SEC and CFTC Chairs Vow Careful Regulation of Cryptocurrency Markets

SEC Chair Jay Clayton and CFTC Chair J. Christopher Giancarlo vowed to support and scrutinize distributed ledger technology (“DLT”) and cryptocurrency-related market activity. In a joint op-ed published in The Wall Street Journal, the agency heads cautioned investors on the risks of investing in cryptocurrencies, given limited regulation and “substantial DLT-related market activity that shows little or no regard to our proven regulatory approach.” Mr. Clayton and Mr. Giancarlo also signaled support for efforts by Congress and others to revisit the existing regulatory structures to provide more effective regulation of cryptocurrencies, particularly spot market trading.

In the op-ed, Mr. Clayton and Mr. Giancarlo acknowledged that advances in DLT are driving important innovations in various areas, such as cryptocurrencies and digital payment systems. They argued that history has shown that the transparency, investor protection and market integrity that come from appropriate regulation are critical for innovation to continue as well as to prevent abuse. They noted widespread retail investor participation in cryptocurrency-related investments, and warned that the risk to all investors in the current environment is high.

Mr. Giancarlo and Mr. Clayton also explained that cryptocurrencies were initially promoted as payment facilitation alternatives to traditional currencies but are now primarily investment assets. Much DLT-related market activity in today’s markets operates outside of regulated venues. They underscored the prevalence of unregistered, offshore “spot market” platforms outside of the SEC and CFTC regulatory umbrellas.

In response to these developments, Mr. Clayton and Mr. Giancarlo called for reconsideration of current regulatory frameworks, and highlighted the activities of their respective Commissions to police cryptocurrency markets where they have authority. With respect to initial coin offerings (“ICOs”), the agency leaders also warned that coins that have the characteristics of securities will be regulated as such, and that the SEC “will vigorously pursue those who seek to evade the registration, disclosure and antifraud requirements of our securities laws.”

President Trump Nominates Four to the Federal Trade Commission

President Donald J. Trump sent to the Senate four Federal Trade Commissioner nominations: Republicans Joseph Simons (nominated to serve as FTC Chair), Noah Joshua Phillips, Christine S. Wilson and Democrat Rohit Chopra.

Mr. Simons is currently a partner and co-chair of the Antitrust Group at Paul, Weiss, Rifkind, Wharton & Garrison LLP. He previously oversaw antitrust enforcement as the Director of the FTC Bureau of the Competition from June 2001 through August 2003.

Mr. Phillips is currently Chief Counsel to Senator John Cornyn (R-TX). He previously worked as a litigation associate at two law firms.

Ms. Wilson is currently the Senior Vice President for Regulatory and International Affairs at Delta Air Lines. Ms. Wilson previously served as Chief of Staff to the FTC Chair (2001-2002).

Mr. Chopra is a Senior Fellow at the Consumer Federation of America. Previously, he was an Assistant Director at the Consumer Financial Protection Bureau, where he was responsible for overseeing work on student loan issues. Mr. Chopra also worked as a Special Advisor for the U.S. Department of Education.


CFPB Acting Director Promises Restrained Approach

In a memorandum to Consumer Financial Protection Bureau (“CFPB”) employees, Acting Director Mick Mulvaney outlined his approach to governing the agency.

After disputing reports that he intends to shut down the CFPB, Director Mulvaney made it clear that the agency will adopt a different approach from that of his predecessor, former Director Richard Cordray. Director Mulvaney said that the agency will pull back on aggressive actions and no longer seek to “push the envelope.” Instead, he pledged that the CFPB will focus on protecting consumers without immediately looking to pursue aggressive enforcement actions. Director Mulvaney asserted that vigorous action will be pursued when necessary, but “only reluctantly, and when all other attempts at resolution have failed.”

Director Mulvaney shared that the CFPB will undertake a comprehensive review of its policies, procedures, and strategies. Specifically, he promised that the agency will be less focused on filing lawsuits, and will engage in more formal rulemaking to provide clarity to market participants. He explained that the CFPB will reorganize its priorities, and employ quantitative analysis to determine whether agency efforts are appropriately taking into account costs and benefits of a particular action.

Director Mulvaney expressed a commitment to a “new mission” focused on “faithfully enforc[ing] the law” in accordance with the CFPB’s Congressional mandate, but without expanding authority or seeking to push its boundaries.

