We're still in the middle of a "crypto winter," with the price of coins well off their highs from back in 2021. But debates over how to regulate them are heating up, with significant disagreements among US politicians and agency chiefs. At the recent ISDA Annual General Meeting, we sat down with Commodity Futures Trading Commission Chair Rostin Behnam to talk about his view on crypto rules and more. Among the things we discussed are what constitutes a security or a commodity, market structure questions, new types of betting markets, and other matters currently facing the CFTC. This transcript has been lightly edited for clarity.
Key insights from the pod:
Who should regulate crypto? — 1:28
Does the CFTC talk to the SEC? — 3:14
Should crypto be regulated at all? — 4:30
Is ETH a commodity or a security? — 7:40
Could a token morph from a security to a commodity? — 12:05
DeFi exchanges and the CFTC — 15:22
The CFTC’s Binance lawsuit — 18:02
FTX’s proposal for futures trading — 21:42
The CFTC and prediction markets — 25:22
Should investors participate in risky markets at all? — 34:24
Potential cybersecurity rules after the ION hack — 37:35
Will the CFTC police voluntary carbon offsets? — 41:04
Treasury market vulnerabilities and the debt ceiling — 43:54
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Tracy Alloway: (00:10)
Hello, and welcome to an episode of the Odd Lots podcast. I'm Tracy Alloway.
Joe Weisenthal: (00:14)
And I'm Joe Weisenthal.
Tracy: (00:16)
We are very happy to be recording a live episode in Chicago at the ISDA AGM. There are a lot of talking points. You hear a lot of things like leverage, liquidity, risk, how to properly regulate and handle trillions of dollars worth of derivatives. But there's another thing that you hear quite a bit about as well, Joe, right?
Joe: (00:37)
Of course, nonstop talk about crypto. Obviously, crypto itself wanes and ebbs in terms of how much people are interested or paying attention. Maybe we're still in a winter right now, but I feel like the next time there's a summer, a lot of how that market looks is going to be based on decisions and choices that are happening today by industry participants and regulators.
Tracy: (00:57)
Perhaps ironically, but not necessarily unexpectedly, when the lines on the chart go down in crypto, there does seem to be some extra regulatory attention paid to the market. So I am very pleased to say that we have the perfect guest to discuss all of this. We are going to be speaking with CFTC Chairman Ros Benham. Ros, thank you so much for coming on Odd Lots.
Rostin Behnam: (01:18)
Thanks Tracy. Thanks Joe. Good to be here.
Tracy: (01:20)
I want to start out with a very simple question that I think everyone agrees on. Who should regulate crypto?
Rostin: (01:28)
Well, you know, we have a very unique system of financial regulators in the US. I don't think that's new or something novel to either of you or the audience or the listeners as well. And I think it's been built up over decades. It's been built up as a result of crises and different instances or sort of inflection points in the financial history of the US -- both monetary system and financial markets.
But because of that, we have over time developed a pretty comprehensive regulatory system where each agency, whether it's the market regulators or the prudential regulators, has a unique responsibility. And it really falls on what type of asset are they regulating? Is it a banking asset? Is it a market sort of financial asset with trading markets and whatnot? And we have the SEC and the CFTC as market regulators and the banking regulators, which include, you know, the Fed, OCC, FDIC.
So as much as the crypto conversation presents new and novel issues and questions about the underlying asset, how to regulate it, whether to regulate it, I do think, and I've said this many times before, we have to sort of use the same playbook that we've used in the past as we think about policy that we construct for crypto.
Joe: (02:42)
So you mentioned that people are aware of, you know, the unique nature of the US regulatory regime, but as much as we sort of know that, I still have very, you know, I'm not a Washington person, I don't know how it works. Do you and your counterparts of the other agencies, and we see these headlines, right? And we'll talk about that, it’s like the CFTC has one view and this SEC has another view on these things. Do you guys call each other up and chat? How does that work? Do you guys just talk?
Tracy: (03:09)
Gensler is here later. Just throwing that out there.
Joe: (03:11)
Yeah, can we get him on stage? Do you just talk about these things?
Ros: (03:14)
We absolutely do talk, we talk within the context of a lot of the interagency working groups, which you're familiar with -- the FSOC or the president's working group. But we also do have one-on-one conversations. And a lot of these conversations that we have, and this is my perspective of course, I can't speak for the others, is high-level, sort of 30,000 feet about what we're thinking, what we're seeing, who the registrar pool is that we're starting to observe within our markets and how we need to approach this.
