HOUSE COMMITTEE ON AGRICULTURE
Hearing on CFTC Reauthorization
For questions on the note below, please contact the Delta Strategy Group team.
On December 11, the House Committee on Agriculture held a hearing entitled “CFTC Reauthorization: Stakeholder Perspectives.” The witnesses in the hearing were:
- Dawn Stump, Former Commissioner, Commodity Futures Trading Commission
- Edward Prosser, Senior Vice President, Scoular, on Behalf of the Commodity Markets Council (CMC)
- Alicia Crighton, Managing Director, Global Co-head of Futures, and Head of OTC and Prime Clearing at Goldman Sachs, on Behalf of the Futures Industry Association (FIA)
- Rob Schwartz, Former General Counsel, Commodity Futures Trading Commission
- Benjamin Schiffrin, Director of Securities Policy, Better Markets
Below are several high-level takeaways prepared by Delta Strategy Group.
Key Takeaways
- Representatives from across the aisle, led by Chairman Thompson (R-PA) and Ranking Member Craig (D-MN), recognized the importance of reauthorizing the Commodity Futures Trading Commission (CFTC or Commission). Multiple Representatives highlighted the significant impact the markets that the Commission oversees have on the lives of U.S. producers and consumers.
- All of the witnesses emphasized the importance of a fully funded and fully staffed CFTC. Stump and Schwartz noted that a full Commission allows for better deliberation, risk management, and policymaking across traditional and emerging markets. Prosser specifically urged that at least one Commissioner have an agricultural background to ensure that the perspective of American agribusiness is represented.
- Crighton highlighted the central role of Futures Commission Merchants (FCMs) in safeguarding customer assets and providing financial resources to backstop clearinghouses, particularly as direct-access trading and leveraged retail activity grow. She stressed the importance of maintaining adequate margin levels, calibrating bank capital requirements, and separating default resources to mitigate systemic risk.
- Prosser and Crighton stressed that adequate clearing capacity is critical during times of market stress and for smaller end-users. Both discussed how increasing capital requirements for banks for their clearing services could have the unintended consequence of reducing access to clearing, which would add to the overall risk in the system.
- Crighton outlined the Futures Industry Association’s (FIA) support for the implementation of rules to address conflicts of interest in vertically integrated markets, ensure investor protections, and uphold customer priority in bankruptcy scenarios. She discussed the importance of segregating various clearing activities so that traditional market participants are not tied to the waterfall of more novel asset classes.
- Democrats raised concerns about event contracts, especially those related to sports, and witnesses addressed the CFTC’s authority in this area. Schwartz explained how the Commodity Exchange Act (CEA) grants the CFTC jurisdiction to determine, on a contract-by-contract basis, whether it is in the public interest. Schiffrin maintained that the agency lacks sufficient resources and expertise to oversee these contracts effectively.
SUMMARY
Opening Statements and Testimony
Chairman G.T. Thompson (R-PA)
This is a transformative time for the CFTC and financial markets, and the Commission’s authorization for appropriations lapsed in 2013. This Committee’s years-long process on digital assets culminated in the House passage of the Digital Asset Market Clarity (CLARITY) Act, and the legislation received overwhelming bipartisan support. It is long past time for Congress to fulfill its responsibility and reauthorize the information, especially as we consider providing new authorities to the agency. The markets that the CFTC oversees allow American businesses, including farmers, ranchers, and producers, to manage risks of modern business. It is clear that, as markets have evolved, so has the Commission. From legacy financial futures to novel new perpetual derivatives, the CFTC has applied its principles-based mandate and subject matter expertise to regulating new products and novel issues. This is an important opportunity to consider stakeholder perspectives and listen to their suggestions for improvements and refinements to set the CFTC on solid footing for the next fifty years.
