CFTC’s Energy and Environmental Markets Advisory Committee to Meet April 10 in Kansas City

Source: US Commodity Futures Trading Commission

CFTC Commissioner Summer K. Mersinger, sponsor of the Energy and Environmental Markets Advisory Committee (EEMAC), today announced that the EEMAC will hold a public meeting from 9:00 a.m. to 12:00 p.m. (CDT) on Wednesday, April 10 at the University of Missouri – Kansas City in Kansas City, Mo. Members of the public may also attend the meeting virtually or in person, if space permits.

At this meeting, the EEMAC will continue its discussion on the federal prudential financial regulators’ proposed rules implementing Basel III and the implications for and impact on the derivatives market. There will also be presentations and discussions on the state of crude oil markets and the future of power markets. Finally, the two EEMAC subcommittees will offer updates on their continued work related to traditional energy infrastructure and metals markets. A formal agenda for this meeting is forthcoming. For agenda updates and more information about this advisory committee, including its members, please visit EEMAC at CFTC.gov.

“The last few EEMAC meetings focused on the metal and mineral markets and the crucial role of those commodities in the transition to renewable energy,” said Commissioner Mersinger. “I am looking forward to the discussion at this meeting about longstanding, traditional energy markets— crude oil and power markets—and how the state of those markets ultimately affect the price of energy and the cost to U.S. consumers.”

Members of the public may watch a live webcast or listen to the meeting via conference call using a domestic or international number to connect to a live, listen-only audio feed. People requiring special accommodations to attend the meeting because of a disability should notify Lauren Fulks, the EEMAC Secretary, at (816) 787-6297 or [email protected].
 

What:

Energy and Environmental Markets Advisory Committee Meeting

Location

(In-person/virtual):

University of Missouri – Kansas City

Student Union, Room 302

5100 Cherry Street

Kansas City, MO 64110

 

*Virtual instructions below

 

When:

 

Wednesday, April 10, 2024

9:00 a.m. – 12:00 p.m. (CDT)

 
Viewing/Listening Instructions: To access the live meeting feed, use the dial-in numbers below or stream on CFTC.gov. A live feed can also be streamed through the CFTC’s YouTube channel. Call-in participants should be prepared to provide their first name, last name, and affiliation, if applicable. Materials presented at the meeting, if any, will be made on CFTC.gov.
 

Instructions:

Domestic Toll-Free Numbers:

 

Domestic Toll Numbers:

 

1-833-568-8864 or 1-833-435-1820

+1 669 254 5252 US (San Jose)

+1 646 828 7666 US (New York)

+1 646 964 1167 US (US Spanish Line)

+1 669 216 1590 US (San Jose)

+1 415 449 4000 US (US Spanish Line)

+1 551 285 1373 US (New Jersey)

International Numbers:

International Numbers

Webinar ID:

 

Passcode:

160 927 5439

 

339801

Members of the public can submit written statements in connection with the meeting by April 17, 2024. Submit public comments at CFTC.gov. Follow the instructions for submitting comments through the Comments Online process on CFTC.gov. If you are unable to submit comments online, contact Lauren Fulks, EEMAC Secretary, via the contact information above to discuss alternate means of submitting your comments. Any statements submitted in connection with the committee meeting will be made available to the public, including publication on CFTC.gov. Written statements should have “Energy and Environmental Markets Advisory Committee” as the title on any such statement.  

There are five active Advisory Committees overseen by the CFTC. They were created to provide advice and recommendations to the Commission on a variety of regulatory and market issues that affect the integrity and competitiveness of U.S. markets. These Advisory Committees facilitate communication between the Commission and market participants, other regulators, and academics. The views, opinions, and information expressed by the Advisory Committees are solely those of the respective Advisory Committee and do not necessarily reflect the views of the Commission, its staff, or the U.S. government.

CFTC’s Energy and Environmental Markets Advisory Committee to Meet April 10 in Kansas City

Source: US Commodity Futures Trading Commission

CFTC Commissioner Summer K. Mersinger, sponsor of the Energy and Environmental Markets Advisory Committee (EEMAC), today announced that the EEMAC will hold a public meeting from 9:00 a.m. to 12:00 p.m. (CDT) on Wednesday, April 10 at the University of Missouri – Kansas City in Kansas City, Mo. Members of the public may also attend the meeting virtually or in person, if space permits.

At this meeting, the EEMAC will continue its discussion on the federal prudential financial regulators’ proposed rules implementing Basel III and the implications for and impact on the derivatives market. There will also be presentations and discussions on the state of crude oil markets and the future of power markets. Finally, the two EEMAC subcommittees will offer updates on their continued work related to traditional energy infrastructure and metals markets. A formal agenda for this meeting is forthcoming. For agenda updates and more information about this advisory committee, including its members, please visit EEMAC at CFTC.gov.

“The last few EEMAC meetings focused on the metal and mineral markets and the crucial role of those commodities in the transition to renewable energy,” said Commissioner Mersinger. “I am looking forward to the discussion at this meeting about longstanding, traditional energy markets— crude oil and power markets—and how the state of those markets ultimately affect the price of energy and the cost to U.S. consumers.”

Members of the public may watch a live webcast or listen to the meeting via conference call using a domestic or international number to connect to a live, listen-only audio feed. People requiring special accommodations to attend the meeting because of a disability should notify Lauren Fulks, the EEMAC Secretary, at (816) 787-6297 or [email protected].
 

What:

Energy and Environmental Markets Advisory Committee Meeting

Location

(In-person/virtual):

University of Missouri – Kansas City

Student Union, Room 302

5100 Cherry Street

Kansas City, MO 64110

 

*Virtual instructions below

 

When:

 

Wednesday, April 10, 2024

9:00 a.m. – 12:00 p.m. (CDT)

 
Viewing/Listening Instructions: To access the live meeting feed, use the dial-in numbers below or stream on CFTC.gov. A live feed can also be streamed through the CFTC’s YouTube channel. Call-in participants should be prepared to provide their first name, last name, and affiliation, if applicable. Materials presented at the meeting, if any, will be made on CFTC.gov.
 

Instructions:

Domestic Toll-Free Numbers:

 

Domestic Toll Numbers:

 

1-833-568-8864 or 1-833-435-1820

+1 669 254 5252 US (San Jose)

+1 646 828 7666 US (New York)

+1 646 964 1167 US (US Spanish Line)

+1 669 216 1590 US (San Jose)

+1 415 449 4000 US (US Spanish Line)

+1 551 285 1373 US (New Jersey)

International Numbers:

International Numbers

Webinar ID:

 

Passcode:

160 927 5439

 

339801

Members of the public can submit written statements in connection with the meeting by April 17, 2024. Submit public comments at CFTC.gov. Follow the instructions for submitting comments through the Comments Online process on CFTC.gov. If you are unable to submit comments online, contact Lauren Fulks, EEMAC Secretary, via the contact information above to discuss alternate means of submitting your comments. Any statements submitted in connection with the committee meeting will be made available to the public, including publication on CFTC.gov. Written statements should have “Energy and Environmental Markets Advisory Committee” as the title on any such statement.  

There are five active Advisory Committees overseen by the CFTC. They were created to provide advice and recommendations to the Commission on a variety of regulatory and market issues that affect the integrity and competitiveness of U.S. markets. These Advisory Committees facilitate communication between the Commission and market participants, other regulators, and academics. The views, opinions, and information expressed by the Advisory Committees are solely those of the respective Advisory Committee and do not necessarily reflect the views of the Commission, its staff, or the U.S. government.

Opening Remarks of Commissioner Kristin N. Johnson: The South African Reserve Bank Fintech Summit

Source: US Commodity Futures Trading Commission

  1. Introduction

Good morning. It is my pleasure to join you today for the South African Reserve Bank’s Fintech Summit. I would like to thank everyone who worked tirelessly to organize the event. I am particularly thankful for the efforts of Lyle Horsley, Divisional Head- FinTech of the South African Reserve Bank. The remarks that I will share reflect my opinion and not the views of the Commission.

I would like to focus my remarks on a set of twin issues emerging in financial markets and the relevant implications. My remarks intimate that there are a number of novel financial products and new and emerging technologies, but certain products, market structures and technologies merit careful consideration.

First, the Summit rightly focuses on the development of crypto assets as an issue on the global financial markets landscape. In my remarks, I’ll explore the U.S. regulatory landscape. In addition, I will explore the Commodity Futures Trading Commission’s (CFTC or Commission) crypto-enforcement agenda.

Second, I agree that artificial intelligence, a technology long integrated in financial markets for predictive pricing, risk mitigation, and enforcement surveillance and in other pattern-detection contexts has evolved. As the agenda for today’s program reflects, the transition beyond reinforcement learning to generative artificial intelligence represents a marked shift. Employing generative AI models in contexts beyond natural language processing may present challenges for existing regulation. These challenges may amplify risks in both traditional financial markets and decentralized markets.

Finally, the development of crypto assets in certain sectors of the economy may create unique concerns regarding market integrity and, without sufficient guardrails, may impede the successful development of the market. Specifically, for the U.S. CFTC, I am thoughtful about the development of tokenized environmental commodities, namely the tokenization of voluntary carbon credits (VCCs). Let’s tackle each of these in turn.

I am hopeful that my presentation and the presentations over the course of today will lead to generative conversations, effective enforcement of existing authority, and the thoughtful development of innovative regulatory policy that addresses emerging financial products and technologies.

  1. Regulating Novel Financial Products and Market Structures

It is an honor to work with the incredibly talented staff of the CFTC and my fellow Commissioners. April 15th marks the 50th anniversary of the Commission.

The 50th Anniversary of the CFTC

The Commission was established pursuant to the Commodity Futures Trading Commission Act of 1974, which Congress passed and President Gerald Ford signed into law in October 1974. Congress established the CFTC as an independent federal agency. On April 15, 1975, four of the first five CFTC members, including the CFTC’s first Chairman, were sworn in.

The CFTC initially conducted its business in the cafeteria of the Department of Agriculture. The agency now has more than 700 employees at its headquarters in Washington, D.C. and three regional offices in New York, Kansas City, and Chicago. The Commission, and its dedicated employees, endeavor to carry out the mission of the Commodity Exchange Act (CEA)—the Commission’s enabling statute.

In the 1980s, market participants developed a novel over-the-counter (OTC) swaps derivatives or swaps market featuring instruments that shared characteristics with existing futures contracts and had similar economic purposes. Notwithstanding the rapid, exponential growth in the swaps market, Congress exempted certain OTC derivatives from the scope of the CEA, subject to certain conditions.