A lot of the work gets done at the staff level, a lot of the technical legal work, economic work, but we are shaping policy and we're shaping decisions as we see risks emerge, as we see new markets emerge. But communication is frequent. It's very transparent. And I will say this, I've said this many, many times before, we have common interests across the US government in terms of what we want to accomplish and how we want to accomplish it.
Tracy: (04:08)
Can you maybe clarify that last bit? Because there is this ongoing debate about whether or not crypto should be regulated in a meaningful way at all. I guess the argument against regulating it would be that that way you kind of keep it out of the walled financial system, you get less contagion. So what exactly are you thinking in terms of regulating the space? What is the end goal?
Ros: (04:30)
Yeah, you know, this is a question that I think about a lot, but it really comes down to me thinking about my position and my current role and how that intersects with the markets as they're developing. And I know, and I can appreciate that others, including yourselves, might have a different perspective about crypto, how/if it should be regulated, and the experiences we had most notably last year in 2022, and how those repercussions affected traditional markets, if at all.
And there's a strong argument that they didn't impact the traditional markets. But as I think about my role, and let's just break down that, you know, that puzzle of financial regulators in the US. As one of two chairs of the two market regulators in the US, it's very difficult for me to sit back and say, “You know what, this'll just fizzle over time.” Or, “this is not in the best interest of the United States or economy, national security or whatnot.” Or “we don't have to necessarily worry about this because there's no contagion risk to other parts of traditional markets.”
I think we've all read or heard, or maybe know individuals who were hurt from last year's, you know turmoil in the crypto markets. It is a largely unregulated market, notwithstanding some state level requirements. And I do think my responsibility within the context of the mission of the CFTC is to protect investors. And when it comes to commodity financial assets, which many of these tokens are, I have to do everything I can with the power I have as Chair of the CFTC to ensure that US customers are protected.
And we use every tool we have within our toolbox, whether it's regulatory, whether it's putting out notices and advisories, or most notably and importantly is using our law enforcement tool through enforcement. So we continue to use these tools, but I don't see, given the way the market's developing and evolving, and the CFTC does have a unique role and has had a unique relationship with crypto.
Our relationship with crypto at the CFTC certainly precedes me. It goes back to 2014, is I think when we brought our first enforcement case. And we've seen the development of derivatives products on crypto over many years. We have listed futures contracts on both Bitcoin and Ether going back several years now. So we do have a very vested interest in the protection and the monitoring and the surveillance of this underlying cash market, which as I said, remains largely unregulated.
So I will continue advocating. I think there's a lot of individuals in Congress and around Washington who agree with me, and certainly some who disagree. But I do always sort of fall back to that, that home base for myself as Chair of this agency that I have to focus on protecting US customers. And as long as this market exists, potentially grows, ebbs and flows in terms of size and market cap, we need to do whatever we can to protect those investors.
Joe: (07:40)
All right. So we've been talking a little bit high level here, so I want to like jump into just a specific question. And you mentioned the existence of Bitcoin and Ether futures that are traded. And my understanding is that on the matter of Ether specifically, there is a different perspective at the CFTC and the SEC. Is it a commodity? Is it a security?
And, kind of a two-part question, which is, you know, how do you arrive at the view that say Ether is a commodity and therefore should be regulated as such? And then more, I guess more importantly, you know, there are other coins out there, and so there are other Ethereum competitors, level one blockchain platforms like a Solana or something. Would the logic that leads you to sort of make the case that Ethereum should be seen as a commodity apply to other coins potentially as well?
Ros: (08:31)
Well, it's less logic as opposed to legal analysis. And maybe, you know, those are within the same Venn diagram, right? Legal analysis hopefully is logical.
Tracy: (08:43)
My husband's a lawyer and I would debate that statement.
Ros: (08:46)
<Laughs> But, you know, as I said, and Joe, you pointed this out, we have two listed futures contracts, one on Bitcoin and one on ETH. And this is not because we, the CFTC, sought out market participants or exchanges and said “You should do this,” nor is it because we have a list on our website that says these tokens are commodities, right? And these tokens are securities.
