The Exchanges

Q So you mentioned fair and transparent markets, the importance of that. I'm wondering what is it you do as a regular or regulatory agency to ensure fair and transparent markets?

A Sure. So we have multiple divisions within the agency, and this is pretty typical in sort of structure. We're unique because of our market, but we have the division of enforcement, which enforces our rules and our laws. We have a division of market participants, and that's in the intermediaries, the brokers, In our world, that's the commodity trading advisors, the pool advisors, the swap dealers, the FCMs, the futures commissions merchants. We have a division of clearing and risk, and they oversee the clearinghouses. Clearing is a huge part of the futures market and has become a huge part of the swaps market as well. And we have the division of market oversight, which oversees the exchanges. And we have two major exchanges, but several other smaller and midsize exchanges in the U.S., What we do as the commission is oversee the running of the agency. We oversee the policy. So the Commodity Exchange Act is the law that Congress authorizes our agency and requires us to do certain things to sort of promote fair and transparent markets that actually fulfill the need of price discovery and risk management. But we are constantly changing our rule set, and the rules are different than the law. The law is what Congress writes. The rule is what we are authorized to It's right at the agency level, and again, very typical for an agency. So as a five-member commission, we are constantly eng…

AI assessment note: “we have the division of enforcement, which enforces our rules and our laws.”

Q So how did you end up in this seat?

A It's been a long little bit of road, but a fun one, different perspectives. Going back a little bit in time, I actually traded, I was on a prop equity desk right out of college, which was both fun, exciting, and really just an educational experience. I was in New York for just over a year, and I graduated college in 2000, so I was downtown. And shortly after nine 11, I left the firm. It was, I think, two or three weeks. And at that point, I had some ideas of going to graduate school. I didn't know when it would happen, or where I would go, or what discipline I would study, but after nine 11, I decided it was a good time to leave. So left, went to law school in the next fall, spent three years up in upstate New York, and wasn't totally convinced I wanted to become a lawyer, but after graduating, I spent two years in New Jersey, which is where I grew up, at the Attorney General's office on focusing on state securities law, so it was the Bureau of Securities, So that was my sort of first touch on official sector, public sector work, and specifically on securities regulation, and after a few years there, I worked at a private law firm in the city for about two, two and a half years, and at that point, I had an interesting conversation with a friend's dad, who's a corporate tax attorney, and I was just seeking advice, and you know, what should I do? How should I be thinking about my…

AI assessment note: “Going back a little bit in time, I actually traded, I was on a prop”

Q I think it'd be interesting to start out with just getting a deeper and basic understanding of the CFTC itself. So why don't we start with what the CFTC is?

A It's one of the two market regulators in Washington. I think probably most of your listeners are more familiar and work with the SEC, but we are the primary derivatives regulator in the U S and we have an interesting history. We're a five member commission, which is very typical among the commissions in the U S. By law, we can't have more than three members of the commission of the same political party. So under a Trump administration, we have three Republicans and two Democrats. I'm one of the two Democrats at the commission. We work very closely together, not only internally, everything we try for consensus. It's a very collegial atmosphere. And I think that's really the point of the commissions. We're sort of subject matter experts in our space, in the derivative space. And we do whatever we can to work together and get consensus or policy can really run the markets in a fair and transparent way. We also work very closely with our fellow regulators across the city. And the SEC is obviously, like I said, one of the two market regulators, but we work closely also with the Prudential regulators, which again, many of your listeners will know as the Federal Reserve, the FDIC, the OCC. So a patchwork of financial regulators, but certainly we work together. We have a lot of the same constituents or registrants, whether it's banks, investors, And others, but we certainly do what we …

AI assessment note: “we are the primary derivatives regulator in the U S”

Q advantage. That's why customers call it miraculous, game-changing, and an awakening. If that's not how you would describe your investment management tech, request a demo at ridgeline.ai. And now back to the show. In the prior administration, which clearly wasn't so favorable to even the science of climate change, did you need to depoliticize the science? Because the risk might be present whether or not you believe in the science.