As a result of the deregulation of the swap markets, for a time, the CFTC had limited visibility in the OTC swaps market. Disruption in the OTC swaps market served as a precipitating catalyst to the onset of the global financial crisis that began in 2007. According to the U.S. Government Accountability Office, the 2007-2009 financial crisis, which threatened the stability of the U.S. financial system and the health of the U.S. economy, may have led to $10 trillion in losses, including large declines in employment and household wealth, reduced tax revenues from lower economic activity, and lost output (value of goods and services).[1]

As a response to the global financial crisis, Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), which was signed into law by President Barack Obama on July 21, 2010. The Dodd-Frank Act enacted legislation introducing mandatory clearing obligations and much needed market infrastructure reform to address opacity in the OTC swaps market.

For each asset class that the CFTC regulates, the Commission should offer a regulatory framework that emphasizes transparency, protection for our most vulnerable customers and enhances the integrity and stability of the U.S. and global financial markets.

It is important to understand the scope and contours of the Commission’s authority. “As derivatives markets have evolved, so too has the mission outlined in the [CEA], the mandate of the [CFTC]. Our broad anti-fraud and market manipulation authority stretches across an expanding and evolving universe of derivatives markets.”[2]

  1. Crypto Assets

There is no single, widely-adopted legal definition of a term “digital asset.”[3] This poses a challenge for domestic and international regulators. The attributes that characterize these assets may be varied and complex. Digital assets are built on complex underlying technological infrastructure- distributed ledger technology (DLT).

During my service as a Commissioner, I have noted several key vulnerabilities in the crypto market ecosystem including the lack of effective anti-money laundering protocols; risk of market manipulation including insider trading and fraud; lack of transparency, accountability and governance; a pathway for illicit transactions and activity; cybersecurity threats (particularly in the context of defi cross-chain bridges); single points of failure; market structure risk; macroprudential economic risk; and energy resource consumption.[4]

There is a significant need for careful development of comprehensive regulation that addresses anti-money laundering and know-your-customer obligations; segregation of customer funds, disclosure, and other customer protection measures; vertical integration and endemic conflicts of interest; corporate governance and risk-management oversight; independent risk assessment; internal controls; compliance systems; and risks created by reliance on critical third-party service providers.

  1. The CFTC’s Jurisdiction Over Digital Assets

There is a need to ensure that the Commission’s regulations keep pace with evolving market structures addressing the new ways in which certain traditional risks arise.[5]

The CEA and Commission’s regulations establish rules for those who operate in our markets and carry out certain activities within our remit.

For example, the CEA requires that, subject to certain exemptions, certain derivative transactions must be conducted on exchanges designated by, or registered with, the CFTC.

Specifically, Sections 5 and 5h of the CEA require exchanges to register with the CFTC as a designated contract market or swap execution facility, as the case may be, if they are providing regulated trade execution services for futures or swaps.[6]

Additionally, Section 4d of the CEA requires registration for intermediaries that act as futures commission merchants—i.e., those that engage in the solicitation or acceptance of orders for, among other things, the purchase or sale of any commodity for future delivery and in connection therewith, accept money, securities, or property (or extend credit in lieu thereof) to margin, guarantee, or secure any trades or contracts that result from such solicitation.[7]

The futures commission merchant registration requirement is fundamental to our regulatory framework, as registered entities must comply with a host of other rules designed to protect customers, such as the segregation of customer assets, the implementation of conflicts of interest safeguards, the adoption of information security and systems safeguards, and the implementation of anti-money laundering and know-your-customer programs, just to name a few.

  1. Enforcement of Existing Laws and Regulations: Same Activity, Same Risk, Same Regulation

Over the last several years, the CFTC Division of Enforcement has announced actions in several of the most important investigations and civil enforcement actions in crypto-markets. Markets have witnessed a remarkable rise in fraud enforcement cases involving digital assets as well as enforcement cases charging a violation of the Commission’s regulations.

Last year, nearly 44 of the 59 fraud enforcement actions announced involved transactions in digital assets.[8] The total number of crypto-fraud cases initiated by the Commission nearly doubled year over year as well.

The lack of transparency and visibility into crypto markets enables illicit activity, undermines the integrity of the market, and stymies the development of innovative projects based on the underlying technology which demonstrates potential to engender economic or social benefits.

Recent Enforcement Cases

Binance

Last spring, the Commission announced a civil enforcement action against three affiliated operating entities constituting the digital asset exchange Binance, the CEO of Binance Changpeng Zhao, and the former chief compliance officer of Binance Samuel Lim.[9] At the time, Binance described itself as the world’s largest centralized digital asset exchange.

According to the complaint, Binance offered and executed digital asset spot and derivative transactions for U.S. customers. The CFTC complaint charged that, based on the transactions executed on its platforms, the CEA and CFTC regulations required Binance to register with the Commission and submit to standard regulatory requirements imposed on firms providing similar trade execution, clearing, and settlement services.

The complaint also charged that Binance engaged in a campaign to intentionally avoid being subject to regulation. According to Binance, the global firm was not headquartered in any jurisdiction and did not permit trading by U.S. persons. The Commission alleged that Binance “purported to restrict U.S. customers from trading on its platform, [but] instructed its customers in particular its commercially valuable U.S.-based VIP customers on the best methods for evading Binance’s compliance controls.”[10]

Binance had failed to register with the CFTC and failed to comply with the Bank Secrecy Act and anti-terrorism financing know-your-customer (KYC) and anti-money laundering (AML) obligations. Last November, the Commission announced a proposed consent order under which the defendants “agreed to findings of liability on each of the charges alleged in the complaint, including the first ever charged violation of CFTC Regulation 1.6, governing anti-evasion[11] The order further imposed $1.35 billion in disgorgement and over $1.35 billion in civil monetary penalties.[12]

The many failures in crypto markets illustrate the need for swift action. I want to discuss briefly the various vulnerabilities illustrated by the failure of FTX.

FTX

In December of 2022, in coordination with the Department of Justice (DOJ), U.S. Attorney’s Office for the Southern District of New York (SDNY) and the Securities and Exchange Commission (SEC), the CFTC charged Sam Bankman-Fried, former chief executive officer of FTX; FTX Trading Ltd. d/b/a/ FTX.com (FTX); and Alameda Research LLC (Alameda) with fraud and material misrepresentations in connection with the sale of digital commodities in interstate commerce.

The complaint alleged that from May 2019 to November 2022, Mr. Bankman-Fried controlled both FTX.com, a centralized digital asset spot and derivatives trading platform, and Alameda, a digital asset trading firm that operated as a primary market maker on FTX.

Commingling Customer Assets

FTX held itself out as “the safest and easiest way to buy and sell crypto.” In other words, tapping into the fear of missing out that has characterized certain crypto-investor demographics, Mr. Bankman-Fried and FTX solicited customers on the premise that the FTX platform could be trusted and represented the highest quality standards. Most importantly, FTX promised that customers would control access to the assets in their accounts, had control over those assets at all times, and that those assets were “appropriately safeguarded and segregated” from FTX’s own funds.

The CFTC’s complaint alleges that despite these promises, FTX permitted Alameda to access customer deposits and commingle customer assets with Alameda’s proprietary funds. The complaint further alleges that Alameda and executives at FTX used these funds for its own business operations, personal purchases, acquisitions of other businesses, and for risky investments.

In other words, while soliciting customers to trust in the integrity of its business, FTX is alleged to have engaged in the very business practices that it denounced. The complaint alleged that defendants’ actions caused the loss of over $8 billion in customer deposits.

Conflicts of Interest in a Vertically Integrated Market Structure

In the absence of conflict-of-interest protections, and particularly where there are vertically integrated operational models, customers may be exceptionally vulnerable.

The CFTC complaint in the FTX matter alleged that Alameda operated as a primary “market maker” on FTX, providing liquidity to its various digital asset markets, and also performed a number of other key functions for the exchange. Even when FTX added institutional market makers, Alameda remained a high-volume market maker.

The complaint also alleged that Alameda received preferential trading privileges on its sister exchange. FTX executives created features in the underlying code for FTX that allowed Alameda to maintain an essentially unlimited line of credit on FTX. FTX Trading executives also created other exceptions to FTX’s standard processes that allowed Alameda to have an unfair advantage when transacting on the platform, including quicker execution times and an exemption from the platform’s distinctive auto-liquidation risk management process.

Pernicious and endemic conflicts of interest may be amplified in vertically integrated market structures.

Weak Governance and Risk-Management Framework

Strong governance and risk-management frameworks are key to ensuring the proper functioning of a business. The FTX complaint alleged that Alameda and FTX continued to share office space, first in Berkeley, California and later in Hong Kong and the Bahamas. They also shared key personnel, technology and hardware, intellectual property, and other resources. Bankman-Fried and other senior management at Alameda and FTX also had widespread access to each other’s systems and accounts. Bankman-Fried controlled the FTX entities without adequate governance and risk-management oversight, “a failure of corporate controls” and “a complete absence of trustworthy financial information,[15] and a lack of corporate infrastructure and record-keeping”[16]

In the parallel criminal case, Bankman-Fried was indicted on eight counts, including charges of fraud, money-laundering, and violation of federal campaign finance laws.[17] In November of last year, in a federal courtroom in the Southern District of New York, jurors found Bankman-Fried, guilty of misappropriating billions of dollars in customer funds and assets deposited with and held in the custody by FTX. Bankman-Fried currently awaits sentencing, and prosecutors have requested a prison term of 40-50 years.[18]

  1. Need for Regulatory Solution

Only a week after FTX filed for bankruptcy, I delivered a keynote at the annual meeting of the Federal Reserve Bank of Chicago Financial Markets Group in which I emphasized the need for measures that address the challenges that contributed to FTX’s failures.[19]

The speech called for the adoption of:

  • internal governance and risk management measures that introduce important know-your-customer and customer identification program obligations,
     
  • segregation of customer funds and limitations on the use of customer funds,
     
  • conflicts of interest policies designed to address transactions with affiliates.[20]

Three Key Regulatory Principles: Governance Measures, Customer Protection, and Conflicts of Interest

Last year, I delivered a keynote at Duke University’s Digital Assets Conference. There, I repeated my call for the adoption of internal governance measures, protections for customer funds, and policies to address conflicts of interest. I called for “expanding prohibitions on the commingling of customer assets and codifying segregation of customer money from proprietary (house) money”; “implementing financial resources requirements that obligate firms servicing retail markets to maintain sufficient working capital to sustain operations or, in the event of a liquidity crisis, to ensure an orderly liquidation or wind down”; “[e]stablishing requirements for the adoption of conflicts of interest policies”; and “[e]stablishing authority for the Commission to conduct effective due diligence on businesses that seek to buy entities registered with the CFTC.”[21]

Numerous international organizations and standard-setting bodies have spent the last several years studying crypto markets, including the Financial Stability Board (FSB) and the International Organization of Securities Commissions (IOSCO). Both the FSB and IOSCO have issued important recommendations that should inform policy and debate moving forward.