This was a market driven effort by exchanges, probably driven by client demand, to list two particular tokens. And the process that sort of transpires when you list a contract, and this is not unique to crypto, this happens in that the ag complex, the energy complex, the metals complex, and others is, you know, there's legal analysis done by the exchange. They have to conform wit, the laws and the regulations of the CFTC.
There's open dialogue over sometimes many months to make sure that the contract conforms with our legal requirements. And then at some point, there's two avenues to go down. You can [do] something called self-certify a contract, or you can seek approval from the commission.
So this is what happened with both the Bitcoin and the Ether contract. Bitcoin in 2017, Ether in about 2020. And that is what we've done historically and consistently. And in the context of your question about is it a security or is it a commodity? There's no doubt, you know, we within the agency and at the staff level, examine the characteristics of a financial asset to ensure that it complies with the law and that it falls within the definition of a commodity. And more importantly, is not a security.
If you look up at the definition of a commodity under the Commodity Exchange Act, nearly everything is a commodity, including a security. It's just securities are exempt from the CEA. So we do have dialogue with the SEC and other agencies, and we go through this sort of legal analysis to ensure that we feel confident that when an exchange or registrar lists a contract, it does in fact comply with the law.
Now, I'll add very quickly, and many in this room know this, and I'm sure many of your listeners know this as well, we have to derive our legal analysis from legal precedent, which your husband will know, right? And this Howey test, which talks about, you know, four factors about an investment of money and a common enterprise with an expectation of profit from the work of others.
And that, for better or for worse, is this sort of driving force that sits as the foundation of our legal analysis to this day for digital assets. When we think about that question about securities versus commodities, and I know Congress is contemplating this, we've raised this question, there are many characteristics about the digital financial assets, which are common to traditional financial assets. But there are certainly many characteristics which are unique and I think demand a unique set of thoughts and policy driven ideas about how and whether we should regulate it.
Tracy: (11:45)
So just on that note, could you have a situation where someone creates a coin or a token and they're raising money and it is a security as defined by legal precedent and, you know, the Howey test and things like that, but then technology enables it to become decentralized enough that it could be a commodity?
Ros: (12:05)
Yeah, I mean, there's no doubt about that. And that this is certainly a question that we've been grappling with, and I know Congress is thinking about it as well, that, you know, initially, Tracy, as you point out, there's going to be a pooling of capital from investors to start a protocol or to start a project. And at some point there would be a milestone and an inflection point where that asset flips from being a security because of those characteristics and then ends up being a commodity.
We've never had to deal with this, I think, in the context of traditional non-digital assets. But again, these are the types of questions that I think force policymakers, elected officials to think about, which regime do these financial assets properly fit into? And the policy case that I've made as the chair of the CFTC is, you know, we have to think about how these assets exist within the financial ecosystem and what requirements we should layer on to each of the financial assets as it relates to customers and investors, right?
And if you think about the SEC and the 33 Act and the 34 Act, and how and why those laws were built, it is in fact -- this term is thrown around a lo -- but to bridge an information gap between an issuer of a security and an investor, right? To provide as much information between that centralized body of individuals that’s running a company or running an organization or running a common enterprise, so that investor, whether retailer or institutional, can make the most informed decision. Fine.
Commodity markets are completely different in the sense that you have decentralized financial assets, whether it's wheat, whether it's crude, whether it's palladium. And you want to create a resilient, transparent market environment so that the individual investor, whether retail, but more commonly institutional, understands the risks associated with investing in commodity markets. But more importantly, can understand and know with confidence that the infrastructure around those trading markets, whether it's the intermediary, the exchange, the clearinghouse, the custodian, are well regulated and sort of resilient in their ability to manage that trading and that execution.
Joe: (14:35)
So you mentioned when a new commodity, or when any new future is launched, the entity can either self-certify or go to you for approval. There is one type of entity that I'm pretty sure does not do any of that, and that is DeFi exchanges.
If I were to launch a defi exchange, I come up with some new code that's like, “oh, this could be a novel way of trading futures for some of these digital assets.” What do I have to do to be in your good graces? What would constitute, are any DeFi exchanges doing that? What would get me in trouble? And are the laws clear for someone interested in the space such that they could create a code, manage the code, manage a DAO perhaps that runs the code, such that they could stay on your good side?
Ros: (15:22)
Yeah, Joe, you wouldn't be the first who would do that. So you're a little bit behind the ball there. But, you know, this does raise questions about whether or not you have individuals involved in programming and what the code is and how it's set.
