September 28, 2017 / 7:02 PM / 10 months ago

CFTC's Giancarlo signals priorities; focus on swaps, algos, position reporting

NEW YORK (Thomson Reuters Regulatory Intelligence) - The U.S. top commodities regulator has been operating with as few as two commissioners in 2017 and hasn’t had a full slate of five commissioners for nearly three years. Now, finally after some recent confirmations by the U.S. Senate, the commission is nearing its intended size and is now signaling its priorities ahead.

Commodity Futures Trading Commission Acting Chairman Christopher Giancarlo testifies before a Senate Appropriations Subcommittee on Capitol Hill in Washington, U.S., June 27, 2017.

The newly confirmed chairman of the Commodities Futures Trading Commission, Christopher Giancarlo, went to Europe in September for a series of meetings and speeches(here) with his European counterparts where he voiced concerns about the global swaps market and international and U.S. regulations. Giancarlo also spoke of some of the agency's priorities that lay ahead.

Below we recap some of this year’s accomplishments by the staff-depleted CFTC and also review priorities set forth by Giancarlo with an emphasis on whether the new makeup and leadership will mark a meaningful change in course for the commission.


Former CFTC Chairman Timothy Massad stepped down in January with the change in presidential administrations to Donald Trump. Until early August the CFTC operated with only two commissioners. Giancarlo moved up from commissioner to act as interim chair while he awaited Senate confirmation after his appointment by Trump.

Commissioner Sharon Bowen, a Democrat appointed by President Barack Obama in June 2014, announced her resignation in June 2017 which would have left the commission with Giancarlo as the sole commissioner, but she agreed to stay on for a few months.

Clearly Bowen was frustrated. She said in her resignation letter(here) that having "just two commissioners makes routine business difficult, but makes important policy decisions almost impossible." She described the commission as "froze in place" while the markets evolved at a rapid pace.

Nevertheless, the CFTC has undertaken several regulatory initiatives, including "Project KISS"(here), an effort to simplify the application of existing CFTC rules, and LabCFTC(, an effort to promote responsible financial technology. The CFTC also has taken an enforcement lead among all regulators with successful cases against "spoofing," a manipulative trading practice where firms quickly cancel orders before execution as they attempt to use such orders to move prices in one direction or another.

The U.S. Senate voted in August to finally confirm Giancarlo as CFTC chairman as well as another Republican and a Democratic commissioner bringing the body up to four commissioners, including the outgoing Bowen, while a fifth and final appointee is still awaiting a vote from the Senate.

Republican Commissioner Brian Quintenz founded Saeculum Capital Management, LLC, and served as its Managing Principal and Chief Investment Officer. Democrat Rostin “Russ” Behnam served as senior counsel to Senator Debbie Stabenow of Michigan, who is the top Democrat on the Senate Agriculture Committee which oversees commodity markets. Another Republican nominated by Trump is Dawn DeBerry Stump. Stump was approved in the Agriculture Committee at the same time as Quintenz and Behnam, but a vote by the full Senate on her nomination likely will be taken up in conjunction with a Democratic nominee to replace Commissioner Bowen in the fall.

The agenda for the replenished commission may not come as a huge surprise, as Giancarlo’s views are pretty well known.


Since taking the helm, Giancarlo has made his ambitions clear to refocus and reinterpret the mission of the regulator.

Giancarlo has championed Project KISS (for “keep it simple stupid”). The review seeks public comments on existing regulations “to make them simpler, less burdensome and less costly.” The public can submit their ideas and comments by emailing

At a Futures Industry Association annual conference in March, Giancarlo outlined his plans(here) to streamline regulation and restructure the CFTC's market surveillance branch. He also unveiled plans to create a "chief market intelligence officer" role to help oversee new trends and technology.

Giancarlo was first appointed to the CFTC in 2014. Throughout his tenure he has been critical of the way the CFTC has implemented many of the new rules for over-the-counter derivatives, commonly referred to as swaps, under a mandate by the 2010 Dodd-Frank law.

“America’s derivatives markets are struggling, in some cases, under the weight of flawed and excessive regulation,” Giancarlo told the FIA. “Our markets today are more fragmented, more concentrated, less liquid and less supportive of economic growth and renewal than in the past. The overly prescriptive regulation of American derivative markets is a part and parcel of the over-regulation of the US economy that thwarts revival of American prosperity.”

Giancarlo also said he would take a more active role as a member of the Financial Stability Oversight Council (FSOC), a body of regulators created by the Dodd-Frank law that reviews large financial firms to determine whether their collapse could pose broad systemic risks.

Giancarlo recently told the Financial Times in London, “As someone who was appointed by both President Trump and President Obama, my position on these markets is not going through sudden change. It’s actually quite consistent.”


One of Giancarlo’s top concerns has been the rules for swap execution facilities (SEFs), more precisely, a need to reform swaps trading and SEFs, particularly the harmonization of rules with European SEFs. Without it, U.S. traders and banks could not use European swaps venues.

The swaps execution rules he envisions “will be equivalent and suitably consistent with European regulations. I’m not unduly concerned that we won’t be able to achieve equivalence,” he told the Financial Times.