FSB Proposed Framework for the International Regulation of Crypto Asset Activities

Last summer, the FSB proposed a framework for the international regulation of crypto asset activities. The regulation included nine high-level recommendations to promote the consistency and comprehensiveness of regulatory, supervisory and oversight approaches to crypto asset activities and markets. The guidance encouraged consideration of regulatory powers and tools, a general regulatory framework, governance, risk management, cross-border cooperation, coordination, and information sharing, data collection, recording and reporting, disclosures, financial stability risks and crypto asset service providers with multiple functions.

The FSB has called for a crypto regulatory framework “based on the principle of ‘same activity, same risk, same regulation.’”[22] It makes clear the importance of safeguarding client assets, noting that “[m]any crypto-asset service providers [] are observed to extensively commingle proprietary assets with client assets, often without consent of the clients.”[23] It also calls for the mitigation of conflicts of interest, noting that “[v]arious crypto-asset intermediaries combine multiple functions. …Some entities are not transparent about their governance structures and set up complex structures of affiliated entities that often finance each other, leading to acute conflicts of interest and increasing interconnectedness and the risk of contagion within crypto-asset markets.”[24]

IOSCO Consultation

Similarly, IOSCO has issued a report with 18 policy recommendations that cover 6 key areas: (1) conflicts of interest, (2) market manipulation, insider trading and fraud, (3) cross-border risks, (4) custody and client asset protection, (5) operational and technological risk, and (6) retail access, suitability, and distribution.[25] The goal of these recommendations is “to promote greater consistency with respect to how IOSCO members approach the regulation and oversight of crypto-asset activities, given the cross-border nature of the markets, the risks of regulatory arbitrage and the significant risk of harm to which retail investors continue to be exposed.”[26]

As the FSB has noted,

The events of the past year have highlighted the intrinsic volatility and structural vulnerabilities of crypto-assets and related players. They have also illustrated that the failure of a key service provider in the crypto-asset ecosystem can quickly transmit risks to other parts of that ecosystem. As recent events have illustrated, if linkages to traditional finance were to grow further, spillovers from crypto-asset markets into the broader financial system could increase.[27]

As the recent crypto bankruptcies demonstrate, without sufficient customer protection, risk management, corporate governance and conflict-of-interest guardrails, there may be endemic risks in crypto markets. These episodes highlight the need for careful consideration and regulatory oversight.

  1. Artificial Intelligence

Another urgent issue I would like to touch on is the rapid advancement in the technologies known as artificial intelligence, or AI. While our markets have long relied upon AI for a variety of risk management and predictive pricing functions, we are witnessing rapid developments beyond reinforcement learning and neural networks in generative AI.

Increasingly, diverse industries and sectors of our economy identify opportunities to integrate aspects of the assemblage of technologies that we commonly describe as AI or AI technologies. AI enables doctors to diagnose and map diseases earlier, faster, and with greater accuracy than ever before in the history of medicine. Farmers who cultivate crops that feed our nation may integrate AI to better manage access to vital resources such as freshwater, enabling more efficient irrigation, fertilization, and crop rotation leading to more sustainable farming.

In our markets, AI offers similar efficiencies for faster trade execution and settlement, more accurate pricing prediction, and more precise risk management oversight. Markets have witnessed increased adoption of AI including AI-driven investment advising, trade execution, risk management, and market surveillance.[28]

It is essential that market regulators such as the CFTC are prepared to respond to the new challenges that AI raises. To that end, the CFTC released a Request for Comment in January, seeking information from the markets regarding current and future uses of AI and the risks that those uses create. This is a great start, though I believe we also must do more.

I am the sponsor of the Market Risk Advisory Committee, and we have launched a Future of Finance Subcommittee that will harness a diverse range of voices to study and propose responses to the new issues that AI raises.

At a Future of Finance Subcommittee meeting earlier this month, I noted that numerous U.S. and international bodies have produced reports with commentary and recommendations regarding the oversight of AI in financial markets.[29]

These efforts include a number of common threads, suggesting that, while many questions remain, there are important areas of consensus regarding the right approach to AI in financial markets. A few of these commonalities include:

A focus on the governance of AI models. FSOC “recommends monitoring the rapid developments in AI, including generative AI, to ensure that oversight structures keep up with or stay ahead of emerging risks to the financial system while facilitating efficiency and innovation.”[30] “Regulators should consider requiring firms to have designated senior management responsible for the oversight of the development, testing, deployment, monitoring and controls of AI and [machine learning]. This includes a documented internal governance framework, with clear lines of accountability.”[31] 

  • Promoting the explainability of AI models. Many AI models are “black-box” models, meaning that it may be difficult and in some cases impossible, to explain their decision-making processes. Accordingly, FSOC, IOSCO, the FSB, and FINRA have all emphasized the importance of addressing the explainability challenge.[32] As FINRA put it, [i]ncorporating explainability as a key consideration in the model risk management process for AI-based applications.”[33] 
     
  • Data collection, Data Quality, and Data Protection. The need for data controls and data quality, report notes, “data controls like data quality, suitability, security, privacy, and timeliness are vital to sound AI use.”[34] Similarly, FINRA calls for “data governance efforts” including: “data review for potential bias,” “data source verification,” “data integration,” “data security,” and “data quality benchmarks and metrics.”[35] 
     
  • Implementing measures to address bias. In 2019, I testified before Congress and voiced my concerns that AI models trained on incomplete or inaccurate data may engender biased results. The White House AI Bill of Rights appropriately emphasizes the need to ensure fairness and guard against bias. In its report, FSOC notes that “specific requirements to prevent discrimination or bias that apply to tools, models, or processes used in consumer compliance also apply to AI. This is an important consideration because without proper design, testing, and controls, AI can lead to disparate outcomes, which may cause direct consumer harm and/or raise consumer compliance risks.”[36] 
     
  • Testing and monitoring output. Protecting against bias, promoting explainability, and implementing governance strategies are only possible where models are properly tested and monitored. FSOC, IOSCO, the FSB, and FINRA have each emphasized the importance of testing. FSOC notes the responsibility of financial institutions to “monitor the quality and applicability of AI’s output” – the ability of regulators to “help to ensure that they do so.”[37] Similarly, the FSB recognizes the importance of “[a]ssessing AI and machine learning applications for risks, including adherence to any relevant protocols regarding data privacy, conduct risks, and cybersecurity.”[38] Existing approaches to issues like cybersecurity offer some guidance. Last year, in a statement regarding a proposed cyber resilience rulemaking, I noted the importance of comprehensive regulation in this area, including regulations that capture mission-critical third-party service providers.[39] This last point is particularly important since third-party service providers used by CFTC-regulated entities are unlikely to independently be subject to CFTC oversight. Finally, model testing and oversight, for cybersecurity for example, and much more, must similarly be comprehensive in the parties and the issues that it captures.

In consultation with members of this working group of the Market Risk Advisory committee, I look forward to exploring the ways in which the Commission can ensure that oversight structures keep up with or stay ahead of emerging risks to the financial system while facilitating efficiency and innovation.

The Commission has tools readily available to better understand and address the use of AI in our markets. The Commission also released a Request for Comment in January, seeking information from the market regarding current and future uses of AI and the risks that those uses create.[40] This is a great start, though we must do more:

  • The Commission should expand our annual systems examination questionnaire to incorporate a survey of questions that directly inquire about the adoption of AI and related risks in CFTC-regulated markets.
     
  • The Commission or staff should issue guidance or advisories regarding their regulatory and compliance expectations with respect to the application of existing CFTC requirements to the use of AI in CFTC-regulated markets.
     
  • The Commission should heighten penalties for intentional misuse of AI to facilitate fraud or market manipulation in CFTC-regulated markets.[41]

Heightened Penalties

AI raises new challenges that we must be prepared to respond to. AI may also make certain well-known challenges—like preventing fraud and market manipulation—even more difficult to detect and identify.

To address these concerns, I have proposed for the Commission to consider introducing heightened penalties for those who intentionally use AI technologies to engage in fraud, market manipulation, or the evasion of our regulations. In many instances, our statutes provide for heightened civil monetary penalties where appropriate. I propose that the use of AI in our markets to commit fraud and other violations of our regulations may, in certain circumstances, warrant a heightened civil monetary penalty.

Bad actors who would use AI to violate our rules must be put on notice and sufficiently deterred from using AI as a weapon to engage in fraud, market manipulation, or to otherwise disrupt the operations or integrity of our markets. We must make it clear that the lure of using AI to engage in new malicious schemes will not be worth the cost.[42]

To create heightened penalties, in some contexts, regulators and courts will need to carefully consider the role of intent as an element in misconduct by AI. It may be necessary for our regulations and fraud precedent to affirmatively address questions regarding the intent of trading algorithms as well as algorithms trained to engage in misconduct.

A similar sentiment has been echoed by the U.S. Department of Justice. The DOJ also recently announced enhanced penalties for fraud involving AI misuse (as well as revisions to DOJ’s corporate compliance program guidance to assess AI use).

  1. Voluntary Carbon Credits

Another novel asset class presenting similar challenges to crypto and digital assets is voluntary carbon credits. For over a decade, we have recognized the increasing risks that severe climate events create in markets and for critical market participants.

The 2023 United Nations Climate Change Conference, known as COP28, was held in Dubai in November/December 2023. Last year was the hottest year on record. In fact, according to a recent report from the World Meteorological Organization, the past nine years have been the nine warmest years on record, and mean temperatures are now 1.4 degrees Celsius above the average from the second half of the 19th century.[43]

Concentration of greenhouse gases are at record levels and ocean heat is at its highest level in the 65-year observational record.[44] There is much discussion about the use of carbon credits as one tool to mitigate climate disruption, but there are deep concerns regarding the integrity, credibility, and lack of visibility in the market for voluntary carbon credits (VCCs).

I recently noted,

[w]hile the issues and concerns regarding climate risks are endemic, complex, and inherently require multi-lateral solutions effectuated by an international coalition of stakeholders—let’s call it: a coalition of the willing—I strongly believe that financial market regulators and committed market participants may play a pivotal role in developing and implementing some basic, foundational market reforms.[45]

Just a year ago, I visited with the agricultural communities in Kenya to discuss the state of the markets in these important food production and distribution centers in the global economy. In meetings with the then-Governor of the Central Bank of Kenya, I listened to the descriptions of the challenges that emerging economies that rely heavily on agricultural production are experiencing as they navigate severe climate conditions.

