CFTC Commissioner Sharon Y. Bowen argued that “regulations and international financial standards need to be broadly aligned, but also be strong enough to ward off undue systemic risk and flexible enough to allow for growth.” In an address before the CFTC Annual Symposium for International Market Authorities, Commissioner Bowen set forth her perspective on the remaining CFTC rulemakings concerning position limits, capital requirements for swap dealers, corporate governance, Regulation AT and cybersecurity. She also weighed in on international developments affecting U.S. markets that “underscore the need for cooperation.”
- Position Limits: Commissioner Bowen asserted that “a strong position limits rule would not only work to reduce excessive speculation, which can be a major source of systematic risk, but would also make it more difficult for certain market participants to engage in market manipulation successfully.” She noted that CFTC staff has “included within the proposed rule various enumerated hedge exceptions, as well as a process and standard for exchanges to provide market participants the ability to hedge in certain situations.” She hoped that the rule would be finalized within the next few months.
- Capital Requirements: Commissioner Bowen anticipates that the CFTC will propose capital requirements for swap dealers and major swap participants before the end of the year. While she acknowledged that imposing onerous capital requirements, “such as 35% or even 50% of a portfolio, would inhibit trading and could slow economic growth,” she noted that “[r]equiring a firm to hold a few million dollars in capital against a multi-billion dollar trading book isn’t a regulation that will actually reduce systemic risk and protect firms from imploding. Instead, that kind of de minimis requirement is just a fig leaf.”
- Corporate Governance: Commissioner Bowen argued for a robust corporate governance rule, including fitness standards that require board directors to have a base understanding for matters under their review, limiting the tenure of independent members of audit and compensation committees, and requiring firms to disclose the level of diversity on their boards.
- Regulation AT: Commissioner Bowen said that she was “particularly proud of how [proposed Reg. AT] addresses the massive dangers posed by faulty code within algorithmic trading systems.” She noted that the proposed Regulation AT would impose stringent testing requirements on algorithmic trading systems, including testing of new codes prior to use, and regular backtesting using historical data.
- Cybersecurity: Commissioner Bowen stated that the proposed cybersecurity rule would impose specified testing requirements on DCOs, DCMs, SEFs and SDRs to address the threat of cyber breaches.
- International Cooperation: Commissioner Bowen cautioned against regulators “drop[ping] to the lowest common denominator when it comes to regulation” and urged global regulators to “fight to craft regulations and international standards that are workable, but provide robust protections to the financial system and to investors.” She encouraged global regulators to consider adopting similar rules as those of the CFTC, emphasizing that: “[u]ltimately, we’re all in this together, and I’d rather have an excellent regulation that is widely adopted across the globe to a perfect regulation that is only adopted here in America.” Commissioner Bowen commended global regulatory cooperation during “Brexit” and opined that the incident demonstrates the importance of strong international cooperation.
Lofchie Comment: Commissioner Bowen’s warning that a single country’s regulators should not go it alone is true. The comment might best be directed at her own agency, the CFTC. There is no other regulator whose conduct has made it such an obvious target of her warning.