But ultimately, and I do think, you know, this raises this question about regulation by enforcement. And I very vigorously oppose, at least from a CFTC perspective, and that's the only agency I can speak for, is that we have done everything in our power while I've been Chair and including my predecessors, to remain transparent and to engage with market participants in this digital asset DeFi space to ensure they know as much as they can about what the Commodity Exchange Act requires and what is required of them if they're going to offer futures options or swaps to us customers.
And I think it's easy to suggest, “oh, there's, you know, there's no institution, there's no individual, it's just code. You can't regulate that.” It's sort of self effectuating. But that's really the wrong set of questions. It's really about what are US customers being offered and exposed to, and who is either [the] individual or the group of individuals who set up that entity, that code, to offer those products.
So we are not legal counsel. We don't provide legal advice, per se, and I know that's a challenge there, there are barriers to entry as many people in this audience knows to participate in regulated markets. But regulated markets are why we have the best markets in the US and in the world. And it really is incumbent on individuals to understand and appreciate that if you're going to offer derivatives to US customers, there is a very well developed and mature legal base and requirements for complying with the law.
Tracy: (17:13)
Speaking of exchanges this wasn't necessarily a DeFi exchange, but a centralized one, I want to personally thank you for producing one of the most entertaining legal documents of all time in the form of the lawsuit against Binance. And for those of you in the audience who haven't read it, I highly recommend that you do. It is a good reminder to pick up the phone every once in a while and don't write everything down in emails. But was there any, is that
Joe: (17:38)
Is that legal advice?
Tracy: (17:39)
That is not legal advice. But was there anything in there that surprised you or that said something about the nature of the crypto ecosystem itself and the way that it's being run? I mean, you had people openly talking about you know, “this might be money laundering, but it's only $800. You can't even buy an AK47 for that.”
Ros: (18:02)
Well, I'm going to be careful about what I say and what I don't say. Given that it's active litigation. I certainly can say that it was not our intent to entertain, but, you know, it is certainly a well-developed complaint and credit to staff at the CFTC for doing the really hard work to put that together. I think at this point, and I've been at the commission, remarkably, almost six years -- nothing surprises me anymore.
So we do our work, we do it hard. We know that there's a lot of individuals out there who either don't want to comply with the law, choose to evade the law, or don't know about the law. And, you know, sometimes they will do things that are surprising including writing things down.
But we are focused on making sure we're applying the law, protecting investors, US investors, and, yeah, that case, it's ongoing and we're going to keep vigorously bringing bad actors to account here, and we'll see what happens. At this point it’ss still active. And those are only allegations.
Tracy: (19:06)
Does it feel like the digital nature of this space, the fact that the participants are so online, so much of the activity takes place online, does that make enforcement actions easier or harder from your perspective?
Ros: (19:19)
Yeah, it's a good question, and I think it actually kind of goes to I'm going to just pivot a little bit, but I think within the same context or theme, you know, there's a lot of individuals who question the use case for digital assets, right? And so often we hear about bad actors, illicit finance, utilizing this vehicle, digital assets to sort of conduct their business, which is unfortunately nefarious and sort of contravention to law and good practice.
But what I've observed from a regulatory perspective and recognizing the sort of counter to that is using, you know, traditional paper-backed fiat. What I've recognized over the past couple years working with my colleagues at the Treasury department, FBI, other law enforcement agencies, other regulators, is we're really developing a lot of very sophisticated tools to trace the use of digital assets as a means to conduct illegal activity.
So I think from my perspective, it's still a little bit, the jury is out on whether or not as these technologies develop and as the surveillance tools continue to mature, whether or not I think from a law enforcement perspective, we're going to be able to root out fraud and manipulation and illicit activity, in fact, easier than we do under traditional forms of illegal activity.
Joe: (20:46)
So a year ago at this time, FTX was still a big thing, and they were in the process of attempting to sort of restructure, or pushing to restructure how futures were traded in the US even beyond crypto, like a fundamental rethink of how futures are traded with per potentially direct access to the exchange proposals for 24/7 algorithmic, automated margining, things like that.
And at the time, I think you were somewhat open to this idea, then of course FTX collapsed a few months later, and I think for now that's dead. But the core ideas, would you still be open to some of these ideas? And just in terms of rethinking how we trade, obviously they're still currently in people's minds probably associated with FTX, but the ideas themselves in terms of what futures trading could look like in the future. Could you see that conversation revisited at some point?
