House Ag Subcommittee Hearing

On July 25, the House Agriculture Committee Subcommittee on Commodity Markets, Digital Assets, and Rural Development held a hearing entitled “Reauthorizing the CFTC: Stakeholder Perspectives.”  The witnesses in the hearing were Futures Industry Association (FIA) President Walt Lukken, National Futures Association (NFA) President  Tom Sexton, Agterga Vice President Travis Antonsen, and Center for American Progress Director Alexandra Thornton.

Below is a summary of the hearing prepared by Delta Strategy Group.  It includes several high-level takeaways from the hearing, followed by summaries of opening statements and witness testimonies and a summary of the Q&A portion of the hearing.

Derivatives markets are the backbone of our financial system.  We must ensure their safety and soundness to allow market participants to hedge against volatility and promote stability and predictability.  These are vital tools for farmers and energy producers.  Our derivatives markets are the largest and best in the world, and that is due to the responsible regulation of the CFTC.

The CFTC ensures the vibrancy and resiliency of these markets and protects the end users that depend on these markets for risk management.  It is important that we reauthorize the CFTC so that the public and international partners understand how seriously Congress considers our derivatives markets.

We have seen derivatives markets overseen by the CFTC remain resilient through serious market volatility stemming from weather events, COVID, and geopolitical conflicts, but these events highlight the need for the CFTC to be reauthorized.  I am interested in hearing how we can maintain strong customer protections in our derivatives markets, particularly for retail investors.  This is even more important because we are trying to authorize the CFTC to have additional authority over digital asset markets.  We should not cut any funding for the CFTC; we should increase its appropriations.

Derivatives markets are vital to the success of our economy and allow market participants to focus on their businesses with the knowledge that they are protected against market volatility.  The CFTC has never been more vital than it is today as we see high levels of market volatility, geopolitical crises, and new innovations that requires new regulation.

FIA strongly supports the reauthorization of the CFTC.  Our markets have grown significantly since the CFTC was last reauthorized.  The CFTC has also been asked to regulate more products.  Our markets have demonstrated tremendous stability in the face of recent stress events, which is due to the CFTC’s principles-based regulatory regime.  This adaptability has reduced the need in wholesale changes to the CFTC’s authority.  New products like digital assets bring novel market structures into the traditional futures industry, particularly surrounding vertical integration.  The SEC’s Treasury clearing mandate will also make significant changes to market structure that will have a direct impact on the markets the CFTC oversees. The existing CFTC regulatory framework has proved strong, and the reauthorization of the CFTC should be a simple solution, aimed at maintaining the current structure.  There are three things FIA would raise for consideration: improving certainty around FCM bankruptcies, expanding the CFTC’s ability to educate farmers on how to use derivatives markets, and increasing flexibility for the CFTC to engage in research and development.

Our objective is to partner with the CFTC in its efforts to oversee and regulate derivatives markets, and the CFTC oversees every aspect of NFA’s regulatory authority.  Chairman Behnam and the other Commissioners have been good leaders and worked well with NFA.  Reauthorization is an important issue for Congress and the derivatives industry as a whole. We must strengthen FCM customer protections in the event of bankruptcies.  We strongly support providing additional clarity around these protections as they have faced recent challenges in court, and any reauthorization should include legislation aimed at this purpose.  If there is a shortfall in customer funds, the term “customer funds” should include all parts of the FCMs funds until customers are made whole.  Congress should remove any doubt that customers should be placed at the front of the line and this is the best practice in the case of a bankruptcies. We remain supportive of the CFTC’s tremendous work in protecting against fraud in digital asset markets.  We applaud this Committee on its collaborative work to pass legislation to create a regulatory framework for digital asset spot markets.  The FIT 21 Act includes considerable responsibilities for an SRO such as NFA, and I want to reaffirm that the NFA will assist the CFTC in standing up a regulatory framework for digital asset commodities.

