CFTC Commissioner Sharon Y. Bowen identified “four disruptive elements” that are “substantially responsible” for recent regulatory activity: technology, demographics, economics and institutions. In a speech at Northwestern University as part of the 2017 Brodsky Family Northwestern JD-MBA Lecture Series, Commissioner Bowen described these “disruptive elements.”
- Institutions. Commissioner Bowen contended that the United States is experiencing a “crisis in our institutions, and that is a crisis for our markets, for our government, and for our society.” In order to “increase trust in institutions,” Commissioner Bowen stated, the CFTC must be “willing to be more aggressive in enforcing our rules fairly, including being willing to take individuals and institutions to court rather than just settle with them.” She asserted that the CFTC should fulfill the Dodd Frank Act requirement to “promulgate a regulation to improve governance” and “rebuild faith in institutions.”
- Economics. Commissioner Bowen urged market regulators to be more aware of “how the overall economy is functioning and what effect market regulations are having on the economy.” She highlighted position limits rulemaking by the CFTC as an example of “democratizing . . . markets and making them more accessible and fair to consumers and investors.”
- Technology. Commissioner Bowen identified technology and cybersecurity issues as key marketplace disruptors. She expressed optimism that the CFTC will complete its work on Regulation Automated Trading, and noted that the CFTC adopted enhanced cybersecurity safeguard requirements. She urged regulators to be “mindful of the human dimension of these changes and watch for ways to encourage technology while also supporting the people displaced by it.”
- Demographics. Commissioner Bowen called on regulators to respond to demographic considerations and encourage companies, nonprofits and the government to increase diversity.
Lofchie Comment: Here are four other factors that greatly affect the financial industry in general, and CFTC-regulated entities in particular: (i) the costs of regulation, (ii) the pace of regulatory change, (iii) declines in liquidity and cross-border markets caused by regulation, and (iv) uncertainty about the imminence and outcome of regulatory enforcement actions based on ambiguous trading requirements. Those might not be the most impactful factors, but they certainly are worth Commissioner Bowen’s consideration.
Commissioner Bowen should consider why the number of registered futures commission merchants has dropped so precipitously in the last few years. It isn’t because of demographics or a loss of trust; it’s because firms can’t operate profitably. (See, e.g., this information from the CFTC. Note that the data is from year-end 2014 and the decline has since continued.) In the absence of any meaningful evidence that more expensive regulatory requirements are necessary, the notion that imposing more of them (e.g., more rules on position limits) in order to help sustain futures seems ill considered. Commissioner Bowen should acknowledge the problem that futures commission merchants have become too big to fail because all but a few have shut down. In that regard, it seems ironic that the story of Commissioner Bowen’s call for more regulation appears on the same day as a story about a major firm dropping out of the clearing business.
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