Chair Massad began by discussing the future of the swaps market. He stated that the framework being created by the CFTC and other G-20 nations will “provide a basis for further growth of our derivatives markets.” He contemplated the extent to which the regulation of OTC swaps should follow the model that exists in the futures market. Moving forward, he concluded, a framework must be created that can also evolve.
Chair Massad stressed the need for product innovation in the derivatives market. Specifically, he discussed a number of steps that were taken by the CFTC regarding bitcoin, and recognized that bitcoin “raises many important issues” for law enforcement agencies, tax authorities and other regulators. Chair Massad also noted that benchmark integrity has been a “priority issue” in enforcement actions, and that the CFTC must ensure that efforts to safeguard integrity in the administration of benchmarks do not have an adverse effect on innovation.
Additionally, Chair Massad discussed issues raised by the growth of automated trading, and called for regulators to give greater consideration to its impact on liquidity, fairness, volatility and systemic risk. He emphasized that the CFTC currently is focused on the operating risks that arise from the automation of order origination, transmission and execution. It is considering proposing additional standards in order to minimize the potential for disruptions and other problems.
Finally, Chair Massad spoke about recent international progress in achieving consistency in the regulation of OTC swaps, such as the G-20 Leaders’ agreement on basic reforms. Chair Massad acknowledged that there is “no area of financial regulation where rules are harmonized across borders,” but encouraged regulators to keep this in perspective while moving forward with regulation.
Chair Massad delivered his keynote address before the World Federation of Exchanges’ Annual Meeting in Doha, Qatar.
It is difficult to know what to make of this speech. Chair Massad seems to be calling for more innovation as well as more regulation. While these goals weren’t always inherently inconsistent with one another, the markets have reached the point over the past several years at which the goals have become incompatible. Now Chair Massad must decide if he wants to acknowledge that over-regulation is damaging to the markets, and to determine if he is open to the genuine reconsideration of any material part of the CFTC’s post-Dodd-Frank rulemaking. Of course, the easier and less ambitious path is to continue to “fine tune” without taking on the real task of reexamination.