Ranking Member Angie Craig (D-MN)
For the past twelve years, the CFTC has been operating without formal congressional authorization since it lapsed in 2013. As the industry and markets change, we need to make sure the CFTC has the necessary tools to handle these changes while maintaining its core function of ensuring the integrity of resilience and vibrancy in the markets it currently oversees. A well-regulated financial system keeps our country strong and prosperous while protecting Americans. The CFTC makes sure these markets work for Americans and businesses whose livelihoods are impacted by these markets every day. It takes resources to have effective oversight over these markets and protect the customers who use them. It is a critical time for the CFTC. A well-resourced and appropriately staffed CFTC is critical to a healthy financial system. To accomplish these goals, it is critical that we work together and across the aisle.
Dawn Stump, Former CFTC Commissioner
The CFTC’s mission remains timeless, yet substantial changes in the derivatives markets have taken the agency on a transformative journey. The Commission has found that the best compass for navigating these difficult and subjective debates is re-reading the words used in the CEA where I would have preferred different words, but the CEA is the ultimate directive we all must follow. The reauthorization process has traditionally served as a recurring opportunity for Congress to ensure that the important words in the CEA remain fit for purpose so that market developers, regulators, and the courts can apply the statute in a current context. While the sensible flexibility of the CEA largely enables the CFTC to adapt as the market develops new products and business practices, reauthorization provides an opportunity for this committee to address ambiguities that arise with such changes. The best way to avoid the CFTC being caught in a larger debate about Congressional appropriations is simply to authorize the appropriation. In addition to updating the CEA and addressing this technical budgetary matter, Congress has used reauthorization as a way to renew its support for the CFTC. This is an important affirmation of the agency’s distinct relevance. The CFTC performs a critical regulatory function, overseeing markets with an enormous range of underlying products.
Ed Prosser, Senior Vice President of Special Projects, Scoular, on Behalf of CMC
Commodity Markets Council (CMC) members include end-users that utilize the futures and swaps markets for agriculture, energy, and soft commodities, as well as designated contract markets (DCMs), FCMs, and swap execution facilities (SEFs). CMC advocates for open, competitive, and transparent markets. Derivatives markets operate every day to support the food, fiber, and energy systems we rely on. They provide the liquidity needed for effective price discovery, allowing market participants worldwide to signal which commodities are scarce and which are oversupplied. These markets enable commercial users to hedge exposure to volatile price movements driven by weather, global supply shifts, supply chain interruptions, and geopolitical instability. U.S. agricultural futures serve as global price benchmarks that support risk management both domestically and internationally. These functions are vital to producing and transporting agricultural goods to consumers who depend on them. Derivatives markets shape our economy by ensuring commercial participants can manage risk, avoid losses, and deliver reliable value. Price discovery, risk transfer, and market liquidity are the pillars of healthy, resilient markets. As Congress considers its role in overseeing, supporting, and reauthorizing the CFTC, I urge the Committee to support appropriate funding and staffing for the agency. It should also ensure that regulatory standards prioritize the needs of commercial end-users and consumers. In addition, Congress should safeguard the principles-based regulatory model that has enabled responsible innovation and flexibility in responding to evolving market challenges, and maintain a bipartisan commitment to transparency, public participation, and open debate in regulatory decision-making. It should encourage ongoing review of market structure proposals to ensure that changes do not undermine agricultural and energy markets while anchoring global price benchmarks to U.S. markets.