Ros: (21:42)
Yeah, I mean, you know, I think if you, as I reflect on 2022 and that FTX sequence of events, which goes back to 2021 when they bought the entity sort of that they had purchased was LedgerX, which recently just got auctioned off to a bidder. I think it's my responsibility and any Chair's responsibility to always be open to new ideas, right?
We have these very clear milestone moments in market structure and market technology over the past a hundred years that clearly have put markets on a different path, and a different course, right? Whether that was, and in this city you can appreciate it better than anything else, going from pit trading to electronic trading some 20 years ago, right? I often would use that example to sort of demonstrate and illustrate how we have to be open to technological disruptions in market execution.
It's just, if we don't do it, we're going to potentially be behind from a US perspective. And I think it's incumbent we think about it. The other point is, with respect to FTX and LedgerX, that was not the first entity to come to the CFTC and request an approval for non-intermediation, which essentially was what it was.
And I said this as well, if you think, you know, over the course of 2022, as we were reviewing that application, which was a legal requirement for us to do, this wasn't some sort of arbitrary choice I made of, “oh, okay, we have an application, let's look at it,” or I couldn't as easily [have] dismissed it. We have a legal obligation to review and to respond to applications, and if we don't, then we're actually sort of at legal risk of being sued by the applicant for not being responsive to them.
But we did have two public engagement activities, I'll call them that. We had a request for information or a consultation document in March of last year. And then we had a public round table around non-intermediation, and that was driven around just making sure that we were getting as much input from the public, whoever wanted to provide it, but also to have a larger discussion about market structure and non-intermediation.
Because, you know, as we see this digital asset market mature and develop with traditional financial players wanting a piece and wanting to participate, whether through offering, you know, services or assets to their customers or potentially using the blockchain technology as a foundation for, you know, banking processes, we have this responsibility, I think from a regulatory perspective, to really think through these things.
So despite what happened to FTX, you know, the application was still ongoing. We weren't close to a decision and there were certainly a lot of legal issues, risk issues and policy questions that we were diving through. But I certainly think, as I said this before, that proposal wasn't the first of its kind, and it's not going to be the last of its kind.
Tracy: (24:43)
Hmm, speaking of new ideas, I'm going to pivot slightly from crypto, although I think this is actually related to it because it feels like one of the lasting legacies of crypto, no matter what happens now, is it's sort of normalized gambling behavior by investors. So bets purely on token go up, token go down line on the chart go up or down. And recently we have seen new prediction markets and entities forming, things like Kalshi and PredictIt that are offering all different types of bets. And I'm curious how you are viewing those through the lens of a regulator?
Ros: (25:22)
Yeah, you know, I've had conversations with both of those entities and there are certainly other entities that are trying or doing similar activities and, you know, binary options, these prediction markets are not necessarily novel. But I think from a policy perspective and from my role, you know, on the one hand we have to think about what the law requires.
And the law is very clear when it comes to these types of contracts that it is illegal to list the contract that has to do with war, assassination, terrorism and illegal activity, gaming or something that's not in the public interest, right? So of that five or six items that I just listed off, most are pretty clear. War, terrorism, assassination, gaming becomes a tricky issue that we are, we have dealt with and we're dealing with right now.
Something against the public interest also becomes tricky, right? And that's where, as we see this emergence of products, and this is a combination or a confluence of events driven by technology, market disruption, barriers to entry essentially lowering or being eliminated. And that really is a sort of byproduct of phones and access to markets, clearly a shifting in consumer and investor demand, retail investor demand around products and access to markets, and then an expansion of the type of products we list, right?
Where historically just down the road, you'd have ag products, you'd have energy products, you'd have metals products, then you had the emergence of financial futures, you know, 40, 50 years ago. And now we're sort of entering this next paradigm, and it's been going on for the better part of a decade, where with this confluence events, technology, investor behavior and barriers to entry, folks are saying, why should we be limited in the types of products that we can trade or have access to with this sort of legacy group of products?
Why does it just have to be these few risk management tools? We have so many risks in the economy, so many risks to our businesses, whether small, mid-size or large. So many risks individually. And we've seen them in the past couple years, whether it's, you know Russia invading the Ukraine and what impact that has on consumer prices and inflation, whether it's a pandemic, a once in a century pandemic that affects everyone in a very unique but substantial way.