Traveling to Central and South America, for over a century, the Panama Canal has provided a convenient way for ships to move between the Pacific and Atlantic Oceans, helping to expedite and reduce the costs of international trade.[46] Insufficient water levels are impacting the flow of transport through the Panama Canal, resulting in shipping delays and increased costs

Responding to these escalating and more frequent severe weather events and other climate risks that increasingly threaten the global economy, voluntary and compliance markets began to offer intangible credits for projects seeking to limit greenhouse gas (GHG) emissions into the atmosphere as well as projects that sequester carbon such as reforestation projects that remove atmospheric carbon. Colloquially, many refer to the voluntary environmental commodities as carbon offsets or VCCs.[48]

A VCC is a tradeable intangible instrument that is issued by a carbon crediting program. Once registered, VCCs associated with a mitigation project or activity may be acquired by end users (businesses or individuals) or intermediaries who act as brokers. While the number of VCC exchanges continues to increase, the spot market for such products remains largely bespoke, with buyers purchasing directly from mitigation project developers or via intermediaries. A carbon credit market creates a forum that enables buyers and distributors to engage in the purchase and sale, respectively, of environmental commodities. Each environmental commodity represents the acquisition or distribution of a credit that contributes to the reduction or sequestration (capturing and storage) of greenhouse gas emissions.

During the last two years, the CFTC has hosted two events—Voluntary Carbon Market Convenings—each a day-long discussion that featured industry- and government-wide participation.[49] In June 2022, the Commission issued a request for information on climate-related risks.[50]

As with crypto assets, while the Commission’s regulatory authority does not reach standard setting for the underlying assets, in this context, carbon offsets, we would have broad anti-fraud and market manipulation authority in the market for carbon offsets.[51] The Commission also has broad enforcement authority with respect to derivatives that reference carbon offsets, and in December 2023, the Commission proposed guidance and a request for public comment regarding the listing for trading of voluntary carbon credit derivative contracts by designated contract markets (and swap execution facilities). The guidance marks a step in the right direction, but it suggests the potential for a broader and more comprehensive framework.[52]

As I have noted,

There are deep and persistent concerns regarding the integrity, credibility, and lack of visibility in the market for carbon credits. Indisputably, challenged efforts to establish universally-adopted and enforceable integrity standards has further stymied attempts to scale carbon credit markets.[53]

Tackling these issues would require much more time than I have been allotted here today, but let me offer a few observations.

Lack of Standardization

Top of my mind as we work to address these concerns is that the market infrastructure for VCCs lacks an effective, universally adopted integrity assessment system.[54] Global coordination is needed to create a harmonized approach to assessing these products, which will ultimately bolster market credibility and confidence. Also concerning is the lack of visibility and integrity in carbon markets.

Greenwashing and Greenclaiming

Greenwashing and greenclaiming all too often involve overinflated descriptions of the environmental benefits of carbon credits and other carbon emission reducing activities.[55] In reality, however, too many of these carbon offset projects offer no environmental benefits at all. A recent study out of the University of Cambridge and ETH Zurich estimates that “88% of the total credit volume across the[] four sectors [of renewable energy, cookstoves, forestry, and chemical processes] in the voluntary carbon market does not constitute real emissions reductions.”[56] Greening claims made in connection with carbon offsets are, for now, unverifiable. Even putting aside cases where an offset might be an outright scam, it is incredibly difficult to know whether a given project actually results in reduced carbon emissions or promised carbon sequestration.

With the current absence of regulation directly addressing greenwashing, I encourage the EFTF to step up enforcement efforts in the meantime. Carbon offsets are viewed as contracts of sale of a commodity in interstate commerce, and thus within the anti-fraud jurisdiction of the CFTC pursuant to Section 6(c)(1) and Regulation 180.1(a).[57] The CME Group lists voluntary carbon emissions offset futures on its exchange, further bringing these products within the ambit of our anti-fraud jurisdiction.[58] The CFTC can and will devote appropriate resources to punishing fraud carried out in these new marketplaces.

Tokenized Carbon Offset Credits

The carbon economy has spawned a mirror crypto-economy, in the form of carbonized tokens. And as is the case with much of the crypto-economy, the theoretical goal of carbonized tokens is to make trading of carbon offsets simpler, more transparent, and cheaper, which will enable creators of carbon-reducing projects to access financing more easily.[59] But I have deep concerns that taking one unregulated market—carbon offsets—and layering it on top of another unregulated market—cryptocurrency—will serve only to compound the risks and vulnerabilities inherent in both.[60]

The sheen of new technology-based solutions might entice new and unsuspecting investors hoping to do their part in reducing carbon emissions. With clear guidance on disclosures, governance, auditing, anti-money laundering, data reporting, to name a few issues, there may be hope for offsets to contribute to positive environmental changes. In addition to the steps already taken by the Commission, the Market Risk Advisory Committee which I sponsor has formed a subcommittee focused specifically on climate-related market risk and will be working to engage with these issues this year.

  1. Conclusion

The complexity of novel financial products and the emergence of new technologies raise challenges for regulators in the United States and across the globe and expose gaps and overlaps in existing regulatory frameworks. The regulatory framework in the U.S. is characterized by a system of federal regulators and state regulators and umbrella groups that often share authority over the same financial institution. We have seen advancements on these topics at each level without consistent coordination.

The Commission has previously noted in the context of digital assets—but this is equally applicable to VCCs and AIs—that “effective coordination enables regulators to share information, advance common interests, and leverage resources. Coordination efforts also build trust and understanding among regulators.”[61]

This is consistent with one of the recommendations of the FSB, which supports cross-border cooperation, coordination and information sharing. The FSB notes, “[a]uthorities should cooperate and coordinate with each other, both domestically and internationally, to foster efficient and effective communication, information sharing and consultation in order to support each other as appropriate in fulfilling their respective mandates…and to encourage consistency of regulatory and supervisory outcomes.”[62]

Regulatory coordination domestically and internationally is necessary for effective oversight and for the development of a comprehensive, consistent, and harmonized framework, which reduces regulatory arbitrage.

Such coordination and cooperation may take the form of formal agreements, inter-agency working groups, staff-level initiatives, and multilateral organizations.[63]

This Fintech Summit is an example of a step in the right direction, but more work needs to be done.

A comprehensive regulatory framework is essential to achieving the Commission’s mission of ensuring the financial integrity of our markets; avoiding systemic risks; protecting market participants from fraud, abusive sales practices and misuses of customer funds; and promoting responsible innovation in our markets.[64]

Before closing, allow me to thank to my staff Rebecca Lewis Tierney, Julia Welch, and Tamika Bent for their assistance preparing my draft remarks today. Thank you so much for inviting me to join today.


[1] U.S. Gov’t Accountability Off., GAO-13-180, Financial Regulatory Reform: Financial Crisis Losses and Potential Impacts of the Dodd-Frank Act (2013); Kristin N. Johnson, Commissioner, CFTC, Statement Regarding Notice of Proposed Rulemaking Making Amendments to Parts 43 and 45 Swap Data Reporting Technical Specifications (Dec. 15, 2023), https://www.cftc.gov/PressRoom/SpeechesTestimony/johnsonstatement121523.

[2] Kristin N. Johnson, Commissioner, CFTC, Keynote Remarks at Rice University’s Baker Institute Annual Energy Summit (Oct. 5, 2023), https://www.cftc.gov/PressRoom/SpeechesTestimony/opajohnson7.

[3] CFTC, DIGITAL ASSETS PRIMER (2020), https://www.cftc.gov/media/5476/DigitalAssetsPrimer/download

[4] Id.

[5] Id.

[6] 7 U.S.C. §§ 7, 7b-3.

[7] 7 U.S.C.A. § 6d.

[8] Press Release No. 8822-23, CFTC, CFTC Releases FY 2023 Enforcement Results (Nov. 7, 2023), https://www.cftc.gov/PressRoom/PressReleases/8822-23.

[9] See Complaint, Commodity Futures Trading Commission v. Changpeng Zhao, Binance Holdings Limited, Binance Holdings (IE) Limited, Binance (Services) Holdings Limited, and Samuel Lim, Slip Copy, 2023 WL 10448932 (N.D. Ill. 2023).

[10] Id.

[11] Kristin N. Johnson, Commissioner, CFTC, Statement Regarding CFTC’s Landmark Resolution of Charges against Binance and Its CEO and CCO (Nov. 21, 2023), https://www.cftc.gov/PressRoom/SpeechesTestimony/johnsonstatement112123,

[12] Id.

[13] Press Release No. 8638-22, CFTC, CFTC Charges Sam Bankman-Fried, FTX Trading and Alameda with Fraud and Material Misrepresentations (Dec. 13, 2022), https://www.cftc.gov/PressRoom/PressReleases/8638-22; Kristin N. Johnson, Commissioner, CFTC, Statement on Preserving Trust and Preventing the Erosion of Customer Protection Regulation (Nov. 3, 2023), https://www.cftc.gov/PressRoom/SpeechesTestimony/johnstatement110323.

[14] See Complaint, Commodity Futures Trading Commission v. Samuel Bankman-Fried, FTX Trading Ltd d/b/a FTX.com, Alameda Research, LLC, Caroline Ellison, and Zixiao “Gary” Wang, 2022 WL 17884168 (S.D.N.Y. 2022).

[15] Declaration of John J. Ray III at 2, In re FTX Trading Ltd., Hr’g Tr. 156:15-25 (Bankr. D. Del. June 9, 2023) [Case No. 22-11068, ECF No. 1612].

[16] Investigating the Collapse of FTX, Part I: Hearing Before H. Fin. Serv. Comm., 118th Congress (2022) (testimony of Mr. John J. Ray III, CEO, FTX Debtors).

[17] Luc Cohen, Sam Bankman-Fried trial: What charges was he convicted of over FTX’s collapse?, Reuters, Nov. 3, 2023, https://www.reuters.com/legal/what-charges-does-sam-bankman-fried-face-over-ftxs-collapse-2023-10-03/.

[18] Matthew Goldstein and David Yaffe-Bellany, Sam Bankman-Fried Should Get 40 to 50 Years in Prison, Prosecutors Say, N.Y. Times, Mar. 15, 2024, https://www.nytimes.com/2024/03/15/technology/sam-bankman-fried-sentencing.html.