Alicia Crighton, Managing Director, Global Co-head of Futures, and Head of OTC and Prime Clearing at Goldman Sachs, on Behalf of FIA
Current market structure has many valuable and time-tested risk management traits that can play an important role in integrating traditional and novel products and platforms. When innovation and risk management work together, they help ensure broad participation across both retail end-users and institutional investors. Many of the safeguards in place today operate behind the scenes but are critical to customer protection and market stability. FCMs act as the first and last line of defense, preventing losses from triggering a domino effect that could threaten market stability. To the extent trading platforms offer direct access models, the CFTC should consider whether the regulatory framework also needs to evolve to protect market participants, particularly as retail investors are provided direct clearing access on a leveraged basis. In 2023, I made two suggestions to this Committee that remain relevant today, maintaining adequate margin levels and implementing a well-calibrated bank capital regime. One of the most notable changes in the CFTC’s mission over the last twenty years is the potential oversight of significantly greater leveraged retail investor trading volumes. FIA supports Congressional efforts to expand the CFTC’s authority over digital commodities to help ensure retail investors are protected. FIA recommends that the CFTC authorize rules or guidance to require that financial resources used to manage defaults involving leveraged retail transactions be segregated from other default resources in the clearinghouse. This separation could help mitigate systemic risk concerns. FIA supports provisions in the CLARITY Act intended to ensure risk offsets are recognized across both traditional and digital asset products that span CFTC and SEC jurisdiction. Recognizing such offsets will incentivize hedging activity while promoting harmony between the two agencies. FIA also supports provisions in the CLARITY Act that authorize the CFTC to carry out rulemaking to mitigate potential conflicts of interest for vertically integrated market participants and ensure retail investors remain protected. CFTC rulemaking should establish requirements for the identification, mitigation, and resolution of conflicts in vertically integrated market structures. FIA supports the inclusion of the Griffin Fix, which is designed to strengthen customer protections in bankruptcy proceedings involving FCMs by ensuring customers have priority if there is a shortfall in segregated funds.
Rob Schwartz, Former General Counsel, Commodity Futures Trading Commission
It is time to take a fresh look at the CEA. The CFTC is a deliberative, bipartisan body in the truest sense. Democrats and Republicans debate, sharpen their thinking, and sometimes even change their minds. This is a technical field. Partisanship should not and typically does not dictate how the CFTC executes its mission. Those working at the CFTC do not care if it is led by Democrats or Republicans. When the Commission is at full strength, it possesses a wealth of knowledge. The CEA directs the President to nominate people with demonstrated knowledge of futures trading or regulation, or of one or more of the commodities covered by the statute, and to seek to ensure balance in those areas. The CEA definition of a commodity covers anything that underlies a futures contract. It covers assets from cotton and grain to oil and gas, precious metals, interest rates, and now, cryptocurrencies. Achieving balance is hard, but Presidents of both parties have succeeded. The CFTC can only be as strong not only as its members and staff but also as the CEA itself, which has made the United States the gold standard for derivatives regulation. These are times of change. Reauthorization is an important part of making sure the agency is always equipped to carry out its mission.
Ben Schiffrin, Director of Securities Policy, Better Markets
When Congress fails to provide proper support for market oversight, novel products emerge, and gaps develop. A CFTC with the appropriate regulatory authority and resources is critical because the agency’s core mission is of vital importance. Today, it is critical for the CFTC to focus on its primary mission, ensuring that everyday commodities are available to the American people at fair prices. The agency appears to spend an outsized amount of time on crypto markets, and serving as the leading promoter of crypto is a distraction that the American people cannot afford. The CFTC is also taking on new responsibilities with prediction markets, which have accelerated in recent months. The focus on crypto and prediction markets is especially problematic because the agency is underfunded and understaffed. It is tasked with overseeing $380 trillion in notional U.S. swaps and futures contracts with a budget of only $365 million. The CFTC was designed to be a five-member bipartisan Commission, but has been led by a single acting Chairman since September 2025. The need for a full bipartisan Commission is heightened at a time when policymakers are considering expanding the agency’s jurisdiction. The CFTC should not move forward with rulemaking or guidance until it has both a permanent chair and robust bipartisan representation among the Commissioners.
DISCUSSION
Chairman Thompson (R-PA): What big derivatives and public policy issues do you see arising in the coming years? Crighton: One is the possibilities new technologies provide for the industry at large. An appropriate balance of technology, along with a good policy framework, is important to create a healthy ecosystem. In our current markets and areas going forward, we continue to be worried about margin maintenance. Margin acts as the first line of defense, whether it is existing markets or traditional, or what new or digital markets present. We worry about the amount of clearing capacity in the ecosystem, especially if required margin levels are increased. At the moment, capacity is quite strained with new products coming to market. Whether it is the Treasury clearing mandate or the repo clearing mandate, there is significant demand for additional clearing capacity. The impact of that on end-users is incredibly significant; Prosser: I do not know if there has been any time we have had such a rapid pace and scope of new innovations that we are seeing today. In that environment, having a regulator that sits in the middle and acts as a referee, not just for novel but for mundane issues, is critical, especially when it comes to clearinghouse issues.
