FROM: U.S. COMMODITY FUTURES TRADING COMMISSION
Remarks of Chairman Timothy Massad before the National Grain and Feed Association 119th Annual Convention
March 17, 2015
As Prepared For Delivery
Thank you for inviting me today, and I thank Gary for that kind introduction. It’s a pleasure to be here. It’s been a while since I have been to San Antonio, but I am not a stranger to this part of the country. I drove in this morning from Austin, where I spent last night. Both my mother and sister live there, and my brother lives in Houston. My family lived in Texas for many years when I was a kid – in Midland, Brownsville and Houston. My father worked in the oil business so we moved around a lot between Texas, Louisiana and Oklahoma. Eventually as my dad advanced in his career we moved to the Northeast. When my dad retired, my folks moved back to Texas and my siblings gradually migrated back as well. I was the black sheep of the family who stayed in the Northeast, other than some years in the Midwest and abroad. So I hope those of you from this part of the country will give me a little credit for at least having lived here, rather than concluding I’ve got bad judgment for not coming back.
While my time in Texas had more to do with oil than with agriculture, as a kid I did spend some time on farmland outside of Tyler Texas. My uncle, who still lives in Dallas, and my father had some land there, and we’d come for part of the summer and vacations. They had a few cattle that a local guy tended for them. I can’t say that taught me anything about raising cattle – other than to watch where I was walking – but I have fond memories of those times.
Moving around a lot as a kid, and later as an adult, taught me a few things about our country. One is you appreciate the incredible richness and physical beauty of this country. Another is you learn to listen to and respect those who may have a different point of view. When you live in different parts of the country and the world, when you have to make new friends and acquaintances, you come to appreciate that people can look at things differently. Now, of course, if you work in Washington as I do, admitting that others may have a reasonable point of view, even if you don’t agree with it, can be an occupational hazard. But I try to do the best I can despite this limitation.
My view of the country was also shaped by the fact that my grandparents were immigrants who came over as teenagers, one suitcase in hand and speaking no English. After getting past Ellis Island, they went to Oklahoma and Kansas. This was in the years before World War I. They struggled hard to make it and create a better life for their kids. And my parents were part of the Greatest Generation, who grew up learning how to survive and build a better life for their kids in the face of events that were totally out of their control – the Depression and then World War II.
I say all this because many of the characteristics that have made our country great – the richness of the land, the diversity of our people, the opportunities for those who work hard, and the challenge of dealing with forces and events that are far greater than you and are outside of your control – are deeply tied to agriculture. You all know that, I’m sure. Every day, your work, your lives are shaped by these things – the richness of the land, the opportunity for those who work hard, and the challenge of dealing with events beyond your control.
So today I want to say a few words about the importance of the agricultural industry to our work at the CFTC, then talk about our current priorities, and then I would be happy to take your questions.
The agricultural industry is the foundation for the CFTC. Indeed, helping the agricultural industry is what gave this agency its start, its purpose, and it remains central to our mission today.
As you know, the futures industry started because farmers and ranchers needed a way to deal with events outside of their control – the uncertainties of weather, the unpredictability of the market. Many decades before people in finance figured out that they could manage interest rate or credit risk using futures, people in agriculture were hedging risk. Futures on agricultural commodities have been traded in the U.S. since the 19th century and have been regulated at the federal level since the 1920s. The CFTC itself was part of the U.S. Department of Agriculture before becoming an independent agency in 1974-1975. And, in fact, the newly independent Commission initially worked out of the USDA basement and cafeteria.
In the hall leading to my office in the CFTC’s headquarters, there’s a wall with historic objects documenting the roots of the agency in the agriculture sector. You can see some of the first agricultural contracts approved by the USDA – objects signed by both USDA Secretary Henry Wallace Sr. of the Hoover administration and Secretary Henry Wallace Jr. of the Roosevelt administration.
Many things have changed in the 40 years since the agency was created. Like the agricultural industry itself, the derivatives markets we at the CFTC oversee have grown and changed over the years. The number and types of futures, options and swaps have increased dramatically, with products based on energy, metals, interest rates, currencies, and equities in addition to those based on agricultural commodities. The markets have grown substantially in size. U.S. futures and options markets are now estimated to be $30 - $40 trillion, measured in notional value, and the swaps markets are around ten times that amount. The way trades take place has also changed. Trading pits have given way to automated, electronic trading.
Despite these significant changes, a few things haven’t changed: the first is the importance of agricultural futures products. While they may no longer be the largest segment of the markets by volume, their importance is just as great today as it was then, just as agriculture is just as important today as it was then – if not, in each case, more so. After all, our agricultural industry doesn’t just put food on the table for every American family, it feeds the world. You all also know that while there have been tremendous advances in technology, science and knowledge, and our ability to influence or control many things, you still can’t control the weather. And even if you can at least predict the weather a bit better, you can’t predict or control the market. And so, the derivatives markets have remained just as important for agricultural folks as they were when they started: farmers and ranchers rely on these markets to hedge price, production, and other risk.