A Yes, a hundred percent, and it's one of the key strategies I had, because something I say pretty often is that I've been asked, why are you doing this? Like, why do you think this is your job? And I have a very clear answer why I think this. I mean, I'm a market regulator. I have to, I do my job on a day-to-day basis, but I'm also having to constantly think about future risks of financial markets. Like, my job is not to just reflect on past risks and think how another housing crisis might cause a meltdown or how a sovereign wealth fund might go down and cause ripples across the globe. My job is to think about future risks and what We have to anticipate from a policy perspective, and how we can build a more resilient system. So the easiest way for me to do this was just to use examples of climate events, and the unfortunate reality, and this is what I say all the time, is that these climate events keep happening in a more extreme, more frequent manner, such that it really is not hard to connect the dots about what future climate events caused by climate change are Will result in for both our economy and financial markets, and we don't have to get into a discussion of why this climate is changing. Let's just look at what's going on, and for the past several years, you've had record flooding in the Midwest, you have hurricane seasons in the Gulf Coast, and then obviously to speak …

AI assessment note: “Yes, a hundred percent, and it's one of the key strategies I had”

Q That was great. What's your biggest pet peeve?

A Pet peeve. So a simple one or a fun one. I've been doing a lot of grocery shopping during the pandemic, and we all want to be efficient, keep our distance from each other, and when you get into a grocery line and I see folks ahead of me not packing bags and just letting the cash attendant pack bags, that drives me nuts because I think we could just be a lot quicker and just move things along. That's my basic pet peeve, but something that I think about these days a lot, the internet and technology has democratized Our ability to write and share our views, which I think is a great thing, and the privileges that we have under the First Amendment, but in these very divisive times where we have a lot of different points of view, I get articles sent to me or notes sent to me from friends or family, and I read an article and I'm like, did you not unpack this a few layers? I wish people would just unpack things a little bit more. And not just take things for their face, because you have to look about who wrote it, why they wrote it, and what's driving it, and I think if we did that a little bit more as a country, we could understand each other better, and I think it would lead to better outcomes.

AI assessment note: “when you get into a grocery line and I see folks ahead of me not packing bags”

Q One of the things going on at that time was this sort of massive spike in Bitcoin. And I'm curious, it may still be early days, but how have you thought in your seat about what you might need to do to think about price transparency and risk and digital assets?

A Yeah, it was a both extremely interesting time, but also an uncertain time because we had this brand new asset, which had been around for years, right? And this goes back to Satoshi in 2009, I think was when the white paper came out. But obviously, and you point that out in the fall of 17, we had a major run up in the price of Bitcoin and it was to reflect back on it now. It touched 20,000, and we were the first Real regulator to be from a government perspective to touch crypto assets. And there were two reasons. A few years earlier, it had been determined by the agency that Bitcoin is a commodity. And that's something that's pretty unique about the agency, right? The securities laws has a definition for a security, and that's a policy discussion that's going on right now with respect to crypto assets is what constitutes a security or not, and that security is offering. But if it's not a security in If you look up the definition of commodity in the Coney Exchange Act, there's pretty much everything. Like if it's not a security, it's a commodity. So it naturally sort of fell to us because it wasn't clearly defined as a security. And there was a futures product, two of them actually listed in December of 17. So in the buildup to that, which had taken months, we were engaged pretty heavily with the exchanges and the clearinghouses and the stakeholders and figuring out What are the…

AI assessment note: “figuring out What are the traditional sort of rigors of our marketplace?”

Q So with five commissioners in the agency, I'm curious, how do you get all this done?

A Yeah. So we have 700 people at the agency. We're actually split across four different offices. So our main office is obviously in Washington, but we have offices in New York and Chicago and Kansas City. And if you think about, especially the commodities market, the regional offices, which were the ones outside of DC, were really focused on where the commodity exchanges were. And historically they were in New York, Chicago, and Kansas City. So our smallest footprint is in Kansas City, our biggest is in Washington, and then we have a fair number of people in New York and Chicago for obvious reasons. So different divisions, really, really talented people, some that have been at the agency for over 30 years, some who are young and newer to commodities and derivatives, but we split up into these different divisions. The leadership is the commission and ultimately the chair, and we're making the final calls on the sort of executive decisions and operations of the agency and the policy. But from a day-to-day perspective, the nuts and bolts of what's done at the agency is done by the 700 or so people who are committed, dedicated, and really do a good job and know the markets well. Our markets are very complex, obviously. They're very unique and bespoke. It takes many, many years to get a hold on how they function and how they work from the ags to the energies to the financials, but we …