[19] Kristin N. Johnson, Commissioner, CFTC, Federal Reserve of Chicago Financial Markets Group Fall Conference, Investing in Investor Protection (Nov. 16, 2022); see also Nahiomy Alvarez, Nomaan Chandiwalla, Alessandro Cocco, 2022 Financial Markets Group Fall Conference–Recap (Feb. 6, 2023), https://www.chicagofed.org/publications/blogs/chicago-fed-insights/2023/2022-fmg-fall-conference-recap

[20] Kristin N. Johnson, Commissioner, CFTC, Keynote Address at Digital Assets @ Duke Conference, Duke’s Pratt School of Engineering and Duke Financial Economics Center (Jan. 26, 2023), https://www.cftc.gov/PressRoom/SpeechesTestimony/opajohnson2.

[21] Id.

[22] Financial Stability Board, FSB Global Regulatory Framework for Crypto-Asset Activities (July 17, 2023) at 1.

[23] Id. at 5.

[24] Id. at 6.

[25] OICU-IOSCO, Final Report, Policy Recommendations for Crypto and Digital Asset Markets (Nov. 2023), https://www.iosco.org/library/pubdocs/pdf/IOSCOPD747.pdf.

[26] Id. at 1.

[27] Financial Stability Board, FSB Global Regulatory Framework for Crypto-Asset Activities (July 17, 2023).

[28] Kristin N. Johnson, Commissioner, CFTC, Opening Statement Before the Market Risk Advisory Committee Future of Finance Subcommittee Meeting (Mar. 15, 2024), https://www.cftc.gov/PressRoom/SpeechesTestimony/johnsonstatement031524.

[29] Id.

[30] Financial Stability Oversight Council, 2023 Annual Report (Dec. 14, 2023),   https://home.treasury.gov/system/files/261/FSOC2023AnnualReport.pdf.

[31] INT’L ORG. OF SEC. COMM’NS BD., THE USE OF ARTIFICIAL INTELLIGENCE AND MACHINE LEARNING BY MARKET INTERMEDIARIES AND ASSET MANAGERS 17 (2021), https://www.iosco.org/library/pubdocs/pdf/IOSCOPD684.pdf (IOSCO Report)

[32] Financial Stability Oversight Council, 2023 Annual Report, supra note 30 at 92

[33] The Financial Industry Regulatory Authority (FINRA), Report on Artificial Intelligence (AI) in the Securities Industry, June 2020, https://www.finra.org/sites/default/files/2020-06/ai-report-061020.pdf.

[34] Financial Stability Oversight Council, 2023 Annual Report, supra note 30 at 92

[35] The Financial Industry regulatory Authority (FINRA), Report on Artificial Intelligence (AI) in the Securities Industry, June 2020, https://www.finra.org/sites/default/files/2020-06/ai-report-061020.pdf.

[36] Financial Stability Oversight Council, 2023 Annual Report, supra note 30 at 92

[37] Id.

[38] Financial Stability Board, Artificial intelligence and machine learning in financial services: Market developments and financial stability implications at 34 (Nov. 1, 2017), https://www.fsb.org/wp-content/uploads/P011117.pdf

[39] Kristin N. Johnson, Commissioner, CFTC, Statement Regarding the CFTC’s Notice of Proposed Rulemaking on Operational Resilience Program for FCMs, SDs, and MSPs (Dec. 18, 2023), https://www.cftc.gov/PressRoom/SpeechesTestimony/johnsonstatement121823.

[40] U.S. Commodity Futures Trading Comm’n, Request for Comment on the Use of Artificial Intelligence in CFTC-Regulated Markets (Jan. 25, 2024), https://www.cftc.gov/PressRoom/PressReleases/8853-24; see also Kristin N. Johnson, Commissioner, CFTC, Statement on the CFTC RFC on AI: Building a Regulatory Framework for AI in Financial Markets (Jan. 25, 2025), Commissioner Kristin N. Johnson Statement on the CFTC RFC on AI: Building a Regulatory Framework for AI in Financial Markets | CFTC.

[41] Kristin N. Johnson, Commissioner, CFTC, Opening Statement Before the Market Risk Advisory Committee Future of Finance Subcommittee Meeting (Mar. 15, 2024), Opening Statement of Commissioner Kristin N. Johnson Before the Market Risk Advisory Committee Future of Finance Subcommittee Meeting | CFTC

[42] Kristin N. Johnson, Commissioner, CFTC, Building A Regulatory Framework for AI in Financial Markets (Feb. 23, 2024), Speech of Commissioner Kristin Johnson: Building A Regulatory Framework for AI in Financial Markets | CFTC

[43] World Meteorological Organization, Provisional State of the Global Climate in 2023 at 2 (Nov. 30, 2023), https://wmo.int/files/provisional-state-of-global-climate-2023

[44] Id.

[45] Kristin N. Johnson, Commissioner, CFTC, All Hat, No Cattle: The Need for Market Structure Reforms in Voluntary Carbon Markets (Nov. 29, 2023), https://www.cftc.gov/PressRoom/SpeechesTestimony/opajohnson9a.

[46] Peter Eavis, Drought Saps the Panama Canal, Disrupting Global Trade, N.Y. Times (Nov. 1, 2023), https://www.nytimes.com/2023/11/01/business/economy/panama-canal-drought-shipping.html.

[47] Id.

[48] Kristin N. Johnson, Commissioner, CFTC, Statement Regarding Policing the (Token) Economy: Introducing Corporate Governance and Market Structure Reforms in Crypto and Environmental Commodities Markets (Nov. 13, 2023), https://www.cftc.gov/PressRoom/SpeechesTestimony/opajohnson8#fnt13.

[49] Kristin N. Johnson, Commissioner, CFTC, Statement Regarding Credibility, Integrity, Visibility: The CFTC’s Role in the Oversight of Carbon Offset Markets (Oct. 5, 2023), https://www.cftc.gov/PressRoom/SpeechesTestimony/opajohnson7#_ftn4.

[50] CFTC, Request for Information on Climate-Related Financial Risk, 87 FR 34856, https://www.cftc.gov/sites/default/files/2022/06/2022-12302a.pdf.

[51] Id.

[52] Kristin N. Johnson, Commissioner, CFTC, Statement on Commission Guidance Regarding Listing of Voluntary Carbon Credit Derivative Contracts (Dec. 4, 2023), https://www.cftc.gov/PressRoom/SpeechesTestimony/johnsonstatement120423.

[53] Id.

[54] Kristin N. Johnson, Commissioner, CFTC, Statement Regarding Credibility, Integrity, Visibility: The CFTC’s Role in the Oversight of Carbon Offset Markets (Oct. 5, 2023), https://www.cftc.gov/PressRoom/SpeechesTestimony/opajohnson7#_ftn4.

[55] Id.

[56] Benedict Probst et al., Systematic Review of the Actual Emissions Reductions of Carbon Offset Projects Across all Major Sectors at 2 (July 27, 2023), https://www.researchsquare.com/article/rs-3149652/v1.

[57] 7 U.S.C. § 9(1); 17 C.F.R. § 180.1(a); 7 U.S.C. § 1a(9) (The definition of the term “commodity” includes “all services, rights, and interests (except motion picture box office receipts, or any index, measure, value or data related to such receipts) in which contracts for future delivery are presently or in the future dealt in.”).

[58] See, e.g., 7 U.S.C. § 9(1) (making unlawful the use of manipulative or deceptive devices “in connection with . . . [a commodity] for future delivery on or subject to the rules of any registered entity”).

[59] Kristin N. Johnson, Commissioner, CFTC, Statement Regarding Credibility, Integrity, Visibility: The CFTC’s Role in the Oversight of Carbon Offset Markets (Oct. 5, 2023), https://www.cftc.gov/PressRoom/SpeechesTestimony/opajohnson7#_ftn4.

[60] Id.

[61] CFTC, Digital Assets Primer, supra note 3.

[62] FSB, High-Level Recommendations for the Regulation, Supervision and Oversight of Global Stablecoin Arrangements (July 17, 2023), High-level Recommendations for the Regulation, Supervision and Oversight of Global Stablecoin Arrangements: Final report (fsb.org)

[63] CFTC, Digital Assets Primer, supra note 3.

[64] 7 U.S.C. § 5.

CFTC Charges KuCoin with Operating Illegal Digital Asset Derivatives Exchange

Source: US Commodity Futures Trading Commission

Washington, D.C. — The Commodity Futures Trading Commission today announced it filed a civil enforcement action in the U.S. District Court for the Southern District of New York charging Mek Global Limited, PhoenixFin PTE Ltd., Flashdot Limited, and Peken Global Limited, which collectively operate a centralized digital asset exchange under the name KuCoin, with multiple violations of the Commodity Exchange Act (CEA) and CFTC regulations.  

The complaint charges KuCoin illegally dealt in off-exchange commodity futures transactions and leveraged, margined, or financed retail commodity transactions; solicited and accepted orders for commodity futures, swaps, and leveraged, margined, or financed retail commodity transactions without registering with the CFTC as a futures commission merchant (FCM); failed to diligently supervise its FCM activities; operated a facility for the trading or processing of swaps without registering with the CFTC as a swap execution facility (SEF) or designated contract market (DCM); and failed to implement an effective customer identification program (CIP). 

In its continuing litigation against KuCoin, the CFTC seeks disgorgement, civil monetary penalties, permanent trading and registration bans, and a permanent injunction against further violations of the CEA and CFTC regulations, as charged.

“For too long, some offshore crypto exchanges have followed a now-familiar playbook by offering derivative products and falsely claiming people in the United States cannot use their platforms, when in reality, anyone in the U.S. with commonly used technology can trade without providing basic customer identifying information,” said Director of Enforcement Ian McGinley.

“As made clear by the CFTC’s action today and its previous enforcement actions, the CFTC’s playbook should also now be familiar – the CFTC will charge such entities with failing to register with the CFTC and failing to comply with the agency’s rules that protect U.S. customers and prevent and detect terrorist financing and money laundering,” McGinley continued.

Case Background

According to the complaint, KuCoin offered and executed commodity derivatives and leveraged, margined, or financed commodity transactions to and for people in the U.S. from approximately July 2019 to approximately June 2023, and failed to implement required know-your-customer (KYC) compliance procedures. The complaint further alleges that although KuCoin claimed to have implemented KYC procedures, those procedures were a sham and did not prevent U.S. customers from trading commodity interests and derivatives on the platform.