For these very reasons, the connection, and commitment, of the CFTC to agriculture is still strong, and our mission has changed very little. At its core, our mission is to make sure that the farmers, ranchers, and other businesses that depend on these markets to hedge risk can use them effectively. Our job is to help these markets thrive, to do all we can to make sure they operate with integrity, to prevent fraud and manipulation, and to protect customers.
The global financial crisis, however, taught us that this is not the only thing we must think about. We learned how excessive risk and a lack of transparency in the over-the-counter swaps market could intensify the crisis and the damage it caused. Now, I know that excessive swap risk wasn’t created by agricultural futures. I know it wasn’t caused by farmers, ranchers, or other commercial businesses hedging routine price risk. But the damage that was caused by the crisis hit all of us: millions of jobs lost and homes foreclosed, many businesses shuttered, and countless retirements and college educations deferred. I saw the terrible impacts first hand and spent five years working to help our nation recover. It’s an experience that has shaped how I approach being Chairman of the CFTC.
So the task for us today is to do our job in a way that helps make sure these markets continue to thrive and work well for the businesses that depend on them, while also making sure they do not create excessive risk to our financial system or our economy generally.
If you look at what we have been doing since June, when two other commissioners and I took office, you will see that we are addressing both those goals, and trying to do so in a pragmatic, balanced manner. We have been active in a number of areas, and I want to review what we have been doing and what’s on our agenda in the months ahead.
Before I do so, I want to thank the CFTC staff. Our recent progress and, really, how far we have come since the crisis is a credit to their hard work and dedication. I also want to thank my fellow commissioners as well for their willingness to collaborate and work constructively together.
I know all of us are committed to carrying out the CFTC’s responsibilities and enhancing these markets.
I also want to acknowledge the work that the NGFA and its members do to help us do our work. Your participation in the issues facing the Commission is appreciated and very valuable. We appreciate your input through comment letters, and through arranging meetings or occasions like this one.
I’m also pleased that we have NGFA representation on our Agricultural Advisory Committee. Our advisory committees are a very good way for us to get input from the public. I am the sponsor of the Agricultural Advisory Committee. As chairman, I get to choose, and I wanted to be the sponsor of this committee because of the importance of agriculture to the CFTC and these markets, and because the issues interest me. We had an excellent meeting in Washington in December, where we were joined by Secretary Vilsack. MJ Anderson and Todd Kemp were there, and it was an excellent opportunity to hear directly from farmers, ranchers, and others, who rely on these markets day in and day out – about how our rules are working, where some adjustments may be necessary, and perhaps most importantly, what issues we should be focusing on going forward.
Let me describe some of the things we’ve been doing and some of our current priorities.
Making Sure the Markets Work for Commercial End-Users
I believe that a key measure of our markets’ success is how well they serve the needs of commercial end-users – the farmers, ranchers and wide range of other businesses that depend on them. So a key priority since I took office has been to address some of the concerns of end-users with respect to our rules and fine-tune them where possible.
Last November, the Commission proposed to modify one of our customer-protection related rules to address a concern that I know many of you have had, as have others in the agricultural community, regarding the posting of collateral. Market participants asked that we modify the rules so that the deadline for futures commission merchants to post “residual interest” would not automatically become earlier in the day a couple years from now. This deadline can affect when customers must post collateral. So we have proposed changing the rule so that the deadline would not become earlier unless the Commission takes affirmative action to change it.
I should note that we separately made it clear that you can use electronic transfers, or ACH payments, which makes it easier to meet the deadline.
We also proposed to revise our rules regarding record-keeping requirements to provide some relief to commercial end-users. We proposed to exempt end-users and commodity trading advisors from certain recordkeeping requirements related to text messages and phone calls, as well as from some requirements as to how records must be kept.
On both the residual interest and record-keeping proposals, I appreciate the NGFA’s input and support for these changes, although I also recognize that you’d like us to make further changes. I hope we can take final action on both proposals soon.
We have taken a number of other steps as well that may not be of direct concern to you but that reflect our desire to address the needs of end-users generally. These other changes include making it easier for local utility companies to access the energy swaps market. We also recently proposed to clarify when forward contracts with embedded volumetric optionality – a contractual right to receive more or less of a commodity at the negotiated contract price – will be excluded from being considered swaps. This change, if adopted, should make it easier for commercial companies to use these types of contracts in their daily operations efficiently.
The Commission staff has also taken action to make sure that end-users can use the Congressional exemptions given to them regarding clearing and swap trading if they enter into swaps through a treasury affiliate.
Some of these changes affect the cost of trading, an issue that I know is of concern to many of you. We will continue to focus on these costs. I have recently spoken out about a banking regulation that may increase the cost of clearing because of requirements placed on clearing members. This pertains to the leverage ratio. I’ve directed our staff to work with the staffs of the banking regulators to see if they can modify this rule to address the concern.