Why should we not be able to manage these risks? So I think from my perspective, [we] have to always start the baseline is the law, what it allows, what it doesn't allow, engaging with Congress and seeing whether or not they want to expand or limit those provisions or keep them the same. And whether within those two provisions I mentioned -- gaming and the public interest -- we as a commission and me by proxy as Chair, can sort of lead a discussion about what road do we want to go down and what potential products could we start to list or allow stakeholders, registrants, to list that would stay within the confines of that legal framework and also allow markets to evolve, grow, and sort of shift with this consumer sentiment, right?
But there are a lot of risks associated with, you know, potentially listing contracts around political elections or other types of events. And this is where the commission really has to dig in, get, you know, stakeholder input, but hopefully make decisions in a very concerted, cautious and balanced way.
Joe: (28:50)
What is the concern around political contracts? Because just as a consumer of news, I love them. I love being able to say, “oh, you know, so and so..”
Tracy: (28:58)
Joe wants to bet on 2024.
Joe: (29:00)
No, I don't even want to bet. I just want to see the line and I actually, you know, I find it useful to see where consensus is, to be able to put a price on that. There are definitely times where I watch the news and they’re like “we don't know what's going on,” and I look and the market’s at like 90% [certainty]. It's like the insiders, the people who follow this stuff, do know and there's useful information. I wanted to exist in 2024, why won't it? I'm unbiased but I like it.
Ros: (29:22)
So look, I believe in markets, I believe in efficient markets and price discovery obviously. And the importance of the intersection between efficient well-run markets and how they can price risk for capital allocators or decision makers. I would say, and this isn't thought of enough, it doesn't surprise me, but just to walk you through a hypothetical, and I'm going to take a quick step back to the crypto conversation.
We don't have -- and this should be clear to everyone, we've discussed this -- I don't have legal authority to police cash crypto markets. We do have this very limited authority within the CFTC to police cash markets if there's fraud or manipulation. And the policy idea behind this authority that Congress provided to us is that if you're going to have potentially fraud or manipulation in an underlying contract or an underlying cash market that could impact CFTC-regulated markets, the CFTC should be able to police those markets, right?
We wouldn't want manipulated cash markets to impact the markets we regulate. So now let's pivot back to this conversation around election contracts. In theory, and just taking into the context what we see in the news, what we listen [to] in the news and news and its impact on elections and how we behave, has changed and evolved over the past decade.
Imagine a situation where we have alleged fraud or alleged manipulation of an election and someone coming to the CFTC and say, "You know, you have a contract listed on an election in, you know, X district in Y state, and we believe there was fraud, because of hardware, software, news, you name it.” Right? "You need to police that fraud."
So without being too indirect, what I'm trying to say is the CFTC could end up being an election cop, and I don't think that's what Congress meant or intended for us to do. And I think that raises for me personally, and I can't speak for the commission or my colleagues, a lot of legal questions and policy questions about whether or not you would want a financial regulator that's very interesting policing elections.
Tracy: (31:50)
That's super interesting. And I'm now imagining in my head like a headline in the year 2030 about “CFTC issues enforcement action against Russia for election meddling thus sparking World War III,” which I'm sure no one wants. I can't bet on it though.
Ros: (32:04)
I’ll be gone by that.
Tracy: (32:05)
But actually related question on prediction markets. You talked about people pitching these as a hedging strategy, so we have a business risk that might be related to this thing, and if we had a betting contract, we could mitigate that risk. At what point does that kind of overlap with insurance?
Ros: (32:26)
Yeah, I mean, in many respects, derivatives markets have, there are natural overlaps between insurance markets and derivatives markets. They're unique products, obviously in the way they're structured and the cost, whether it's the premium on the insurance side or the margin on the futures or the derivative side, the duration of the contract itself and this aspect of delivery, if you're talking about physical commodities. So there are many different components or characteristics that differentiate the two, but it's certainly not a unique, they're both risk management products, right? And it's a question that we deal with sort of all the time.
Joe: (33:25)
So, I want to go back to sort of something that Tracy brought up, which is this sort of gambling on everything mentality and people are just placing bets on all kinds of things. And you know, I was reading some of the public comments to the FTX proposal, and one of the criticisms of it in terms of restructuring is, “oh, this is just going to bring more retail people into futures trading. It's de facto gambling. People are going to lose a lot of money. It's very risky.”
