action.
Soto (D-FL): How critical is the FIT 21 for the CFTC’s regulation of digital assets? Behnam: We must have appropriate resources.
Casar (D-TX): I have concerns that FIT 21 is premature as we may not be ready to define what is decentralized. Behnam: Decentralized finance conversations are difficult, but there are very clear rules about what conduct is permissible and not permissible.
Cammack (R-FL): What challenges do you expect to face in oversight of blockchain-based financial products? Behnam: We are engaging with the industry to combat issues related to compliance, fraud, manipulation, and having a proper governance structure.
Nunn (R-IA): The CFTC has been an open place for innovation in the digital asset space. Until FIT 21 becomes law, what can the CFTC do to provide clarity to this space? Behnam: We work with exchanges to ensure products listed are commodities.
Voluntary Carbon Market Guidance
Adams (D-NC): Can you justify the CFTC’s issuance of VCM guidance? Behnam: There is interest in the health of the underlying VCM. The CFTC intends to elevate the diligence that DCMs use when they list CFTC-regulated futures contracts.
Feenstra (R-IA): What is the CFTC doing to ensure that farmers are protected from manipulation within VCMs? Can you collaborate with USDA to further promote these markets? Behnam: The guidance is an effort to clarify the expected diligence that the registered exchanges would use when they list these voluntary carbon credit (VCC) contracts. We held two convenings with USDA to create this guidance.
LaMalfa (R-CA): Is it right for the CFTC to be involving itself in VCMs without Congressional direction? Behnam: We already have listed futures contracts on VCCs, and we are seeing increased demand for VCMs.
CFTC Reauthorization
Scott (D-GA): Why is it important to reauthorize the CFTC? Behnam: We need to reauthorize the CFTC to ensure that the investing public and international partners understand that our economy takes the U.S. derivatives markets seriously.
Artificial Intelligence
Scott (D-GA): What are the dangers of AI? Behnam: The CFTC has put out a request for comment in a deliberate, intentional way of seeking feedback from the market.
Rose (R-TN): Does the CFTC have sufficient bandwidth to address AI? Behnam: We need consistency and certainty in terms of financial resources.
Political Event Contracts
Salinas (D-OR): I am particularly concerned by the rise of political event contracts. How does the CFTC intend to prevent sites like PredictIt from establishing them and would additional congressional clarification help? Behnam: My goal over the next couple of months is to further clarify the existing rules that we have to ensure that no new participant or company lists political event contracts. We are working towards a rule that will clarify, so we do not see these contracts in the future. Additional Congressional clarification would always help.
Rouzer (R-NC): Do you believe that all election event contracts constitute gaming and are therefore prohibited from being listed on the exchange? Behnam: The CFTC’s position is that political election contracts or event contracts are against both the provisions of gaming and state law. We will continue to work with industry stakeholders.
Other
Davis (D-NC): What is the value of the CFTC’s Agriculture Advisory Committee? Behnam: From engagements with agricultural stakeholders, we have gained valuable insights on how our markets can be improved to serve agriculture producers and consumers.