Chairman Thompson (R-PA): What does the Commission need to continue as the premier financial regulator as the markets grow and change? Stump: I look forward to a Senate-confirmed Chairman hosting open meetings with public input and issuing rules that enable the public to have an opinion on what is occurring in the marketplace. There is a real issue with clearing capacity. As we brought more products into the clearing environment under the Dodd-Frank Act, we saw the banking regulators proposing restrictions on the ability of those who acted as intermediaries to take on more clearing. There seems to always be somewhat of a misaligned mission between the market regulators and the banking regulators. Banking regulators are concerned with sustaining the banks, while the market regulators are concerned with functional markets. We had an ongoing dialogue with the banking regulators when I was there to mitigate that. That should continue, and I hope that does continue. I hope that with more Commissioners and a Senate-confirmed Chairman, there will be greater coordination with the banking regulators and the CFTC as a market regulator. Regarding market structure changes, there have been an enormous number of calls to the public for input on a variety of new market structure changes. As those are digested by the new Chairman, I think we will see responses in the form of rulemakings where the public can engage.
Ranking Member Craig (D-MN): You urged the Committee to regulatory standards to prioritize the needs of commercial end-users and consumers. How does the Committee do that? Are there specific changes in the CEA that Congress needs to think about to achieve that? Prosser: As we go forward with the new challenges coming with new entrants into the marketplace, we need to keep in mind that the traditional markets have worked pretty well. The regulatory environment that we have dealt with in the traditional markets has navigated different situations relatively well, and we should not be quick to change it. Markets have bent, not broken, when they needed to, and we changed regulations in 2008. We are asking that there is separation between the traditional and the new. What might be good for the new markets might not be good for the traditional markets. We do not want to squash innovation. I do not want these markets moving overseas, and I do not want the price of soybeans to be discovered in Brazil instead of along the Mississippi and Illinois Rivers.
Ranking Member Craig (D-MN): There are new innovations and additional responsibilities coming to the CFTC. Is the eight percent cut from the FY2025 funding appropriate, given the new responsibilities Congress is giving the agency? Schiffrin: Now is the time to increase CFTC funding, especially if the CFTC is going to be asked to oversee the crypto and prediction markets; Schwartz: The private sector does not want a hobbled CFTC. There has generally been bipartisan support for a well-funded CFTC. It is underfunded now, and we cannot predict how difficult it will be in the future as responsibilities increase.
Ranking Member Craig (D-MN): What needs to happen with enforcement at the CFTC? Schiffrin: We have seen CFTC enforcement ground to a halt, and that is problematic. If you do not have good enforcement, the protections that are there to prevent fraud and manipulation are not going to do what they are supposed to do.
Representative Lucas (R-OK): Why is having two separate regulators for commodities and securities valuable to consumers? Stump: Often, the distinction between the CFTC and the SEC is misunderstood. They do regulate some of the same entities. There have been suggestions that the two should be merged, but this does not make sense. The CFTC is statutorily mandated to promote innovation. The SEC is tasked with protecting investors, and the CFTC is tasked with maintaining fair markets for all participants.
Representative Lucas (R-OK): I was disappointed to see significant capital penalties on clearing derivatives for end-users in the Basel III proposal. Can you speak about the importance of cross-agency communication between the CFTC and banking regulators? Crighton: Two of the most significant impacts that have reduced the amount of clearing capacity available for commodities end-users have been a lack of margin adequacy and the punitive nature of bank capital requirements. We were disappointed to see the changes that were proposed previously in Basel III. Part of the benefit of interacting with the CFTC as deep derivatives market experts is that we were able to articulate the impact of what that proposed regulation would mean, in particular, the amount of clearing capacity we would be able to provide. With that partnership, we were able to work hand in hand with the banking regulators on what would happen. What was proposed with the Basel III Endgame re-proposal would have increased clearing costs another eighty percent, which would have served to decrease the amount of clearing capacity we provide; Prosser: These markets need capacity not just for a normal Thursday morning, but for major moments of volatility. This FCM capacity issue is real, and we need regulators to work together to make sure we have adequate protections from the FCMs in bankruptcy and all of the things that entails. We need to make sure that we do not put burdens or barriers on those who want to participate in these markets. We need agencies to work together to make sure we have as much capacity for FCMs to clear these derivative products because it matters to end-users, particularly the small end-users that do not have the market power to find other FCMs.