Do you have a position essentially on the question of what is the right level of sort of retail participation in these markets? Do you factor into your thinking these are sophisticated markets and there should be some curbs on the degree to which mom and pop is playing in sophisticated financial markets? Or are you sort of neutral on this question, and as long as the trading is done with integrity and not manipulated that it's sort of up for the market to decide how much public participation there is?
Ros: (34:24)
Yeah, I mean, it, it becomes very difficult for me to tell an individual investor how they can either invest or allocate their capital. I think as Chair, you know, my number one responsibility, and this kind of goes to your point, Joe, is that we do everything we can to ensure that the markets are transparent, fair, well-regulated, as much information is flowing from the regulated entity to the customer in terms of disclosures about risks, associating with, you know, investing in leverage markets, the risk of loss around any investment at all.
And then I think it puts a burden, and I say that not necessarily in a negative way on the agency, as markets evolve, and we've seen this, and I'll use a quick example. We all remember the GameStop Reddit trading in the equity markets back in 2020. We had actually seen quite a sharp move in some of our markets in the metals complex at the same period. And it was driven a lot by social media.
Joe: (35:32)
Silver.
Ros: (35:33)
Right. And it's hard to move those markets. Those are very deep markets, very entrenched institutionally. And to be able to move those markets through some sort of externality, in this case, social media is not easy. But point being, we are, we have, and we continue to see an influx of retail participation of retail interest in our markets.
And this goes to what I was saying earlier about barriers to entry being lowered because of technology disruption, retail behavior shifting and wanting more access to markets and new products. And I think that just puts the onus or burden, however you want to frame it, on us, including my successors, to make sure that we're really upping the ante in terms of how we're sharing information to investors and the general public about the risks associated with derivatives markets and what it means to invest in these markets and what the risks are.
But, you know, going back to your original point, I think it becomes very difficult for any Chair or any commission to say “you can't do this.” Now, obviously, we have tests on the equity side, it's the accredited investor test. With us, we have this elig eligible contract participant or ECP -- kind of a wonky term to participate, most notably in swaps markets. But you know, we do have some framing about certain markets and who can participate in them. But if you're thinking about just pure futures and options on futures, in my view, it's all about disclosures, information flow and availability, and knowledge about risk of loss.
Tracy: (37:11)
Since we're talking about risk in general, I wanted to ask you about cybersecurity in the aftermath of the ION hack, which unsettled the derivatives market and probably unsettled some of the weekends and workdays of some people in this room. You talked about the potential need for additional rules around cybersecurity. What would those look like and how are you thinking about them?
Ros: (37:35)
Yeah, we don't, as a market regulator, and I know the SEC is in the same camp, we don't have a legal authority to register to police to supervise third party vendors, right? So we have a registrant who then outsources some back office processing or settlement services or cyber services, you name it. I'm sure a lot of these services are outsourced. We cannot peek into register, regulate, supervise that entity.
And I think by and large, this is another situation which is not uncommon in the regulated space, where naturally our registrants have a vested interest in ensuring the viability of their entity and the health of the markets and the ecosystem. So they're going to do their due diligence. We do have guidance and advisories within the CFTC to say, you know, this is what we expect from you as you engage and contract with vendor and vendor services.
But you know, Tracy, to your point, the policy question, especially with what we dealt with ION, is should the CFTC have new legal authority to either -- and I'll sort of talk about the spectrum of options –to keep things status quo and just continue to issue either advisories or guidance and best practices of what we expect from our registrants as they engage with vendors. Or is it to shift to a regulated structure where we then have, we the CFTC have authority, to regulate and register in some way, shape, or form the vendor, the third party provider? Or somewhere in between -- and this is not inconsistent with what prudential regulators currently do. It's called the Bank Supervisory Act, I believe -- is they can supervise vendors or third parties if that vendor is providing essentially a regulated service to the bank, to the regulated entity.
And, you know, I've proposed these ideas to Congress. I think the conversation is active, and each has its own benefit and risk. Each has its own benefit and responsibility. But I do think it's something that we have to think about because in the context of cyber risk, regardless of size of the registered entity, this is, you know, single point of failure issue that, as we saw with ION, which really was not a huge provider of back office services to US entities, more specifically, this had a pretty significant impact on our ability to do our job. Most notably issue the Commitments of Traders report, which, you know, we heard a lot about, but you know, a serious risk and something that I think demands a new policy conversation.
