CFTC Chair Behnam Defends Record, Seeks Reauthorization in Light of Evolving Markets

At an oversight hearing before the U.S. Senate Committee on Agriculture, Nutrition, and Forestry, CFTC Chair Rostin Behnam identified areas for improvement within the CFTC regulatory framework to address the "dislocation" between regulation and technological innovation.

CFTC Chair Behnam's Testimony

Mr. Behnam underscored the resilience of the derivatives market in the face of market turmoil caused by external factors, such as COVID-19 and Russia’s invasion of Ukraine. Mr. Behnam highlighted the following key priorities going forward:

• risk management and resilience for intermediaries, exchanges and derivatives clearing organizations;
• streamlined practices involving cybersecurity and third-party vendors;
• strengthening customer protections;
• promoting efficiency and innovation initiatives;
• enhancement of reporting and data policy; and
• coordination among federal and state regulators to address duplicative regulatory requirements on a domestic and international level.

Mr. Behnam described gaps in current CFTC regulations and stated that existing regulation could not have prevented the recent cyber-related incident at ION Cleared Derivatives (see previous coverage). He explained that the resulting impact caused FCMs to be prevented from submitting timely and accurate positions data to the CFTC, which in turn caused delays in releasing Commitment of Traders Reports by the CFTC. Mr. Behnam said that he has asked the CFTC Market Participants Division to consider regulations to address cybersecurity risks involving third-party service providers.

Mr. Behnam described current efforts to address risk posed by climate change to the derivatives market. He stated that the Climate Risk Unit is considering ways in which the CFTC can support a shift to a low-carbon economy, both domestically and internationally.

On CFTC enforcement, Mr. Behnam emphasized the importance of penalties being "appropriately calibrated" to (i) penalize bad actors and (ii) dissuade fraud and manipulation throughout the commodity derivatives market. Mr. Behnam asserted that the CFTC does not have the authority to regulate cash digital commodity markets, however, he said that the CFTC has been using its enforcement authority as a tool to act on fraud or manipulation uncovered within the market. He asserted, however, that enforcement is not a replacement for comprehensive regulation that would enable the CFTC to "establish market structures and regulatory barriers, guardrails, and guidance that would prevent fraud before it happens, and fully deploy transparency and surveillance tools to see fraud when it does occur."

Notably, Mr. Behnam described Ether and stablecoins as commodities in his oral testimony (see here).

Statements from Senate Committee Members

U.S. Senator Debbie Stabenow (D-MI) focused her attention on cybersecurity threats in light of the digital transformation of the U.S. financial system and the role the CFTC could play to address those threats. Ms. Stabenow stated that while crypto assets promise an accessible way to speculate financial markets, she described them as "riddled with fraud." She stated that although financial technologies can bring greater efficiencies, she called on the CFTC to protect the derivatives market against the vulnerabilities new technologies expose, rejecting criticism that the CFTC was too small to take on more responsibility.

U.S. Senator John Boozman (R-AR) applauded the "gold-standard" set by the CFTC for its "resilient" futures market and regulatory framework. Mr. Boozman said that the CFTC deserves appropriate funding to effectively continue to regulate, but asserted that it should not come from an increase in user fees. He warned that if this were the case, agriculture end-users would experience the impact of user fees and this could ultimately cause a reduction in liquidity for farmers. Mr. Boozman also highlighted the need for greater federal oversight in regulating digital commodity markets and implementing adequate safeguards.