Representative Costa (D-CA): Given the CEA’s framework and its five prohibitions, why are we allowing people to bet on things such as sporting events or wars? Schwartz: The statute gives the CFTC discretion on which contracts can be listed. The CFTC has the authority to see if it is contrary to public interest to have that contract trading on an exchange. I do not have any doubt that these products meet the definition of swap and are within the CFTC’s exclusive jurisdiction. I do not think Congress intended state gambling regulators to have a say in what is allowed to trade on a DCM.
Representative LaMalfa (R-CA): Does the CFTC have the capacity under its current staffing and regulatory authority to oversee markets that are betting on sports events and other casino-style games? Schwartz: I do not think the CFTC has adequate resources now. Expanding its remit without expanding capacity is not helpful; Stump: This provision was included in the Dodd-Frank Act. At the time, there was very little interest in these sorts of event prediction markets. These markets have developed since then, and the CFTC is tasked with overseeing these types of prediction markets to the extent they are put on CFTC-regulated exchanges. The statute currently provides the CFTC with a review of these contracts.
Representative Salinas (D-OR): How does leaving the CFTC without a full board, combined with the mass firings, weaken enforcement, and does it create opportunities for bad actors to slip through the cracks? Schiffrin: If you do not have a CFTC with the resources it needs and a full complement of Commissioners, then it is not going to be able to do its job; Schwartz: When the Commission was at full capacity and had Commissioners with different, balanced expertise, as the statute requires, it strengthened deliberations to have perspectives that come from those places; Crighton: FIA believes a full Commission is important, and it is good for market safety and soundness; Prosser: One of the benefits of having a full Commission is the diversity of viewpoints that all the Commissioners bring. As we nominate more Commissioners, we certainly hope one of them is deeply involved in agriculture and agriculture issues so they can stand out and support us.
Representative Scott (R-GA): What are the challenges to the Commission in fulfilling its mandate to promote responsible innovation? Stump: I think Congress had the foresight when the agency was created in 1974 to include a research and information program. That language is slightly outdated now and could use an update. When we are talking about technology, the private sector is where the most beneficial information would be for the CFTC to conduct research. There are occasions where federal procurement laws have prevented them from doing so.
Representative Scott (R-GA): If a state regulator were able to unilaterally determine that a transaction on a CFTC-registered DCM was subject to state law, what would be the consequences of state regulators also exercising concurrent jurisdiction over an exchange, a clearinghouse, or FCM for that transaction? Schwartz: That was a question that was asked back in 1974, and Congress answered it with exclusive jurisdiction for the CFTC. I do not think state preempting federal regulation is workable.
Representative Jackson (D-IL): What should the CFTC ask for in terms of funding? Prosser: From our side, as we look at all the new innovations that are happening, it is not our place to say if it is good or bad, but I think it is better to have that debate with a fully staffed and fully funded Commission in place to make sure that all of the participants get to have input, rather than to have a decision made in a vacuum.
Representative Jackson (D-IL): Are there particular areas where you think there is a deficiency in the agency, and is there a sense that the Commission has a plan to address those deficiencies? Schwartz: You must ensure the agency has the expertise the statute requires and that it is adequately staffed. The shedding of staff has included some of the most experienced and knowledgeable people at the agency. It will be important to fill those positions with people who have the talent, education, and experience, especially before crypto legislation is released and while these products and markets continue to expand.
Representative Johnson (R-SD): Is the self-certification framework working as intended over time? Stump: I am a huge fan of the self-certification process. Without the self-certification process, the task Congress has given the CFTC to promote innovation might be hindered. The self-certification process permits a more expedited process for various new products to come to market. I want to dismiss the fallacy that this process is without any oversight.
