CFTC Commissioner Giancarlo Discusses Six Mega-Trends Facing Financial Markets

CFTC Commissioner J. Christopher Giancarlo identified 6 mega-trends facing 21st century financial markets. His comments were drawn from a guest lecture delivered on December 1, 2015 at Harvard Law School and recently released in a podcast.

Commissioner Giancarlo identified the following "overarching challenges":

Cyber threats. "Unfortunately, cyber-hostilities will not end any time soon. They will be relentless for . . . years to come. As mega-trends go, cyber-risk is the number one threat to 21st century financial markets. . . . As market leaders and regulators, we must make it our first priority in time and attention. We must leave no step untaken or precaution unavailed to thwart cyber-destruction of the world’s financial markets."

Disruptive technology. "[E]xponential digital technologies are rapidly changing the very nature of human identity, work, leisure and society. . . . The only effective way for a regulatory agency to stay abreast of the rapid advances of trading automation is to be informed through an ongoing, bottom-up process."

Giancarlo voiced the following concerns regarding proposed rules for the registration and regulation of automated trading: "First, the apparent window-dressing of requiring risk controls and testing that are already widely adopted by industry. Second, the high cost and burdens the rule places on small market participants. And third, the rule’s inconsistencies regarding what firms must comply with it."

Central bank (government) intervention. "[The Federal Reserve] has become the multi-trillion dollar 'Washington Whale'. . . . The Fed is having an increasingly direct and immediate impact on [all] markets, from corporate bonds to equities and foreign exchange rates, to developing nations’ sovereign debt. It has reduced the heterogeneity of the investor base, herding it into one-way bets on anticipated changes in Fed policy rather than traditional fundamental credit or value analysis.

Market illiquidity. "In trying to stamp out risk, global regulators are instead harming trading liquidity. . . . The question that must be asked is whether the amount of capital bank regulators are causing financial institutions to take out of trading markets is at all calibrated to the amount of capital need to be kept in markets to support market health and durability. I understand how prudential regulators want banks to limit trading capital to limit their insolvency risk. But what is missing is any analysis of how much trading capital is appropriate to limit broad liquidity risk. Those of us with direct responsibility of overseeing financial markets need to ask that question and demand that analysis, even if bank prudential regulators will not. Once again, Dodd-Frank provides no answers."

Market concentration. "[A] wave of market consolidation has taken place across the financial landscape, concentrating the provision of essential market services to fewer and fewer institutions. . . . Unfortunately, global financial markets are now undergoing a pronounced reduction in the bio-diversity of market service providers, with deleterious effect on market safety and soundness. Market regulators must find a way to reverse this trend, that threatens the systemic safety that Dodd-Frank was meant to preserve."

Deglobalization. "[T]he 2008 financial crisis and the political and response . . . seems to have reversed the course of financial market globalization. . . . [T]here is a fundamental mismatch between [the CFTC's swaps trading] regulatory framework and the distinct liquidity and trading dynamics of the global swaps markets. This mismatch, and the application of the framework worldwide, has caused numerous harms, foremost of which is driving away global market participants from transacting with entities subject to CFTC swaps regulation, resulting in fragmented global swaps markets."

Commissioner Giancarlo concluded: "Regulators and others with responsibility for financial markets must take steps to address these challenges: prioritize cyber-risk resiliency; foster best practices for new trading technologies; counter the distortions caused by central bank market intervention; acknowledge and address the diminishing liquidity in trading markets; and review and reduce the numerous poorly designed rules and regulations that are causing service-provider concentration and market fragmentation."

Commissioner Giancarlo delivered his remarks as part of the Fidelity Guest Lecture Series on International Finance at Harvard Law School, which was previously covered in the Cabinet News.