Futures markets are vital for those trading or growing agriculture commodities.  Reauthorizing the CFTC is the best way for Congress to acknowledge the critical importance of regulating derivatives markets.  While we would support additional appropriations for the CFTC, we caution against any market user fees being used to fund the CFTC, which would increase commodity prices and the cost of hedging for those protecting against risk in these markets.  We are also deeply concerned with the Basel III capital requirement proposals.

Johnson (R-SD):  What agency today has jurisdiction over fraud and manipulation in commodity spot markets?  What about derivatives for non-securities?  Has the SEC ever asserted jurisdiction over the digital asset tokens that make up the vast majority of volume in crypto markets?  Thornton:  The CFTC has the authority over both of these markets.  The SEC has never claimed authority over bitcoin or ether.

Johnson:  Do market participants care if the CFTC is reauthorized?  Lukken:  Reauthorization constitutes a vote of confidence in the agency from Congress;  Sexton:  Reauthorization recognizes the critical role of the CFTC both domestically and internationally.

Caraveo (D-CO):  What are your views on harmonizing enforcement activities to ensure we are policing for fraud?  Lukken:  The CFTC has sufficient authority to target fraudulent activities overseas.  We support the premise that it is important for the CFTC to be able to go after manipulative behavior overseas.

Caraveo:  What are your concerns around conflicts of interest that may exist with vertically integrated market participants?  Lukken:  A lot of crypto platforms are vertically integrated, but there are concerns that this erodes the regulatory authorities typically separated into different entities.  We saw these concerns with the FTX market structure proposal.

Lucas (R-OK):  Why should Basel III be reopened for public comment?  Lukken:  Clearing and central counterparties for our markets mitigate risk in the financial system.  Banks should hold more capital for risky activity, but it is wrongheaded to consider our markets risky activity.  The proposal as it exists today will result in less services offered for derivatives market users;  Sexton:  I endorse the recommendation that there should be more public feedback on the impact of the Basel III proposal.  The proposal as it exists today would have serious negative impacts on agriculture and energy end users.

Thompson (R-PA):  How have derivatives markets evolved since the 2008 CFTC reauthorization?  Are your members concerned with the Basel III proposals?  Lukken:  Markets have become much more global, and OTC derivatives have added complexity to markets.  That said, the CFTC framework has held up well in the face of these changes.  The CFTC, due to its principles-based regulation, has been able to be flexible and evolve to address new challenges.  On Basel III, our industry is united in opposing the current proposal, which is a rare feat for such a diverse industry.

Costa (D-CA):  What are your views on funding for the CFTC?  Lukken:  We are concerned that user fees would result in less hedging, which would increase risk in markets.  I believe appropriators should appropriately fund the CFTC;  Sexton:  Futures assessment fees are only on a fraction of public volume.  We will continue to self-fund at NFA.  If FIT 21 were to become law, NFA’s new funding needs will be determined by how many new members join NFA.

Miller (R-OH):  Why are derivatives markets important for agriculture and energy markets?  If there is a bad actor in the derivatives space, does the CFTC have sufficient authority to protect other market participants?  Antonsen:  Derivatives are vital to every part of our business;  Sexton:  We are always worried about the impact of bad actors.  We work closely with enforcement to find and punish bad actors.

Mann (R-KS):  Are there any gaps in the CFTC’s authority to police overseas fraud?  What are your concerns with FCM bankruptcies?  Lukken:  I am not aware of any gaps for the CFTC to police against foreign fraud with a nexus to U.S. markets;  Sexton:  It is important to ensure there is certainty and clarity for the treatment of customer funds in the case of a bankruptcy.  It is vital that customers step in front of creditors in the case of a bankruptcy.  Congress should codify the CFTC’s authority to ensure that takes place.

Nunn (R-IA):  How can the CFTC protect market participants without creating burdensome red tape?  Antonsen:  We believe that current status quo is okay in terms of agricultural regulations.