Finishing the Remaining Rules
Another priority for us is completing the position limits rule. Congress mandated that we implement position limits to address the risk of excessive speculation. In doing so, we must make sure that commercial end-users like agricultural producers can continue to engage in bona fide hedging. We have received substantial public input on the position limits rule. We got input at the Agricultural Advisory Committee meeting last December, for example. The Commission and CFTC staff are considering these comments carefully. We understand the importance of bona fide hedging, and I want you to know that we are looking at the concerns many of you have raised. We are going to take our time to get this right.
Another rule we must finish is our proposed rule on margin for uncleared swaps. This would require swap dealers to post and collect margin from their counterparties on uncleared swaps, much as is required on cleared swaps. This helps reduce the risk of those trades and the risk to our financial system as a whole. Our rule makes clear that swap dealers are not required to collect margin from end-user counterparties. This is consistent with Congress’s intent. Congress recognized that the activities of commercial end-users in the derivatives markets do not create the same types or degree of risk as with large financial institutions, and so Congress provided these exemptions to minimize the impact of necessary regulatory reform on commercial end-users.
Enforcement
We also remain committed to a robust surveillance and enforcement program to prevent fraud and manipulation. There is nothing more important to restore and maintain public confidence in our markets than robust enforcement. An important part of this effort is vigorous financial surveillance over futures commission merchants. We have stepped up our efforts to make sure FCMs safeguard customer funds and meet their financial obligations to clearinghouses. We require FCMs to make daily reports demonstrating compliance with the segregation obligations; and to provide notice to us of certain withdrawals of funds from the customer segregated accounts. Depositaries holding customer funds also are required to confirm balances on a daily basis, so that it is possible to verify that the funds that FCMs report as being held for customers are, in fact, on deposit. And CFTC staff, working with the self-regulatory organizations, conduct periodic on-site examinations of the FCMs to assess their compliance with the financial requirements.
With regard to enforcement, we have been vigilant in bringing cases where FCMs have failed to meet their financial and regulatory obligations – not maintaining sufficient capital or keeping customer funds properly segregated, for example. We have held some of the world’s largest banks accountable for attempting to manipulate LIBOR. And we recently ordered five of the biggest banks in the world to pay $1.5 billion in fines for attempting to manipulate foreign exchange benchmarks. We have brought successful cases against those who would attempt to manipulate our markets through high frequency trading using spoofing strategies. And we have also stopped crooks trying to defraud seniors through precious metal scams and Ponzi schemes. In all these efforts, our goal is to make sure that the markets we oversee operate fairly for all participants regardless of their size or sophistication.
Finally, we are focused on new challenges and risks in our markets. Cybersecurity has been getting a lot of attention, and rightly so. It is now perhaps the single biggest threat to financial stability. We are making this a priority in our examinations. Another example of a new challenge is automated, electronic trading, including high frequency trading. We are looking at whether we should take further action to make sure this type of trading does not lead to unfair advantages for some traders or pose excessive risks to our markets.
We are also doing all we can to make sure clearinghouses are strong and stable. The reforms that are being implemented worldwide since the financial crisis have made clearinghouses even more important in the global financial system. A few clearinghouses, in particular, are clearing most of the futures and swaps products. As a result, there is more attention being paid around the world to the risks that clearinghouses pose and what would happen if there was a problem at a clearinghouse. As we think about these issues, we need to address financial stability concerns while still making sure that clearinghouses, and clearing members, can operate successfully so that their clients – end-users like you – can still participate in these markets in a cost-effective manner.
The Importance of Market Participant Feedback
In all that we do, feedback from people like you, businesses that use these markets, is vital. Your input helps us understand the issues you face in using these markets. That’s particularly helpful when we face the task of balancing competing objectives. So I look forward to your continued input.
Resources
One of the biggest challenges we face is simply that there is more we should be doing that we cannot do because of resources. Not more rules to write, but rather, things like responding quickly to the concerns of market participants. Dealing with the threats posed by cybersecurity, or the challenges of high frequency trading. Or simply processing requests for registration, rule changes, or new product approvals. The CFTC’s current budget has simply not kept up with the growth of the markets and our responsibilities.
We have more work to do than we have people to do it. This means we cannot be as responsive as we wish to be. And today’s markets are sophisticated and technology driven. To be effective, our oversight must be as well. Without additional resources, it is difficult for us to do the job that I believe our markets need and the American people deserve.
Conclusion
The United States has the best derivatives markets in the world – the most dynamic, innovative, competitive and transparent. They have been an engine of our economic growth and prosperity, in large part because they have attracted participants and served the needs of end-users who depend on them. I know this group understands the importance of risk management and price discovery more than most. I look forward to working with all of you to make sure that these markets continue to work well for businesses like yours in the years ahead.
Thank you for inviting me. I would be happy to take some questions.
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