Speaking at a forum in Switzerland earlier this week(here), Giancarlo said any unilateral change to a hard-fought 2016 agreement on central clearing counterparties (CCPs) equivalence between the U.S. agency and the European Commission (EC) would be viewed as a sharp break in cooperation.

In June the EC proposed an amendment to regulate third-country CCPs, including a process to introduce a CCP location policy. With much of euro-denominated clearing taking place in London, the Commission is considering an increase its oversight of clearing houses based outside the EU, and the introduction of a “location policy” to force them to shift their activities.

The amendment comes in the wake of the UK’s Brexit referendum.

“I am respectful of the fact that this is an important regulatory policy development that needs to be made with care by European officials. I fully understand that Brexit raises new and challenging issues for how Europe regulates its financial markets,” Giancarlo told the conference.

“Nevertheless – whatever the outcome of the Brexit negotiations and the EU’s internal discussions about how to supervise CCPs – I would consider any unilateral change by EU authorities to the CFTC-EC Equivalence Agreement to be a violation of trust and cooperation between the U.S. and Europe,” he said.


The issue of automated trading has been a keen interest of Giancarlo. When Giancarlo was a commissioner he voiced concerns about “Reg AT,” a proposed regulation of automated trading programs. He opposed one provision which would allow the CFTC to seize secret computer codes without a subpoena.

The CFTC still intends to go forward with Reg AT in “some form” to “better keep pace with the dramatic expansion of algorithmic trading in our markets,” he said.


Another unfinished rule relates to positions in commodity futures. Giancarlo was skeptical of earlier versions of the rule. However, he has indicated that he intends to push a revised version that relies on better data and allows sufficient exemptions for commercial traders using futures to hedge risks.

The need for such reform and clarity can be seen in recent cases and actions by the agency.

A case settled in June involving a large, Hong Kong-based purchaser of cotton is a good example of the importance of accurate position reporting.

The CFTC announced(here it had settled charges against Huafu HK Co. Ltd., a corporation based in Hong Kong, for failing to file CFTC Form 304 reports, reporting its call cotton purchases and sales when it held or controlled at least 100 cotton futures positions

Huafu is public listed company in China, and its subsidiary, Huafu Top Dyed Melange Yarn Co., Ltd. is the world’s largest supplier and manufacturer of the melange (mixed-fiber) yarn industry. According to the CFTC, Huafu is a cotton merchant or dealer, and whenever cotton merchants or dealers hold or control at least one hundred (100) cotton futures positions, they are required to file weekly CFTC Form 304 reports on their call cotton purchases and sales.

The CFTC said in its settlement, that on 78 occasions Huafu held or controlled at least 100 cotton futures positions, but failed to file the required CFTC Form 304 reports.

Huafu consented to the order and, without admitting or denying the findings, agreed to pay a fine of $250,000. Huafu also agreed to adopt and maintain internal controls to ensure compliance the regulations and other CFTC filing requirements. This includes designating a specific individual with responsibility for filing CFTC Form 304.

The Huafu case shows the need for accurate and timely position reporting by market participants. Whether Giancarlo intends to make reporting easier or offer exemptions for firms like Huafo remains to be seen.

In August the CFTC Division of Market Oversight granted time-limited no-action relief(here) to market participants from certain exemption and notice-filing requirements related to the aggregation of positions. Previous temporary relief from filing requirements was set to expire on August 14, 2017.

In response to requests for relief submitted by the Securities Industry Financial Markets Association (SIFMA) and the Futures Industry Association, the CFTC division agreed not to pursue enforcement action against market participants for failure to comply with CFTC Rule 150.4(c)(here notice-filing requirements (regarding compliance with CFTC Rule 150.2 ("Position Limits")(here in certain scenarios.

The market oversight division determined that granting relief from the filing requirement would ease compliance burdens on market participants and also granted relief in areas related to independent account controllers where a person has granted discretionary trading authority but does not meet the definition of an eligible entity. It also granted relief in the areas of “substantially identical trading strategies” and the associated aggregation rules related to position limits.

The relief outlined in Staff Letter 17-37(here, will remain in effect until August 12, 2019. Starting on August 14, 2017, market participants were required to comply with the position limits and aggregation requirements in CFTC Rules 150.2 and 150.4, except as otherwise provided in the Staff Letter.

Future rule changes in the area of position reporting will likely take time and not be an easy task for the agency as can be seen in the few examples above. In the interim compliance departments must stay abreast of the developments but most importantly remind themselves that the current rules and requirements are still valid and enforcements such as the Huafu case are occurring.

The same holds true for spoofing, automated trading, and every other area of compliance. Although a new chairman and commission is now mostly in place and their views and priorities are becoming better known, compliance departments should remain diligent with their compliance efforts as future changes are likely to take time and talk of relief is just that until it is actually codified by the regulator.

(Todd Ehret is a Senior Regulatory Intelligence Expert for Thomson Reuters Regulatory Intelligence. He has more than 20 years’ experience in the financial industry where he held key positions in trading, operations, accounting, audit, and compliance for broker-dealers, asset managers, and hedge funds.)

This article was produced by Thomson Reuters Regulatory Intelligence and initially posted on Sept. 15. Regulatory Intelligence provides a single source for regulatory news, analysis, rules and developments, with global coverage of more than 400 regulators and exchanges. Follow Regulatory Intelligence compliance news on Twitter: @thomsonreuters

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