The complaint also alleges people who identified themselves as being U.S. customers were permitted to trade commodity futures, swaps, and leveraged, margined, or financed commodity transactions on the exchange, in violation of the CEA and CFTC regulations. KuCoin failed to impose any IP address restrictions during the relevant period to prevent U.S. customers from trading commodity interests or account for commonly used technology such as virtual private networks (VPNs) that could potentially circumvent IP address restrictions.

Related Criminal Action

In a separate criminal matter, the U.S. Attorney’s Office for the Southern District of New York filed an indictment against PhoenixFin PTE Ltd., Flashdot Limited, and Peken Global Limited charging them with violating the Bank Secrecy Act, operating an unlicensed money transmitter business, and conspiracy to violate the Bank Secrecy Act and operate as an unlicensed money transmitter business. 

 * * * * * * * 

The Division of Enforcement staff responsible for this matter are Christopher Giglio, Andrew Rodgers, Jack Murphy, K. Brent Tomer, Lenel Hickson, Jr., and Manal M. Sultan. 

 * * * * * * * 

The CFTC also strongly urges the public to verify a company’s registration with the CFTC before committing funds. If unregistered, a customer should be wary of providing funds to that company. A company’s registration status can be found using NFA BASIC.

Customers and other individuals can report suspicious activities or information, such as possible violations of commodity trading laws, to the Division of Enforcement via a toll-free hotline 866-FON-CFTC (866-366-2382)), file a tip or complaint online, or contact the Whistleblower Office. Whistleblowers may be eligible to receive between 10 and 30 percent of the monetary sanctions collected paid from the CFTC Customer Protection Fund financed through monetary sanctions paid to the CFTC by violators of the CEA.   

Chairman Behnam Announces CFTC Agricultural Advisory Committee to Meet April 11 in Overland Park, KS

Source: US Commodity Futures Trading Commission

— Chairman Rostin Behnam, sponsor of the Agricultural Advisory Committee (AAC), today announced the AAC will hold a public meeting on April 11 from 9:30 a.m. to 11:00 a.m. (CDT) at the Sheraton Overland Park Hotel in Overland Park, KS. Members of the public will also have the option to attend virtually.

This meeting precedes AgCon2024, the third Agricultural Commodity Futures Conference hosted by CFTC and the Center for Risk Management Education and Research at Kansas State University. [See CFTC Press Release No. 8874-24].

At this meeting, the AAC will discuss topics related to the agricultural economy and recent developments in the agricultural derivatives markets.

A formal agenda for this meeting is forthcoming.

What:

Agricultural Advisory Committee Meeting

Location

(In-person/virtual):

Sheraton Overland Park Hotel

6100 College Blvd

Overland Park, KS

*Virtual instructions below

When:

Thursday, April 11, 2024

9:30 a.m. – 11:00 a.m. (CDT)

Viewing/Listening Instructions: Members of the public may listen to a live, audio-only feed via conference call using toll or toll-free numbers provided below. Call-in participants should be prepared to provide their first name, last name, and affiliation, if applicable. People requiring special accommodations to attend the meeting because of a disability should contact Swati Shah at [email protected].

Materials presented at the meeting, if any, will be made available on CFTC.gov.

Instructions:

 

Domestic Toll-Free Numbers:

 

Domestic Toll Numbers:

 

1-833-568-8864 or 1-833-435-1820

1-669-254-5252 or 1-646-964 1167 or

1-646-828-7666 or 1-669-216-1590 or

1-415-449-4000 or 1-551-285-1373

International Numbers:

International Numbers

 

Webinar ID:

 

Passcode:

160 831 3224

 

031806

Public Comments

Members of the public may submit comments in connection with the meeting, identified by “AAC,” by April 18, 2024. Follow the instructions for submitting public comments through the Comments Online process. If you are unable to submit comments online, contact Swati Shah at [email protected] to discuss alternate means to submit comments. Statements submitted in connection with the committee meeting will be made available to the public, including publication on CFTC.gov. The meeting agenda may change to accommodate other AAC priorities. For agenda updates and more information about this advisory committee, including its members, visit AAC.

There are five active Advisory Committees overseen by the CFTC. They were created to provide advice and recommendations to the Commission on a variety of regulatory and market issues that affect the integrity and competitiveness of U.S. markets. These committees facilitate communication between the Commission and market participants, other regulators, and academics. The views, opinions, and information expressed by the Advisory Committees are solely those of the respective Advisory Committee and do not necessarily reflect the views of the Commission, its staff, or the U.S. government.

Chairman Behnam Announces CFTC Agricultural Advisory Committee to Meet April 11 in Overland Park, KS

Source: US Commodity Futures Trading Commission

— Chairman Rostin Behnam, sponsor of the Agricultural Advisory Committee (AAC), today announced the AAC will hold a public meeting on April 11 from 9:30 a.m. to 11:00 a.m. (CDT) at the Sheraton Overland Park Hotel in Overland Park, KS. Members of the public will also have the option to attend virtually.

This meeting precedes AgCon2024, the third Agricultural Commodity Futures Conference hosted by CFTC and the Center for Risk Management Education and Research at Kansas State University. [See CFTC Press Release No. 8874-24].

At this meeting, the AAC will discuss topics related to the agricultural economy and recent developments in the agricultural derivatives markets.

A formal agenda for this meeting is forthcoming.

What:

Agricultural Advisory Committee Meeting

Location

(In-person/virtual):

Sheraton Overland Park Hotel

6100 College Blvd

Overland Park, KS

*Virtual instructions below

When:

Thursday, April 11, 2024

9:30 a.m. – 11:00 a.m. (CDT)

Viewing/Listening Instructions: Members of the public may listen to a live, audio-only feed via conference call using toll or toll-free numbers provided below. Call-in participants should be prepared to provide their first name, last name, and affiliation, if applicable. People requiring special accommodations to attend the meeting because of a disability should contact Swati Shah at [email protected].

Materials presented at the meeting, if any, will be made available on CFTC.gov.

Instructions:

 

Domestic Toll-Free Numbers:

 

Domestic Toll Numbers:

 

1-833-568-8864 or 1-833-435-1820

1-669-254-5252 or 1-646-964 1167 or

1-646-828-7666 or 1-669-216-1590 or

1-415-449-4000 or 1-551-285-1373

International Numbers:

International Numbers

 

Webinar ID:

 

Passcode:

160 831 3224

 

031806

Public Comments

Members of the public may submit comments in connection with the meeting, identified by “AAC,” by April 18, 2024. Follow the instructions for submitting public comments through the Comments Online process. If you are unable to submit comments online, contact Swati Shah at [email protected] to discuss alternate means to submit comments. Statements submitted in connection with the committee meeting will be made available to the public, including publication on CFTC.gov. The meeting agenda may change to accommodate other AAC priorities. For agenda updates and more information about this advisory committee, including its members, visit AAC.

There are five active Advisory Committees overseen by the CFTC. They were created to provide advice and recommendations to the Commission on a variety of regulatory and market issues that affect the integrity and competitiveness of U.S. markets. These committees facilitate communication between the Commission and market participants, other regulators, and academics. The views, opinions, and information expressed by the Advisory Committees are solely those of the respective Advisory Committee and do not necessarily reflect the views of the Commission, its staff, or the U.S. government.

Statement of Commissioner Kristin N. Johnson Regarding Enforcement Action to Stop Fraud Targeting the Spanish-Speaking Community

Source: US Commodity Futures Trading Commission

Today, the Commodity Futures Trading Commission (CFTC or Commission) announced the approval by the Southern District of Florida of a Consent Order to resolve claims against a Ponzi-scheme operator that fraudulently solicited more than $19 million from at least 220 individuals in the U.S. and abroad.

For more than seven years from 2013 through 2020, Joseph Carvajales (Carvajales), along with the W Trade Group LLC (WTG) and Larry Ramos Mendoza (Ramos, and collectively, Defendants), fraudulently solicited customers, mainly other Spanish-speakers, by phone, the internet, and U.S. mail, to trade, among other things, commodity futures, forex and options. Defendants solicited customers by making numerous false and misleading statements concerning their alleged trading successes and methods. In particular, they falsely represented that they were successful traders and promised customers would see profits of up to 4% by virtue of a commodity trading algorithm Ramos had developed. They also falsely told investors that WTG operated on major exchanges and that any trading done in the U.S. was supported by SIPC. In reality, while WTG did open a trading account in its own name, it never traded the account, and WTG never opened a single trading account for its customers. Defendants created fraudulent account statements to cover up their fraud and made Ponzi-style payments to certain investors to perpetuate the scheme.

Based upon these fraudulent solicitations, WTG received approximately $19 million from at least 220 customers. WTG and Ramos misappropriated these funds to pay personal expenses, including salaries for Ramos and Carvajales. Though Ramos was indicted, he removed his ankle monitoring device and fled. The FBI has been unable to determine Ramos’ whereabouts and suspects he may have fled the country. Under the Consent Order announced today, Carvajales faces permanent trading and registration bans and must pay $2.4 million in restitution and an additional $1 million as a civil monetary penalty.

Throughout my time as a Commissioner, I have frequently advocated for greater customer protection for the most vulnerable investors in our marketplace.[1] As I have previously noted:

“I am deeply committed to raising alarms regarding fraud that targets vulnerable investors based on relationships, kinship, or other social network connections.  Affinity-based fraud schemes targeting vulnerable individuals within a specific community based on a shared characteristic seek to exploit the trust generated within the community.”[2]

In the current case, the fraudsters used a shared native language to gain the trust of their victims. Further, the fraudsters assured their customers that their investments would receive the protections available through registered trading activity.

The CFTC must take decisive action in cases where fraudsters target vulnerable investors by turning pillars of strength, such as shared identity or robust regulatory protections, into ammunition.

I applaud the efforts of the CFTC’s Division of Enforcement and would like to recognize the staff bringing this litigation: Nia Vroustouris, Kevin Samuel, Alison B. Wilson, and Rick Glaser.


[1] See, e.g., Kristin N. Johnson, Commissioner, CFTC, Statement Regarding CFTC Charges in “Pig Butchering” Case, Jan. 19, 2024, https://www.cftc.gov/PressRoom/SpeechesTestimony/johnsonstatement011924#_ftn8; Kristin N. Johnson, Commissioner, CFTC, Statement Regarding CFTC Consent Order Imposing $1.7 Billion in Restitution against South African Commodity Pool Operator (Sept. 7, 2023), https://www.cftc.gov/PressRoom/SpeechesTestimony/johnsonstatement090723; Kristin N. Johnson, Commissioner, CFTC, Statement Regarding CFTC Action Against Retail Forex Ponzi Scheme Targeting Spanish Speakers in Puerto Rico and the Continental United States, Feb. 14, 2023, https://www.cftc.gov/PressRoom/SpeechesTestimony/johnsonstatement021423.