AI assessment note: “the nuts and bolts of what's done at the agency is done by the 700”

Q So I'd like to dive into another example of work that you've done that certainly came to fruition in a, I don't know, a 200 page report on sustainability. And maybe we start with how does the notion of climate risk fall its way into your lap and turn into a very substantial report?

A A lot of it has to do with what I did in my previous time in the Senate, for sure. And then before that, As a trader and as an attorney, and I, when I was at the commission in September of 17, you kind of getting your feet wet, you're figuring out what you want to do, you have to develop relationships with your colleagues, get to know the agency and the one that you're going to be part of this sort of executive team. And then as time goes by, you want to start to think about what your priorities are going to be. To an extent, this is kind of corny, but like what your legacy is going to be, what you want to leave the agency being known for. And climate change has been an issue that's been growing in this country for a number of years. I think it's fair to say that even in the past couple years, the interest, I think, from a large portion of the country and the populace has grown and spiked in the financial circles, sustainability, ESG. Has grown exponentially, both from a retail perspective, but I think just from a, what is this, and what can it do for resolving and mitigating climate change? And I started reading, and just getting to know What potentially the relationships were. The CFTC is like a great landing spot, right? Historically, we are a market that helps mitigate, in many respects, climate risk. It's certainly commercial risk for a farmer or rancher to be able to know…

AI assessment note: “A lot of it has to do with what I did in my previous time”

Q So we have a new administration coming in. What do you think happens from here?

A On a more specific level, I haven't spoken to anyone in President-elect Biden's camp about the report, but from public documents, they've actually, in their larger climate policy papers, the one thing in the sort of sustainable finance or climate risk space that they've called for is Mandatory disclosures for public reporting companies. So my suspicion is whoever is nominated or potentially in the queue for a SEC chairmanship, this will be a priority for the administration. Everything else kind of falls in line, I think, to an extent. We discussed how As much of all these sort of policy recommendations are unique in their own way. They're all sort of connected. You've seen a lot of work by the Federal Reserve just in the past couple of weeks and advancements in their view on climate change, and they've been doing it for a number of years. So I think that will only continue to snowball. And then most importantly, and you've seen this from the Biden folks, they view climate as an all of government exercise. So regardless of what specific policy data points or talking points they've issued, that Larger statement gives a lot of context to, I think, the way they're gonna view climate change in the financial services space. And this document, the greatest thing about this document, it's 200 pages. The bulk of it is about risk. And we have to think about that. We have to think about w…

AI assessment note: “the one thing in the sort of sustainable finance or climate risk space that they've called for”

Q You touched on a couple of, of key things and maybe disclosure and taxonomy go together. There's always this question of, it's great to say we should have disclosure about emissions, whatever the case may be. It's a whole nother thing trying to figure out consistency in what gets measured. What did you conclude are the next steps that should be taken?

A So you're right. I said this recently. I say it often, but disclosures, I think if you asked Sample set of people. What do they think about when they think about climate change and financial markets? Disclosures would probably be the first thing. And in my view, it's information. It's the research analyst. It's the portfolio manager being able to make the most informed decision. But on the other hand, and I think this is where you're going, it's like, what's the context of that disclosure? What's the metrics that we're measuring different issues, uh, by, and how are we supposed to really trust this information to be accurate and comparable and reliable? And interestingly, that discussion was probably the hardest, but I think the most rewarding at the advisory committee level, because it is one of the most difficult ones from a policy perspective. There's a very clear standard right now for public reporting companies that you have to disclose material risk. And you could see on one side of the debate how someone might argue, well, material risk is an umbrella term. If you're the compliance officer, if you're in-house counsel, if you're outhouse counsel, whoever's putting those documents together, the Q's and the K's, it says material risk. We will evaluate what constitutes material risk. If it's climate or otherwise, we will put it in the report. On the other hand, Material risk…

AI assessment note: “we need to be a little bit more prescriptive in what constitutes material climate risk”

Q So the concept of that is sort of incontrovertible. It'd be nice if we could all have a consistent way of looking at this, measuring it, and reporting it. Were you able to make recommendations as of yet as to exactly what those should be?

