INTERVIEW: U.S. derivatives regulator engages 'fintech' world seeking better oversight, compliance

NEW YORK (Thomson Reuters Regulatory Intelligence) - The U.S. Commodity Futures Trading Commission has taken a lead among fellow American regulators in its “LabCFTC” initiative to engage emerging fintech and regtech companies. The effort seeks to enhance the agency’s oversight of commodity and derivatives markets, but also to make compliance and regulatory reporting more effective for the industry participants.

Some of Bitcoin enthusiast Mike Caldwell's coins are pictured at his office in this photo illustration in Sandy, Utah, January 31, 2014.

The Lab, launched last month by Acting Chairman Christopher Giancarlo, is open for business, with headquarters in New York City, and a core team of three who are already receiving inquiries from technology firms in the U.S. and abroad.

“We’ve had inbound communications from New York, around the country, and around the world,” Jeffrey Bandman, Fintech Advisor for the CFTC, told Regulatory Intelligence in an interview last week. In a surprise announcement on Monday, Bandman said he was stepping down from his role as fintech advisor to take a position in the private sector.

“We’ve had interest from innovators who want to learn more about the lab and who have technology they want to show us, as well as from those who want to understand more about how the program functions,” said Bandman.

He said the CFTC’s focus for the effort would be on better understanding physical markets, real-time surveillance, and reporting.

While the New York-based Lab is the main conduit for the agency’s outreach to the fintech and regtech world, Bandman said the resources and expertise across the agency would be involved in future projects with promising potential for the regulator.

“While we made New York the focal point it’s very important that from the outset there is engagement by the staff, a larger group of contributors in all offices of the CFTC that reflects different subject matter expertise,” he said.

“What I would hope is that through LabCFTC we can learn more about the capabilities of emerging tech to help us,” he added.


The CFTC’s effort comes against an uneven regulatory landscape with regard to fintech firms and how to engage them. On the banking side the Office of the Comptroller of the Currency has established its own “Office of Innovation.” While the office will not provide the sort of “fintech sandbox” seen in the UK and other countries that allows banks and fintech firms to develop products without fear of running afoul of regulators, it will allow the OCC and the banks to experiment with new technology before it hits the market.

In addition, the bank regulator late last year announced a “special purpose” banking charter for fintech firms(here), an effort that has been applauded in some quarters while sharply criticized in others, particularly from U.S. state banking regulators who see the OCC charter as a threat to their authority while also making the regulatory requirements for fintech startups more complex and costly.

Federal Reserve officials, meanwhile, have been relatively cautious. Fed governor Laurel Brainard, said in a recent speech(here) that the OCC's fintech charter proposal “raises interpretive and policy issues for the Federal Reserve regarding whether charter recipients would become Federal Reserve members” or have access to the Fed’s accounts and services, such as direct access to payment systems.

More broadly, Brainard said “it is still too early to have any confidence that we know which fintech innovations will prove to be the most long-lasting or widely adopted.”

On the securities side, the Securities and Exchange Commission has also treaded gingerly. Late last year the agency held its first “fintech forum,” bringing together experts from the field and internally to discuss disruptive technologies such as blockchain. It has also established a “Distributed Technology Working Group” to build expertise and identify so-called risk areas. But since then there has not been much public activity by the regulator.


Where could the agency benefit from innovation? Bandman outlined three broad areas where he saw scope for applying new technologies: physical commodities markets, market surveillance and regulatory reporting.

For physical markets, where there is little if any regulatory oversight, applying technologies such as satellite imaging and sensors might give the agency a better view over possible market supply conditions in the roughly 40 commodities they oversee, such as oil, wheat and soybeans, in financial derivatives.

“Our ability to understand the underlying physical commodity markets could be transformational,” said Bandman. “There is a mix of technologies that is providing information on physical commodity markets, including satellite data and sensors.”

Having a better handle on conditions in the physical markets could serve a twofold purpose: spotting possible systemic market development that would lead to greater risk, as well identifying activities by market participants that involve manipulation.

“If a Texas farmer can harvest a field of wheat in the pitch black of night using GPS satellite navigation, vehicle telemetry and aerial drone technology, surely it is high time for the CFTC to take a its own steps toward digital transformation” Giancarlo said in an emailed comment from the agency to Regulatory Intelligence. “We want LabCFTC to bridge the gap from where we are today to where we need to be – a 21st century regulator for 21st century digital markets.”

Bandman added: “One of our missions is to ensure market integrity. As we’ve seen there can be activity in the physical market where the payoff is in the derivatives market or vice versa. . . In terms of accomplishing that mission this is one area where there is tremendous potential.”


The frenzy to apply distributed ledger technology (DLT), or blockchain, in various parts of the financial services offers transformational opportunities in two other areas of regulatory oversight -- market surveillance and regulatory reporting. Bandman sees DLT potentially providing a real-time insight into financial derivatives markets such as swaps that allow for greater detection and surveillance of fraudulent activities, as well identification of the build-up of imbalances that might pose systemic risk.

“There is a lot of activity in the U.S. and around the world by innovators, academic institutions and researchers who are looking at transactions as they occur in real-time and putting the transactional information on the blockchain,” said Bandman, who cautioned that the work was more “potential” at the moment than real.

“The ability to see intra-day or real-time risks as they unfold in real-time would be transformational,” he said. A critical part of reaching such a state would be ensuring the quality of the underlying transactional data, a so-called “golden copy,” that would be used by regulators in monitoring risks in the marketplace.

But the benefits would accrue not only to regulators.

“If the data the regulator is relying on is the same as the industry is also using…then there are clear benefits for the registrants,” Bandman said. “Because that’s the data they are using in their business processes and they will be making sure that data is correct.”

“I think it has real potential to help everyone,” he added. “I don’t think we’re there tomorrow, but it is a transformational opportunity.”

(Henry Engler is a North American Regulatory Intelligence Editor for Thomson Reuters Regulatory Intelligence. He is a former financial industry compliance consultant and executive, and earlier served as a financial journalist with Reuters. Email Henry at