Joe: (40:21)
So right before we got on stage, we watched this video about the rise of voluntary carbon markets and how this is going to be a big market and companies using financial products to offset some of their carbon consumption. You know, sort of one of the questions that comes up in carbon markets or offset markets is the quality of the asset itself. If I'm buying an offset, did this really reduce some sort of carbon emissions or is it a gimmick? Will the CFTC, as these markets develop, mostly just focus on the trading of these offsets or also the quality of these offsets, the projects that generate these offsets, whether they're genuinely sort of doing what they claim?
Ros: (41:04)
Yeah, this goes back -- again -- to a consistent theme of our conversation, is what interest do we the CFTC have in the regulated market, and then naturally the underlying market. So in this case, with the VCM market, the voluntary carbon market, there are at least two listed futures contracts on CFTC registered exchanges. And just by virtue of that reality that we have regulated futures contracts, I then have a vested interest in the underlying market, right?
And if there is, in fact, as you raised, Joe, questions about the integrity of the registries and the actual offsets, whether or not they're really meeting their goals of sequestering X tons of carbon, whether the project really exists, you know, is there additional carbon being sequestered or is it just, “oh, I have a thousand acres of trees. Let me just generate some credits that have been sitting there for 30 years.”
We're not an environmental regulator. I say that often. I understand that there are limitations to what we can and cannot do. But as was said earlier, there are a number of private sector market driven initiatives, the Integrity Council on voluntary carbon markets and others, trying to create standards and best practices around the voluntary carbon market.
So we are looking at all aspects of the market and all aspects of what the private sector is doing, and thinking about what role we can play in ensuring that the underlying market has integrity and credibility. So that, and most importantly, the markets that I regulate have the same credibility because that price dislocation that might occur between the underlying and the cash and the derivatives, is obviously something that's very important to us. And we need to make sure, as the law very clearly states that our contracts are not readily susceptible to fraud or manipulation. And if there are issues in the underlying market that raise questions about fraud or manipulation, that naturally is going to have an impact on our markets and something that I would care deeply about and want to address.
Tracy: (43:20)
Speaking of credibility, Congress currently hashing it out over the debt ceiling. I don't want to ask you about that directly, but maybe we could talk about it through the lens of the Treasury market, because I know this is something you've considered, you gave a really good speech on this matter, I think it was November of last year. How confident are you that the Treasury market can withstand some sort of unexpected disruption along the lines of, you know, what we saw in March, 2020 when the market was roiled partially because of Treasury futures?
Ros: (43:54)
Well, two very different situations, right? The issues that we dealt with in 2020 were certainly generational at best, you know, in terms of how markets reacted, as we all remember in this room, the huge move downward because of demand destruction. And that very odd correlation between, you know, Treasury markets moving in, in the same direction as equity markets.
What's happening right now in the debt ceiling debate is very different. And I don't want to even begin to predict how that might impact Treasury markets because they're just very different. Snd I think, you know, I'll probably leave it there and hopefully things will get hashed out and figured out. And I have confidence in the President to be able to do that.
What we experienced in 2020, and as I think about that in those few months and some of the dislocations we saw between futures and cash, you know, I always pull myself back and have to, you know, we have to remind ourselves of what we went through and how the economy and markets were reacting to that situation, which was unprecedented sort of historically.
And I do think by and large, and you know, [we] can't forget about the fact that we had intervention from the Federal Reserve and through these multiple facilities, but markets did perform quite well. And the infrastructure and the market structure, I think, was in place. But we did see dislocations and, you know, this was the repo market dried up. We had huge volatility, which created huge shifts in demands for initial margin and variation margin. So it should not come as a surprise given the volatility and the unknowns that were occurring at that moment.
Tracy: (45:49)
Hmm. All right. Well, we're going to have to leave it there, but Chairman Benham, thank you so much for coming on Odd Lots giving us some insight into how you're thinking about a lot of these, you know, thorny and new and complicated issues. So thanks so much.
Ros: (46:02)
Thank you.
Joe: (46:02)
Thank you to ISDA and thank you for joining us.
You can follow CFTC Chairman Rostin Behnam on Twitter at @CFTCbehnam.