FIA CEO Weighs-in on the State of the Derivatives Industry and Proposals for Reform
In testimony on CFTC reauthorization, Futures Industry Association ("FIA") CEO Walt Lukken described the healthy state of the derivatives market while raising concerns about market structure integrity, customer fund protection and the impact of new bank capital requirements.
Before the House Agriculture Committee Subcommittee on Commodity Markets, Digital Assets and Rural Development, Mr. Lukken reported that "the futures and options markets have grown significantly," with total trading volume on CFTC-regulated exchanges in the US nearly doubling from 3.4 billion futures and options contracts in 2008 to 6.6 billion in 2023. He described how the market is safer since 2010 when the "CFTC implemented a new set of clearing requirements for standardized over-the-counter interest rate and credit default swap instruments." He said the markets were more resilient, pointing to how they weathered the financial crisis and the Covid epidemic, and that the markets were more global. He applauded the Committee for engaging "policymakers in other jurisdictions to ensure a level playing field, reduce market fragmentation and improve collaboration between the CFTC and its international counterparts." Further, he said the markets were more innovative, highlighting "the pace of new and novel contracts being listed" today in crypto currencies, crude oil and biofuels, among others.
On trends in market structure, Mr. Lukken noted that more exchanges and clearinghouses are "embedding an FCM [futures commission merchants] within their legal structure." He warned that "collapsing the existing multi-tiered ecosystem—with its inherent checks and balances and customer protections—could undo the strong foundation of the listed derivatives markets and, ultimately, put customers at risk." He said that regulators must address the "conflicts of interest within vertically integrated structures."
On emerging technology and AI, Mr. Lukken urged the agency to take a "technology-neutral" approach and focus on achieving regulatory outcomes, rather than attempting to regulate the technology itself, moving forward."
On the Federal Reserve's Basel III proposal, he argued that the reforms would "harm the CFTC-regulated derivatives markets and the end-users that rely on them." He commended CFTC Chair Rostin Behnam for "emphasizing the need to 'create incentives' for clearing and committing to working with his prudential regulators to ensure new bank capital rules are not 'creating unnecessary barriers to clearing and clearing services for end users.'"
On the SEC final rule on Treasury Clearing, he recommended that the CFTC and SEC work together "to ensure that the Treasury clearing mandate does not conflict with CFTC regulations." He also criticized the timing for implementation of the new rule, saying that "implementing this mandate before June 2026 will be a heavy lift, especially considering the importance of the Treasury and repo markets to the funding of the government and financial markets. Regulators will need to be flexible and aligned with industry to ensure realistic timetables."
On other matters, Mr. Lukken recommended that legislators (i) clarify the definition of "customer property" in FCM bankruptcies; (ii) expand educational resources to small and midsize farmers to help "the 2% that feed the 98%;" and (iii) improve the CFTC's research and development capabilities so that the CFTC has "transaction authority to engage in public-private partnerships with financial technology developers."
On CFTC reauthorization, Mr. Lukken stated that a broad bill is not needed now: "rather, a bill that provides a Congressional stamp of approval on this agency's important mission and legal authority, and that acknowledges the CFTC's proven track record through a period where we have seen record market volatility, is the best approach."