Representative Brown (D-OH): What specific new resources must Congress authorize in order to prevent the agency from putting consumers and producers at risk? Schiffrin: Congress needs to ensure that if the CFTC is going to be tasked with additional responsibilities, ensuring commodity prices are fair and set by supply and demand, it also has the resources needed to properly oversee things like the crypto and prediction markets. That would require tremendous new sources of funding and staffing.
Representative Brown (D-OH): What are the risks to clearinghouse stability today if the agency’s resources and staffing do not grow alongside its mission? Crighton: From a risk management perspective, we are focused on the framework under which these contracts may be margined and how all the financial resources at the clearinghouse are brought to bear in the event of a default or extreme stress situation. We want to make sure we are thinking about, particularly on clearinghouses, where there is an intersection of end-users as well as retail investors in these event-type contracts, segregating the default fund and segregating the resources that backstop those contracts. Insulating those two very distinct pools of risk is a critically important step.
Representative Baird (R-IN): How does regulatory uncertainty in biofuels policy translate into volatility and increased risk for farmers and other commercial end-users? Prosser: Markets are pretty good at pricing risk, and uncertainty increases risk, and that cost flows through to either the consumer or the producer. With biofuel policy, the possibility of it happening or not happening needs to be priced into these markets, and this results in worse prices for farmers and increased volatility in derivatives markets. The political process we have gone through around renewables has created uncertainties that have thrown soybean oil, soybean meal, and soybeans into that arena where uncertainty was priced in a negative way.
Representative Figures (R-AL): Is the Commission best set up for success given the current status of staffing and structure? Stump: The CFTC has always punched above its weight, and I am certain they will continue to do so; Prosser: One Commissioner is not enough. We need a full Commission with all their various backgrounds and interests, especially in these markets that continue to evolve and innovate. We would like some Commissioners to have an agricultural background; Crighton: FIA supports a fully staffed Commission. We think the diversity of expertise and opinions will create durable policy for safety and soundness.
Representative Messmer (R-IN): As a commercial end-user, can you explain the role of futures and options markets in helping agricultural producers plan and manage seasons of market volatility and margins? Prosser: For end-users, the derivatives markets are not an opportunity to speculate. We use them as risk-aversion tools. When a farmer asks us to buy their crop, we will offset that risk in a futures market, therefore stripping off what is a flat price risk and a basis risk, or a freight differential to the delivery point. This allows us a lot more capacity to buy commodities because we are not stuck with the whole price risk. It also allows us to weather extreme price events. The idea of having a functional derivatives market in agricultural commodities allows the industry to price further out, not just for farmers but for consumers.
Representative Messmer (R-IN): What is the CFTC’s unique role in ensuring there is both ground for new industries to innovate and stable footing for commercial hedgers? Prosser: We are most interested in preserving the regulatory environment that we have for our traditional markets. There is going to be a debate about where innovation is going and how it is going to be regulated. 24/7 trading might be adequate for some of the new innovations, but we do not believe it works for our traditional markets. Having a fully funded and fully staffed CFTC would allow us to come to our regulator, lay out the reasons why certain things that might work for crypto, or events do not work for the traditional markets.
Representative Carbajal (D-CA): Does the CFTC have the expertise to regulate the multi-billion-dollar sports gambling market? Schiffrin: I do not think the CFTC has the authority or expertise to regulate sports gambling.
Representative Carbajal (D-CA): Does having only one Commissioner at the CFTC create partisanship within the agency in how it executes its mission? Do you have concerns about whether it remains with only one Commissioner in charge? Schwartz: It eliminates the ability for Commissioners to deliberate, sharpen thinking, and persuade one another.
Representative Moore (R-AL): How do you see the impending market structure legislation advancing the priority of conducting oversight and allowing the market to prosper with cryptocurrency? Stump: I do not think the CFTC or any agency has adequate authority to regulate the non-securities digital asset spot market. This is a point that has been raised repeatedly at the agency. The marketplace is desperate to have such products regulated, and so we should meet that with appropriate authority for the CFTC to regulate the spot market outside of the securities spot market. I think the legislation advancing would provide clearer authority for the CFTC.