Lofchie Comment: While Mr. Mulvaney’s statement will undoubtedly attract some negative reaction, he is describing the right approach to managing the CFPB. The notion that government regulators should “push the envelope” in seeking to expand the scope of their legal mandate is offensive. It is the job of Congress or the legislators to write laws that are both good and clear, and the job of the regulators to write rules that are good and clear. Once those good and clear laws and rules are established, regulators and enforcement actions should seek to enforce those laws, by judicial action where necessary, within their bounds. If those bounds are not broad enough, it is not appropriate for regulators to expand them through creative enforcement actions; they must go back to Congress for authority. Those defending against the government are entitled to be creative; those serving the government need to be restrained by due process.

SEC Leaders Debate Current Issues in Shareholder Engagement

SEC Chair Jay Clayton, SEC Commissioner Kara Stein and other SEC officials and industry leaders shared perspectives on developing challenges and opportunities in shareholder engagement. In a SEC-NYU Dialogue on Shareholder Engagement in New York, panelists debated the current state of shareholder governance and the roles of key stakeholders in an evolving corporate landscape.

Chair Clayton focused on activist investors and their market influence. He questioned the impact activist investors have had on public markets, and how investment funds and the interests of their fiduciaries fit into the ongoing debate on corporate governance. Chair Clayton offered some perspective on the nuances associated with a governance structure that depends on autonomous interests working collectively through investment vehicles. He stated that market participants should be mindful of the greater impact institutional actions have on all investors, given the fiduciary duties that arise out of collective capital allocation.

Commissioner Stein characterized the relationship between corporations and shareholders as the “bedrock upon which . . . capital markets stand,” and explained that increasing globalization and complexity has complicated the traditional state of shareholder engagement. She expressed concern that company operations are too often managed without input from shareholders. She highlighted technological developments (such as webcasts and data analytics advancements) as a means by which companies can more actively engage with shareholders. Commissioner Stein emphasized the importance of engagement with various tiers of shareholders – particularly retail investors – so that the interests of all parties are protected.

Lofchie Comment: In his consideration of the divergence of interests among shareholders of a company, Chair Clayton raises important questions. Here are a few more: What does it mean to say that a company is “American” if a large percentage of the shareholders are not, or if the company’s controlling shareholders are not? Conversely, is a company “American” if its operations or profits are made outside the United States? Much of the recent debate as to the role of corporations has been about their social obligations. To whom is such an obligation owed? Does it relate to the location of the shareholders? of some other group? the workers? the customers? the suppliers?

CFTC Chair Giancarlo Details Risks of Virtual Currency

CFTC Chair J. Christopher Giancarlo reasserted the “obligation of futures exchanges to ensure that virtual currency futures are not susceptible to manipulation, and of futures clearinghouses to ensure that such products are adequately risk managed.” In remarks at the ABA Derivatives and Futures Section Conference in Naples, Florida, CFTC Chair J. Christopher Giancarlo described the impact of virtual currencies on the U.S. derivatives markets and reiterated his support for a deference-based approach to the U.S. and European Union cross-border regulation of swaps.

Chair Giancarlo said that virtual currencies have already had significant effects on the markets. He raised questions about their actual value, given their high volatility and instability as a store of value. He also argued that virtual currencies represent a small asset class that receives outsized media attention, but warned that they present serious risks.

While acknowledging that the CFTC has been criticized for not holding public hearings prior to self-certification of Bitcoin futures, Chair Giancarlo argued that there is no provision in the statute for public input on CFTC staff reviews of such new product actions. Mr. Giancarlo declared that the CFTC is attentive to these concerns, and offered an eight-point checklist of objectives that the CFTC will undertake in future reviews of such certifications.

As to the appropriateness of trading Bitcoin or other cryptocurrencies, Chair Giancarlo reported that the CFTC reached an agreement with two of the primary exchanges for additional measures to be taken with respect to exchange trading of these products. These measures include:

  • Designated contract markets (“DCMs”) setting exchange large-trader reporting thresholds at five Bitcoins or less;
  • DCMs entering direct or indirect information-sharing agreements with spot market platforms to allow access to trade and trader data;
  • DCMs agreeing to engage in the monitoring of price settlement data from cash markets, and in identifying anomalies and disproportionate moves;
  • DCMs agreeing to conduct inquiries, including at the trade settlement and trader level, when anomalies or disproportionate moves are identified;
  • DCMs agreeing to regular communications with CFTC surveillance staff on trade activities that include providing trade settlement and trader data upon request;
  • DCMs agreeing to coordinate product launches to enable the CFTC’s market surveillance branch to monitor minute-by-minute developments; and
  • DCOs setting substantially high initial and maintenance margin for cash-settled instruments.