[2] Kristin N. Johnson, Commissioner, CFTC, Statement on Enforcement Action To Stop Bitcoin Fraud Targeting the Spanish-Speaking Community, https://www.cftc.gov/PressRoom/SpeechesTestimony/johnsonstatement052423.

Federal Court Orders Florida Forex Trader to Pay $3.4 Million for Futures, Forex, Options Scheme

Source: US Commodity Futures Trading Commission

Washington, D.C. — The Commodity Futures Trading Commission today announced the U.S. District Court for the Southern District of Florida entered a consent order on March 20 imposing a permanent injunction, civil monetary penalty, restitution, and equitable relief against Joseph Carvajales (Carvajales), a resident of Florida.

The order requires Carvajales to pay $2.4 million in restitution to defrauded customers and a $1 million civil monetary penalty. The order also imposes permanent trading and registration bans and a permanent injunction prohibiting the defendant from further violations of the Commodity Exchange Act (CEA) and CFTC regulations, as charged.

The order finds, among other things, Carvajales, an employee of The W Group (WTG), willfully or recklessly made numerous false statements to WTG customers and prospective customers in connection with futures, retail foreign currency contracts (forex), and options. The order resolves the CFTC’s case filed on February 7, 2022. [See CFTC Press Release No. 8493-22]

Case Background

The order finds from June 2013 through June 2020, Carvajales, among other things, made false claims to prospective WTG customers about where WTG traded; that WTG would use a commodity trading algorithm to trade futures, forex, and/or options on behalf of customers; that individual trading accounts were opened, that customer funds were deposited into trading accounts, and that trading was conducted; and the profit potential that could be made and the risks of trading. In reality, individual trading accounts were never opened, customer funds were not deposited into trading accounts, and no trading was conducted. 

Previously, the U.S District Court for the Southern District of Florida entered a default order against co-defendants WTG and Larry Ramos Mendoza (Ramos) of Miami, Florida. That order found WTG and Ramos misappropriated over $24 million from at least 220 customers, fraudulently solicited customers and sent them false account statements showing purported profits and trading activity when none existed. The order required WTG and Ramos to pay $7,482,680 in restitution and a civil monetary penalty of $22,448,040. It also imposed permanent trading and registration bans and a permanent injunction prohibiting the defendants from further violations of the CEA and CFTC regulations, as charged.

The CFTC cautions restitution orders may not always result in the recovery of money lost because the wrongdoers may not have sufficient funds or assets. The CFTC will continue to fight vigorously for the protection of customers and to ensure wrongdoers are held accountable.

The Division of Enforcement thanks the U.S. Attorney’s Office for the Southern District of Florida for its assistance in this matter.

The Division of Enforcement staff responsible for this case are Kevin Samuel, Eugenia Vroustouris, Erica Bodin, Alison B. Wilson, and Rick Glaser.

CFTC Fraud Advisories

The CFTC has issued several customer protection Fraud Advisories and Articles that provide information about how customers can detect, avoid, and report scams.

The CFTC also strongly urges the public to verify a company’s registration with the CFTC before committing funds. If unregistered, a customer should be wary of providing funds to that company. A company’s registration status can be found using NFA BASIC.

Customers and other individuals can report suspicious activities or information, such as possible violations of commodity trading laws, to the Division of Enforcement via a toll-free hotline 866-FON-CFTC (866-366-2382), file a tip or complaint online, or contact the Whistleblower Office. Whistleblowers may be eligible to receive between 10 and 30 percent of the monetary sanctions collected paid from the CFTC Customer Protection Fund financed through monetary sanctions paid to the CFTC by violators of the CEA.

Joint Effort Launches to Warn Retirees about Precious Metals Fraud and Gives Tips on Protecting Themselves

Source: US Commodity Futures Trading Commission

— The Commodity Futures Trading Commission’s Office of Customer Education and Outreach (OCEO), the Financial Industry Regulatory Authority (FINRA), and the North American Securities Administrators Association (NASAA) have joined forces to warn people in or near retirement about gold and silver investment scams that tout over-priced metals and coins as “safe investments,” but instead charge exorbitant markups, commissions, and fees. In many cases, the transaction costs and ongoing fees make it impossible for victims to ever profit from their investments.

Today the CFTC and FINRA issued 10 Things to Ask Before Buying Physical Gold, Silver, or Other Metals, an investor bulletin that lists the questions people should ask before making a physical precious metals purchase. The CFTC also released Lies Versus Facts: The Truth Behind Gold and Silver IRA Scams, a one-page, downloadable flier that highlights the common lies scam dealers tell.

Fraudulent precious metals dealers often push the idea of retirement plan rollovers for one simple reason­that’s where most people have the bulk of their investing dollars. The scam dealers target older people because they can more easily access the money in their retirement plans and they typically have saved more than younger people.

The scams also use common affinity fraud techniques, purposefully targeting people with specific political and religious beliefs. These fraudulent metals dealers infiltrate social media groups, and target advertising to access subscribers or follower lists. They then send spam email or make cold calls using high-pressure and often deceitful telemarketing techniques. They even steal images of popular religious leaders, pundits, and celebrities to create fake endorsements.

Precious metals scams can be a particular threat to holders of self-directed individual retirement accounts. Self-directed IRAs are a type of retirement account that is managed by the account holder and allows the account holder to invest in a broader array of assets than are permitted in regular IRAs.

The U.S. Securities and Exchange Commission’s Office of Investor Education and Advocacy, NASAA, and FINRA jointly warned that fraudsters may be more likely to exploit self-directed IRAs because custodians or trustees of these accounts may offer only limited protections and typically do not investigate the assets or the background of the promoter.

Fraudsters might use a fake self-directed custodian to attempt to steal investors’ money, or they might misrepresent the duties of self-directed IRA custodians to deceive investors into believing their investments are legitimate or protected against losses. Because a self-directed IRA account carries a financial penalty for withdrawing money before the accountholder reaches a certain age, investors may manage these accounts more passively, allowing fraudsters to perpetrate the fraud longer.

“These frauds can be particularly damaging to individuals near retirement and retirees who could lose much of their retirement savings and find themselves unable to return to work to support themselves,” said OCEO Director Melanie Devoe. “We hope this effort helps raise awareness about these frauds, the lies the fraudulent metals dealers tell, and the real risks and costs involved in relying on physical precious metals as a long-term retirement plan.”

The CFTC and state authorities have worked together to shut down a number of these frauds in recent years. Cooperation between 30 state authorities and the CFTC resulted in the September 2020 joint civil enforcement action in the U.S. District Court for the Northern District of Texas against two precious metals dealers and their companies for perpetrating a $185 million fraudulent scheme targeting elderly persons nationwide. The complaint charged the defendants with executing an ongoing nationwide fraud that solicited and received more than $185 million in investor funds to purchase fraudulently overpriced gold and silver bullion. [See CFTC Press Release No. 8254-20]

Over the past decade, the CFTC has brought numerous cases against fraudulent precious metals dealers alleging they collectively sold over $500 million of overpriced metals to victims.

About the CFTC’s Office of Customer Education and Outreach

OCEO is dedicated to helping customers protect themselves from fraud or violations of the Commodity Exchange Act through the research and development of effective financial education materials and initiatives. OCEO engages in outreach and education to retail investors, traders, industry organizations, and the agricultural community. The office also frequently partners with federal and state regulators as well as consumer protection groups. The CFTC’s full repository of customer education materials can be found at CFTC.gov/LearnAndProtect.

About NASAA:

Organized in 1919, the North American Securities Administrators Association (NASAA) is the oldest international organization devoted to investor protection. NASAA is a voluntary association whose membership consists of the securities regulators in the 50 states, the District of Columbia, Puerto Rico, Guam, the U.S. Virgin Islands, the 13 provincial and territorial securities regulators in Canada, and the securities regulator in México. For more information, visit https://www.nasaa.org.

About FINRA:

FINRA is a not-for-profit organization dedicated to investor protection and market integrity. It regulates one critical part of the securities industrybrokerage firms doing business with the public in the U.S. FINRA, overseen by the SEC, writes rules, examines for and enforces compliance with FINRA rules and federal securities laws, registers broker-dealer personnel and offers them education and training, and informs the investing public. In addition, FINRA provides surveillance and other regulatory services for equities and options markets, as well as trade reporting and other industry utilities. FINRA also administers a dispute resolution forum for investors and brokerage firms and their registered employees. For more information, visit https://www.finra.org.

Remarks of Commissioner Summer K. Mersinger Before WFECLEAR: The World Federation of Exchanges’ Clearing and Derivatives Conference 2024

Source: US Commodity Futures Trading Commission

(As prepared for delivery)

Good afternoon.  Thank you to the World Federation of Exchanges (“WFE”) for inviting me to participate in this year’s WFEClear Conference, and thank you to the Bolsas y Mercados Españoles for hosting all of us.  I must first give my standard disclaimer: The views I share today are my own and do not necessarily reflect the views of the United States Government, my fellow commissioners, or the Commodity Futures Trading Commission (“CFTC”), on which I am proud to serve.

Throughout the programming over the next few days, the WFE organizers have highlighted a few themes that I would like to echo—clearing incentives, clearing structures, and market resilience—by offering my thoughts on certain current regulatory developments in the United States.  I believe these developments risk undermining the post-financial crisis goals, carefully evaluated and laid out by the G-20 in 2009, of increasing the use of central clearing, strengthening the clearing system, and reducing systemic risk.[1]

Before I get into these developments, I think it may be instructive to take a step back in time to September 2009 and that meeting of the G-20 Leaders, which was held in Pittsburgh, Pennsylvania.  This seminal moment may seem like just yesterday to many in this room, but it has been almost 15 years since that meeting.  Although a lot has happened since 2009, many of the themes from that meeting in Pittsburgh are still relevant, and we continue to be well served by the goals that were articulated at that important summit.

Unless you are a fan of the Pittsburgh Steelers football team (American football, that is), or an alumnus of the University of Pittsburgh, you may be wondering (like I did):  Why Pittsburgh?  A few hours’ drive East would take you to Philadelphia, a city of historical significance to the United States.  Or perhaps the summit could have been held in New York City, the seat of financial power in the United States thanks to Alexander Hamilton’s ambition to create a national bank.[2]

So, why Pittsburgh?  Well, it turns out that New York City was the first choice for the summit, but when that did not work out, it was instead held in Pittsburgh to highlight the city’s economic transformation from the home of America’s steel industry to a hub of high-tech innovation.[3]

Pittsburgh has an interesting history that started well before the city’s economic turnaround.  I am admittedly a bit of a history nerd.  I enjoy learning about the origins of the towns and cities throughout the United States, and I stumbled across a truly unusual historical fact about Pittsburgh—the story of how it came to be spelled with an “h” at the end.  While there are other cities in the United States sharing this name, Pittsburgh, Pennsylvania is the only city that is spelled using the “h” at the end of its name.