Representative Moore (R-AL): What is the right balance for the regulatory environment when it comes to rulemaking to protect participants without being overly prescriptive? What is the right balance of enforcement to weed out the bad actors and not restrict market activity? Schwartz: It is spelled out in the statement of purpose in the statute. If the agency governs according to the mandate, it will get the right balance; Prosser: I do not know exactly the right balance. I think these markets will innovate faster than we expect them to, and having a CFTC that is there to meet those challenges is terribly important.
Representative Davis (R-NC): What happens if Congress moves forward with some sort of digital asset regulatory framework agreement, and the CFTC is not authorized? Stump: Technically, the authorities and responsibilities of the agency continue. The net effect is that the Commission and staff are left with only enforcement authority, which does not provide appropriate oversight.
Representative Vasquez (D-NM): Is the CFTC regulating gambling today? Schwartz: This is an old issue. It used to be illegal in many states to trade futures contracts on corn or wheat, but we have decided that the CFTC has full federal preemption. There is a long-running debate on where the line should be between the states and the federal government on derivatives trading, and this is just the latest iteration of that. Policymakers should look at it through the same lens.
Representative Mann (R-KS): Since commodity, futures, and swaps markets are global markets, what is the importance of global regulators being able to coordinate, share information with, and learn from one another as they surveil and regulate these markets? Schwartz: Things like systemic risk and wrongdoing do not recognize international borders. On the other hand, there are differences between localities. The CFTC’s jurisdiction is primarily domestic, so it is critical that they are cooperating with foreign regulators and sharing information.
Representative Mann (R-KS): What is the importance of convergence in the work that Scoular does? Prosser: The idea that these derivatives derive their value from a real commodity, the things we make food and fiber out of, is central to why they work as risk mitigation tools. This is why the Commission has a role to play in the physical markets. As we come into delivery, the Commission helps us reach a benchmark price that reflects the physical price of the commodities that these represent. This process causes them to become integral hedge tools for producers as well as consumers.
Representative Budzinski (D-IL): How can reauthorization promote stability and sound risk management as margin and collateral requirements continue to evolve while also accounting for the liquidity constraints faced by smaller agricultural firms? Crighton: The CFTC can act and engage with us on margin now, but it is incredibly important to reauthorize the agency. Margin is the first line of defense and is the collateral that sits with the FCM to mitigate a risk issue, providing protection for the ecosystem in the event of a default. When margin levels go too low and hit a period of real stress, we find an incredible strain on the system where customers and users have to quickly source cash, which can have a broader destabilizing effect. As margin levels continue to drift lower, one of the most important things to think about is recalibrating what those margin levels are, so they do not drift too low. If you have the ability for more healthy projections, then you can source more stable funding, so you are not sourcing additional cash when everyone else is, and cash is just more expensive. I do not think it is necessarily intuitive when we say higher or stronger margins. The more robust margin regime is one of the right answers, but we think it is because it gives that durability and stability of funding, so you are not raising your costs when you really do not want to.
Representative Budzinski (D-IL): What transparency improvements should Congress prioritize in this reauthorization to better support commercial end-users’ understanding of market conditions and risk? Schiffrin: If the CFTC is going to take on new responsibilities and emerging markets, it needs to make sure that investors in those markets have the disclosures they need to understand the risks. For products that have new and novel risks, like 24/7 trading, prediction markets, or perpetual futures, you need to ensure investors have the disclosures they need to understand those risks; Prosser: There are opportunities for the Commission to provide more transparency about the market and who is buying and selling. We would encourage the CFTC to publish Commitment of Traders (COT) reports more frequently.
Representative Taylor (R-OH): What are some of the consequences of efforts to narrow the definition of a swap? Schwartz: If it were narrowed too far, you could get into a situation where the CFTC would not have the jurisdiction that it needed. There could be systemic risk problems, anti-fraud, or anti-manipulation problems, so this is something Congress and the CFTC need to consider very carefully.