With regard to cross-border derivatives regulation, Chair Giancarlo affirmed his support of the recent CFTC margin comparability determination with the European Commission. He said that the comparability determination constitutes complete substituted compliance, meaning that the CFTC will defer to European regulators when market participants follow EU margin rules, even if this means certain non-financial counterparties are not subjected to variation margin rules when they would be under the CFTC framework.

Lofchie Comment: The SEC and the CFTC have taken philosophically opposing views with respect to the ability of investors to trade in cryptocurrencies. The SEC Division of Investment Management previously announced that it would not allow the registration of an investment company to go forward if the company were to be significantly involved in trading cryptocurrencies. By contrast, Chair Giancarlo has acknowledged the risks of these products, but determined not to prevent trading in them.

To some extent, the different conclusions reached by the regulators may reflect the differing investor bases. Investment companies are likely to attract a retail investor base, while futures traders are more likely to be institutions. Further, through his negotiations with the exchanges, Chair Giancarlo was actually in a better position than the SEC would have been to impose additional prudential requirements on the trading of cryptocurrencies. Still, Chair Giancarlo leaves himself vulnerable to second-guessing if there are material negative developments with trading cryptocurrencies, while the SEC has taken the politically safer path. In so doing, Chair Giancarlo should be respected for his willingness to take some political risk on the basis of the view that the Government can not, and should not, prevent individuals from deciding to take economic risk.

FRB Vice Chair Explains Plan for Tailored Banking Supervision

Board of Governors of the Federal Reserve System (“FRB”) Vice Chair for Supervision Randal Quarles advocated for a more tailored approach to supervising banks.

In an address before the American Bar Association Banking Law Committee Annual Meeting, Vice Chair Quarles discussed the need for increased efficiency and transparency and identified several measures the FRB is taking to improve the regulatory regime. Among them are appropriately recalibrating the capital and leverage ratio rules and reforming the Volcker Rule. Vice Chair Quarles shared that the agencies are collectively working on a “Volcker Rule 2.0” proposal. He indicated the Federal Reserve is committed to a continued  review and refinement of the resolution planning process and stress testing program.

Vice Chair Quarles explained that the FRB will tailor supervision to the “size, systemic footprint, risk profile, and business model” of banks. He said that the goal of such supervision is relevant to both small, mid-size and big banks. He reported that the FRB is supportive of raising the $50 billion statutory threshold for application of enhanced prudential standards or implementing an approach that takes into account other factors besides consolidated assets. Vice Chair Quarles called for more appropriate calibration of liquidity requirements for large Global Systemically Important Banks (“GSIBs”) as opposed to large non-GSIBs.

Vice Chair Quarles also stated that the FRB will revisit the “advanced approaches” thresholds that are used to identify the internationally active banks subject to certain risk-based capital requirements and Basel Committee standards. He added that he is not “advocating an enervation of the regulatory capital regime applicable to large banking firms.”

Separately, Vice Chair Quarles indicated that the Federal Reserve is “rationalizing and recalibrating” the concept of “control” as used under the Bank Holding Company Act, given that the standard has become somewhat ambiguous even though “a determination of control under the [Bank Holding Company] Act is significant because even remote entities in a controlled group can be subject to the BHC Act’s restrictions on activities and a host of other regulatory requirements.”

Vice Chair Quarles said that post-crisis reform has largely resulted in a stronger and more resilient system. He asserted that new efforts by the FRB will result in significant progress in the “areas of core reform” (capital, liquidity, stress testing and resolution).


CFPB Director Says Agency Fully Funded

Acting Consumer Financial Protection Bureau (“CFPB”) Director Mick Mulvaney did not request funding from the Board of Governors of the Federal Reserve System (“FRB”) for the second quarter of 2018.

In a letter to FRB Chair Janet Yellen, Director Mulvaney explained that he will rely on the CFPB’s “reserve fund” at the Federal Reserve Bank of New York. He noted that the CFPB has maintained the reserve fund despite “no specific statutory mandate” to do so. As such, Director Mulvaney represented that he intends to “spend down the reserve” before requesting any additional funds from the FRB. He projected CFPB expenses at $145 million for Q2 2018, and said that the reserve fund totals $177.1 million.

