CryptoDad. J. Christopher Giancarlo

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СКАЧАТЬ determine whether laws, rules, or regulations have been broken in particular cases; and impose fines and other sanctions on transgressors.

To perform these functions, Congress has conferred upon these agencies both quasi-legislative and quasi-judicial powers. They can issue licenses, set rates, and shape or even outlaw business practices.

      Some agencies are federal executive departments, like, say, the Department of Transportation or Department of Agriculture. Other agencies exist outside the executive departments. The latter are referred to as independent agencies, because they report to both legislative and executive branches of government and the president's power to dismiss the agency head or its commissioners is limited. This independent structure insulates the agency from the political winds that sweep over Washington. The best-known independent agencies are probably the Federal Reserve Board, the Federal Communications Commission, the Federal Trade Commission, and the CFTC's sister agency, the Securities and Exchange Commission.

The Commodity Futures Trading Commission is another independent agency. Though less well known, it is of critical importance to the stability and prosperity of global financial markets. It was established in 1974 on the initiative of some visionary leaders of the Chicago commodity futures exchanges. The new agency assumed responsibility for regulating commodity futures markets—a role that, from the 1920s¹ until then, had been performed by the Department of Agriculture. The CFTC operates under the statutory framework of the Commodity Exchange Act (CEA),² a law that was originally passed in 1936 but has been amended several times since.

      The CFTC is composed of five commissioners who serve staggered five-year terms. They are chosen by the president and confirmed by the Senate. No more than three of the five commissioners can be of the same political party. The commission is a creation of Congress, which has delegated power to it. The delegation is necessary because derivatives markets are so large, vast, and ever-changing that close scrutiny is necessary. Congress does not have the time or expertise to exercise daily oversight over them. So it delegated authority to the commission, which the commission is to wield in a fashion shielded from the expediencies of short-sighted politics.

The US derivatives markets—regulated by the CFTC—are the world's largest, most developed, and most influential. They are relatively unmatched in their depth and breadth. They provide deep pools of trading liquidity at low transaction cost and with minimal friction, and facilitate participation by a vast and diverse array of global counterparties. They are also some of the world's fastest growing and technologically innovative markets of any kind.

      Price Discovery

      US derivatives markets are outstanding at providing efficient and undistorted price discovery. Farmers look at the prices set on agriculture futures exchanges to determine for themselves whether they are getting fair value for the crops they sell to local grain elevators. At the same time, the grain elevators use futures market prices as the basis for what they offer local farmers at harvest. The US Department of Agriculture uses that same information to make price projections, determine volatility measures, and make payouts on crop insurance.

      The value of many of the world's most important agricultural, mineral, and energy commodities is reliably established in US futures markets. Importantly, those prices are set in US dollars. Dollar pricing of the world's commodities provides an enormous and unparalleled advantage to American producers in global commerce. Thanks to dollar pricing, neither producers nor consumers in the United States need a currency hedge on top of their commodities hedges.

US derivatives markets are also considered to be some of the world's best regulated. The United States is the only major country in the Organization for Economic Co-operation and Development to have a regulatory agency specifically dedicated to derivatives market regulation: the CFTC. There is a connection between singularly focused federal regulation and having the world's most competitive derivatives markets. For over 40 years, the CFTC has been recognized for its principles-based regulatory framework and econometrically driven analysis. The CFTC is respected around the world for its depth of expertise and breadth of capability. Too often underfunded, at times underestimated, certainly underrecognized, the CFTC is unquestionably the most innovation accommodating market regulator in Washington's alphabet soup of agencies. And, oh yes, unlike almost every other federal financial regulator, markets and institutions overseen by the CFTC did not fail during the 2008 financial crisis.

      When I arrived at the CFTC, my focus was still on the recent past—the 2008 financial crisis and the regulatory response to it. I was determined to complete derivatives reform, but I was also resolved to do it in a way that would promote market efficiency and economic growth. I was particularly focused on two outstanding Dodd–Frank implementations: swap execution facilities and position limits.

      Within three months of my swearing-in, an important change occurred in the commission's composition. Commissioner Scott O'Malia stepped down to join the International Swaps and Derivatives Association, or ISDA. During his almost five-year tenure, O'Malia had been a minority commissioner, meaning that his political party held no more than two seats on the five-member CFTC Commission. Under the CFTC's authorizing statute, up to three seats and majority voting power were with the other party, the party of the president, Barack Obama. Under that structure, O'Malia had nevertheless mastered the role of a minority commissioner, negotiating rule improvements when he could and issuing vociferous and well-articulated dissents when he could not. Even for CFTC rule proposals he voted against, O'Malia always seemed to be in detailed negotiations to the very end.

      I would miss O'Malia's tutelage. His unexpected departure left me as the only Republican alongside three Democrats. Tim Massad, an exacting Wall Street lawyer, was the new chairman, giving him control of the entire agency staff and its agenda. Mark Wetjen, an earnest and approachable former high-ranking Senate staffer, was the most senior commissioner. Sharon Bowen, who had been paired with me during our Senate confirmation hearings, was a principled lawyer and consumer advocate.

In American football terms, I was a defensive free safety covering a capable quarterback and two skilled receivers. In that role, I had no authority to call the plays or direct the staff's rule writing and implementation. I had only a slightly better chance to get their focused attention. I had to use other means to influence it. I chose the written word. With the help of my brilliant staff counsel, Amir Zaidi, who had previously advised O'Malia, I set to work on the promised white paper. Writing it occupied much of the autumn and winter, including the holiday break.

White Paper

      On January 29, 2015, we published the 80-page work. It was the first time in CFTC history that a Commissioner's office had ever written such an extensive treatise. The white paper reviewed how swaps worked and examined their social and economic utility. It laid out the structure of the global swaps markets. It explained why swaps did not trade on exchanges like stocks and futures, but in over-the-counter markets like corporate bonds. It also explained the role of swaps dealers and other market participants.

      The paper then argued that Congress did not give the CFTC the power to dictate market structure or appropriate business models for swap exchange facilities. The correct regulatory structure, it continued, would be one in which the CFTC registered and oversaw these facilities, but otherwise left them to conduct their business according to broad principles rather than restrictive operational constructs. Despite frequent talk about Dodd–Frank's supposed electronic execution model and its exchange trading “mandate,” there is no such requirement in Dodd–Frank. Instead, the law expressly allowed SEFs to operate “by any means of interstate commerce.” That meant, the paper concluded, that such facilities were entitled to exercise economic freedom in choosing their trading methods.

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