CFTC Commissioner Bowen Discusses Cross-Border Issues with International Regulators (with Lofchie Comment)

CFTC Commissioner Sharon Bowen delivered remarks at the European Central Bank in Germany. Her focus was on discussions between the CFTC and international regulators, including the European Union.

Commissioner Bowen explained that the discussions included critical areas "where risk can accumulate," such as the "financial highways" of settlement, payment and clearing systems. She stated that while the failure of a clearinghouse is "highly unlikely," it also would be "devastating." According to the Commissioner, risk management protocols "need to be designed and tested with the understanding that they need to be more flexible."

Commissioner Bowen touched on retail foreign exchange markets, arguing that it makes "no sense . . . that retail fx trading is the least regulated part of the over-the-counter swaps market." She said that the NFA has taken "some good initial steps" to increase margin requirements on foreign retail exchange traders, but added that they should be still considered first steps. She also suggested that "retail commodity trading should occur on regulated exchanges, just as retail securities trading does."

On the subject of financial regulation, Commissioner Bowen stated that she is "open to the idea that further steps may be necessary to improve oversight of benchmarks" in the United States. The Commissioner also talked about tools for reducing the risk of manipulation, and focused on the benefits of a robust governance rule that "would ... deter rule-breaking and address risks."

Lastly, Commissioner Bowen stressed that one obstacle to improving liquidity is the lack of a common definition. The Commissioner argued:

[T]he alleged drop in liquidity is not due solely to changes in financial regulations. While the new regulations enacted as part of Dodd-Frank, Basel III, or European Market Infrastructure Regulation (EMIR) may be playing a role in changing liquidity, many participants didn't focus on regulations as being the prime cause for a drop in liquidity. We need more study of this subject, however, and we should be quick about it."

Lofchie Comment: Commissioner Bowen is the second CFTC Commissioner in the past few days to argue that deterioration in the market (or deterioration in market liquidity, in this case) was not due "solely" to regulation. (The other was CFTC Chairman Massad, who said that an exit from the FCM business was not due solely to government regulation.) Certainly, Commissioner Bowen and Chairman Massad are correct in their view that government regulation is but one contributor to market problems. However, it is also important for the government to recognize that the very actions it takes to protect the financial system may have material unintended and negative consequences. We can only begin to develop a system of reasonable government regulation if the government agrees to examine its own actions, as well as the consequences of those actions, as critically as it does the actions of those over whom it exercises power.

See: Commissioner Bowen's Remarks.