Director Mulvaney asserted that by opting to draw from the reserve fund instead of requesting additional FRB funding, the CFPB will reduce the federal deficit “by the amount that the [CFPB] might have requested under different leadership.” For the first quarter of 2018, former Director Richard Cordray requested and was granted $217 million in FRB funding.

Lofchie Comment: Why would an agency that had the authority to write unlimited checks on the Federal Reserve Board need to have a stockpiled trust fund of $173 million?

SEC Advisory Committee Considers Bond Market Liquidity

At its inaugural meeting, the SEC’s Fixed Income Market Structure Advisory Committee (“FIMSAC”) discussed bond market liquidity. FIMSAC was established in order “to provide a formal mechanism through which the Commission can receive advice and recommendations on fixed income market structure issues.”

In opening remarks, SEC Chair Jay Clayton explained that there is significant growth in the corporate bond and municipal bond markets and emphasized that fixed income markets have direct and indirect impacts on other markets. As a result, he said, these markets demand substantial attention from the SEC.

Commissioner Kara Stein highlighted the importance of growing fixed income markets and the transition of these markets from voice-based to electronic trading. She pointed to the impacts of the shifting markets: “spreads are tighter, trade sizes are smaller, and liquidity is increasingly concentrated in certain bonds.” Commissioner Michael Piwowar added that bond market liquidity is an important area of focus, as “fears of possible liquidity shocks persist.” He encouraged further analysis to inform the next steps that might be taken by regulators.

The meeting included perspectives from industry members on bond market liquidity.

The SEC also announced that it will not renew the charter for the Equity Market Structure Advisory Committee, which recently expired. Instead, the SEC will “organize targeted roundtables on discrete equity market structure issues, which will feature experts on each topic representative of a broad diversity of viewpoints.”

Lofchie Comment: Under the prior Administration, regulators simply refused to acknowledge that there were problems in the fixed income markets, perhaps because it would have meant acknowledging that there had been negative consequences to Dodd-Frank. The fact that spreads in certain securities declined, as Commissioner Stein noted, is not evidence of improved liquidity if the size of the orders as to which those spreads relate has declined substantially, or if those orders relate to a materially lesser number of securities. Leadership at the SEC seems to be returning to the regulatory basics: trying to figure out how the market works and how it can be improved.

CFS Monetary Measures for December 2017

Today we release CFS monetary and financial measures for December 2017. CFS Divisia M4, which is the broadest and most important measure of money, grew by 5.2% in December 2017 on a year-over-year basis versus 4.9% in November.

For Monetary and Financial Data Release Report:

For more information about the CFS Divisia indices and the data in Excel:

Bloomberg terminal users can access our monetary and financial statistics by any of the four options:

3) {ECST} –> ‘Monetary Sector’ –> ‘Money Supply’ –> Change Source in top right to ‘Center for Financial Stability’
4) {ECST S US MONEY SUPPLY} –> From source list on left, select ‘Center for Financial Stability’

SEC Requests Comments on Form PF

The SEC is requesting comment on the collection of information on Form PF (“Reporting Form for Investment Advisers to Private Funds and Certain Commodity Pool Operators and Commodity Trading Advisors”). All private fund advisers with at least $150 million in private assets under management are required to complete Form PF. The form is intended to aid the Financial Stability Oversight Council in monitoring systemic risk, and in allocating its regulatory tools for nonbank financial companies.

The SEC is requesting comments on (i) the necessity of information collection, (ii) the accuracy of the SEC’s reporting burden estimates, (iii) how to enhance the quality, utility and clarity of information requested, and (iv) how to minimize the burden of information collection.

Comments must be submitted by March 11, 2017.

Lofchie Comment: Form PF is fundamentally useless. (See, OFR Researchers Question the Utility of SEC Form PF as a Risk Management Tool.) The financial industry spent hundreds of millions of dollars developing systems to answer questions that were poorly considered and written. Anyone familiar with the relevant area of law could see that the questions posed on the form could not possibly generate useful or consistent results. Leaving aside the time and money wasted, if one believes that the information properly collected might have been useful to the regulators, then the waste was even greater, because an opportunity to acquire useful information was squandered. The real question for regulators now is how can they improve their procedures so as not to make a similar mistake or squander additional resources.