The mysterious existence of this silent “h” at the end of Pittsburgh dates back to 1758, in a letter sent to William Pitt, 1st Earl of Chatham, informing him that his name was being given to the territory—Pittsbourgh (or Pittsburgh)—with an “h.”[4] When the city, then Pittsburgh, was chartered in 1816, an apparent printing error dropped the “h” from the charter.[5]  However, despite the missing “h” in the charter, the citizens of Pittsburgh continued to spell the city’s name with an “h.”[6]

While it might seem as though this should have been the end of that story, in 1891, the United States Government stepped in to correct this supposed spelling error.[7]  The United States Board on Geographic Names declared that an “h” does not belong in the names of towns ending in “burg.”[8]  And, in case there was any doubt as to the government’s decree being the correct outcome to this persistent spelling issue, the Board pointed to the misprinted city charter to bolster its argument that the “h” did not belong in Pittsburgh.[9]

But the good people of Pittsburgh did not see a problem with their preferred spelling of Pittsburgh, and they certainly did not accept the government’s edict on the impropriety of a silent “h” in the names of towns ending in “burg.”  In fact, the Pittsburgh Gazette, the University of Pittsburgh, and the Pittsburgh Stock Exchange refused to accept the government’s new spelling and continued to use the “h” in spelling “Pittsburgh” until the Board on Geographic Names gave up the fight approximately 20 years later and officially restored the original spelling in 1911.[10]

I am sharing this story for a reason other than making all of us relive our fears of the dreaded elementary school spelling bee.  There are numerous lessons in this story that we can learn from and apply today.  First, proofreading is important. Second, change is not always positive.  And third, imposing a solution that is contrary to the interests of those who bear its consequences is not the best way for a government to exercise its power.

Returning to where I started, the G-20 Leaders recognized at their Pittsburgh meeting that the cleared financial derivatives markets remained resilient during the financial crisis[11] —and, of course, we know what happened in the uncleared, over-the-counter derivatives markets.

With that understanding, the G-20 Leaders determined that clearing of standardized derivatives through central counterparties (“CCPs”) offered a solution to limit the counterparty credit risk of interconnected derivatives trading in the financial system.[12]  Thus, increasing central clearing through CCPs became a goal for derivatives markets across the globe, and much of the risk held by individual institutions has shifted to the central clearing model over the past decade.[13]

But recent policy proposals in the United States risk upending the success we have experienced through the efforts of the G-20 and the move to central clearing.  In connection with their implementation of the Basel III framework, United States prudential bank regulators recently proposed increased risk-based capital requirements for banks providing client clearing services, despite the recognition by the G-20 Leaders of the beneficial, risk-reducing effect of clearing derivatives.[14]

This proposal, which we refer to as the Basel III Endgame Proposal, would diverge from (rather than harmonize with) the approach of our international colleagues, and would have a significant—and negative—impact on derivatives markets.

First, it would disincentivize firms from offering client clearing services to derivatives end-users—which is directly contrary to the goal of the G-20 Leaders to increase the use of central clearing.  The Futures Industry Association has compiled data showing that the Basel III Endgame Proposal would increase the capital required to engage in client clearing activities by more than twenty-two percent.[15]  Banks are likely to react to this financial disincentive by passing along the higher cost of providing client clearing services to their customers and/or decreasing the extent to which they offer client clearing services. Either result would undermine our shared post-financial crisis goal of increased clearing.

Second, the Basel III Endgame Proposal would weaken the clearing system by exacerbating the downward trend in the number of entities offering client clearing services.  In January 2004, there were 177 futures commission merchants (“FCMs”) registered with the CFTC.[16]  Twenty years later, as of January 2024, there are 62 FCMs registered with the CFTC[17], representing a 65% decline. But over the same period, there has been a dramatic increase in customer funds held at FCMs to support derivatives trading.  In January 2004, FCMs held over $87 billion of customer funds.[18]  Today, that smaller number of FCMs is holding five-and-a-half times that amount of customer funds—$490 billion.[19]  And of that customer money, approximately 60% is concentrated in the top five FCMs.[20]

By worsening this downward trend in the availability of entities to provide clearing services, the Basel III Endgame Proposal would weaken the clearing system, not strengthen it.  In clearinghouses, when a clearing member fails, losses are mutualized among members. But with fewer members available amongst which a loss can be mutualized, clearing membership becomes a riskier activity—perhaps beyond the risk tolerance of some firms that might then choose to no longer remain members of a clearinghouse…and thus continues a vicious cycle.

Third, a further decline in the number of FCMs would create systemic risk. In addition to concentration concerns, a decline in the number of FCMs would raise serious challenges regarding the portability of customer positions should a clearing member fail.  Consider this potential scenario: a clearing member defaults, and its customers’ positions need to be ported to a different clearing member; however, porting those positions proves difficult or even impossible because the Basel III Endgame Proposal has both decreased the number of clearing members and reduced client clearing capacity at the remaining clearing members.  This outcome of the Basel III Endgame Proposal would increase systemic risk, not reduce systemic risk.

At the end of the day, then, these changes to bank capital requirements under the Basel III Endgame Proposal would have significant negative effects on cleared derivatives markets.  The consequences would be most acute with respect to derivatives that are required to be cleared pursuant to post-financial crisis reforms. And these negative effects would be felt, first and foremost, by the end-users that our markets are supposed to serve—farmers, ranchers, energy producers, energy consumers, pension plans, endowments, and businesses both small and large. 

Derivatives end-users would confront increased risk if the Basel III Endgame Proposal is adopted.  Those that wish to clear through more than one FCM to mitigate the risk of their funds being tied up if their FCM fails may not be able to do so if the universe of FCMs dwindles.  Worse, the resulting increased cost of hedging might compel end-users to leave some of their activities unhedged—and thus far riskier than they need to be.

Ultimately, the increased hedging costs resulting from adoption of the Basel III Endgame Proposal would mean price increases for those buying a house or a car, purchasing food to feed their families, or paying their electricity bills to keep the lights on.  Given the global nature of today’s derivatives markets, I would not expect these consequences to be confined to America’s shores.

To end on a positive note, during a recent Congressional hearing, Federal Reserve Chairman Powell stated he expects that the Basel III Endgame Proposal would be significantly revised, and that the Federal Reserve Board would reach consensus on “broad and material” changes to the Proposal by the end of this year.[21]  For the overall strength and resilience of the global clearing system, I hope these changes reflect what I believe is the most important lesson of the Pittsburgh “h,”—namely, imposing a government-mandated solution that is contrary to the interests of those in the derivatives markets that will bear its consequences is not the best way for a government to exercise its power.

Of course, bank capital requirements are critical to our collective efforts to prevent another financial crisis.  But addressing capital requirements should not impose undue costs on providing client clearing services.  Such a result would undermine the G-20’s goals, harm derivatives end-users that rely on clearing services, increase risk in the global financial system, and raise the cost of living for our families.

Thank you again to WFE for inviting me to speak with all of you today and to our gracious hosts for having us here.  I would be happy to answer any questions you may have.


[1] See generally Leaders’ Statement from the 2009 G-20 Summit in Pittsburgh, Pennsylvania, GRP. OF TWENTY (Sept. 24-25, 2009), https://www.fsb.org/wp-content/uploads/g20_leaders_declaration_pittsburgh_2009.pdf.

[2] Am. Experience, Establishing a National Bank, PUB. BROAD. SYS., available at https://www.pbs.org/wgbh/americanexperience/features/establishing-national-bank/ (last visited Mar. 18, 2024).

[3] Paul Owen, G20 Meeting: Why Pittsburgh?, THE GUARDIAN (Sept. 24, 2009), available at https://www.theguardian.com/world/2009/sep/24/g20-meeting-why-pittsburgh (last visited Mar. 18, 2024).

[4] The Pittsburgh ‘H’, VISIT PITTSBURGH, available at https://www.visitpittsburgh.com/things-to-do/arts-culture/history/the-pittsburgh-h/ (last visited Mar. 18, 2024).

[5] Id.

[6] Id.

[7] Id.

[8] Id.

[9] Id.

[10] Id.

[11] See generally Leaders’ Statement from the 2009 G-20 Summit in Pittsburgh, Pennsylvania, supra note 1.

[12] Id.

[13] Economic Bulletin Issue 8/2016: Looking Back at OTC Derivative Reforms – Objectives, Progress and Gaps, EUROPEAN CENT. BANK (Dec. 21, 2016), available at https://www.ecb.europa.eu/pub/pdf/ecbu/eb201608.en.pdf.

[14] Regulatory Capital Rule: Large Banking Organizations and Banking Organizations with Significant Trading Activity, 88 Fed. Reg. 64,028 (Sept. 18, 2023).

[15] Walt Lukken, Regulatory Capital Rule: Large Banking Organizations and Banking Organizations With Significant Trading Activity, FUTURES INDUS. ASS’N, 2 (Jan. 16, 2024), available at https://www.fia.org/sites/FIA – 2023 Basel Endgame Comment Letter.pdfdefault/files/2024-01/FIA%20-%202023%20Basel%20FIA – 2023 Basel Endgame Comment Letter.pdfEndgame%20Comment%20Letter.pdf.

[16] Selected FCM Financial Data as of January 31, 2004, COMMODITY FUTURES TRADING COMM’N (2004), available at https://www.cftc.gov/sites/default/files/files/tm/fcm/tmfcmdata0401.pdf.

[17] Selected FCM Financial Data as of January 31, 2024, COMMODITY FUTURES TRADING COMM’N (2024), available at https://www.cftc.gov/sites/default/files/2024-03/0120-20FCM%20Webpage20Update20-20January202024.pdf.

[18] Selected FCM Financial Data as of January 31, 2004supra note 16.

[19] Selected FCM Financial Data as of January 31, 2024supra note 17.

[20] Id.

[21] Christopher Rugaber, Federal Reserve’s Powell: Regulatory Proposal Criticized by Banks Will be Revised by End of Year, ASSOCIATED PRESS (Mar. 7, 2024), available at https://apnews.com/article/inflation-economy-housing-rates-prices-federal-reserve-87ffd50b57a391a1bfd0eed17dde1ddd.