A So the specifics, no, that's going to take a long time, not years, but what the recommendation was in the space of disclosures was that with some caveats, not, you know, everyone agreed that need to rethink disclosures, and I think the consensus unanimous decision was the current standard is it's like guidance around climate risk at the SEC, and the recommendation is that there needs to be mandatory Disclosure of climate risk that is clear, reliable, and fair, and I'm paraphrasing, so I'm probably missing a few things, but essentially the bottom line is that we need to up our ante and we need to either rewrite the rule or affirm the guidance and be more clear for the public and the investor community what constitutes climate risk. The work that will go into that I think will be the very difficult work in sort of potentially drafting a rule that Engaging with the public or clarifying what constitutes climate risk above and beyond that umbrella term material risk. So it would have taken a long time to do that, but I think the number one goal was to just sort of clarify where we would fall on that line and the committee clearly fell on the side of disclosing in a mandatory fashion to climate risks.

AI assessment note: “So the specifics, no, that's going to take a long time”

Q What were some of the other most important conclusions of the work?

A Number one recommendation was carbon price. I think for a group as diverse as the committee was, For them all to agree that you need a price on carbon, and we talked about this a little bit earlier with Bob and The economic point of view is creating incentives, right? The incentives are not in the right place so that the capital is not flowing in the right area. And we, we can have this debate about how we're going to mitigate and tackle climate change. But for those who strongly believe in a carbon price, how are we going to really start to move the needle on this discussion is you have to put a price on carbon, right? It's an externality right now. It's free essentially, right? If there's no cost to emitting There's no incentive to stop or reduce emissions. So that was, especially with oil and gas companies, and you're seeing this across the board, the Baker Schultz model has a number of oil and gas companies, a number of large corporations have committed to, or at least advocated for a carbon price, but to get this group to agree to that, that was pretty remarkable, and I think a strong statement. The other things, which my takeaway is, you have this diverse group of economic stakeholders, from academics to private companies, and in this day and age, I think where the conversation about climate change and ESG and sustainable finance is really evolving so much and so rapidly,…

AI assessment note: “Number one recommendation was carbon price.”

Q second. One more question about that fair and transparent markets, which is, if you're listening to the people coming to you, it's not hard to think, well, the people who are more likely to come to you are maybe better resourced, maybe larger. How do you go about balancing the voices of those people with the large number of smaller participants who probably don't find their way into your offices?

A That's a great question, Ted, and I think We obviously have the largest institutions who have the most resources who can either come in individually or a part of a larger association or group of like-minded institutions, but we have a lot of great public interest representation. You have to lean on academics. There's a lot of great academics across the country who are thinking about things in very different ways from an economic perspective, from a socioeconomic perspective, and then you just have to do your own homework, right? You have to understand what What is the interest of the retail investor? What is the interest of the end user? And that really is for the CFTC, the most important thing. And if you kind of flip that on its head and you think about the SEC, one of their core requirements, obviously for capital formation is the retail investor, making sure there's transparency, making sure there's the free flow of the best information, factual information, so that investors can make the most informed decisions, paraphrasing all of that. But from a derivatives perspective, where we are more institutional in nature, It really comes down to the end user and price discovery and risk management and those markets functioning, markets converging from a futures perspective and understanding that in order to achieve those goals, what's the outcome? The outcome is an end user being…

AI assessment note: “we have a lot of great public interest representation. You have to lean on academics.”

Q So as you follow on from that, this notion of a stress test makes a lot of sense. How do you go about that without the sort of common metrics of what would go in the inputs to the stress test?

A Yeah, I mean, it's another huge challenge. All of this all goes back to data, and data is one of the hugest and biggest challenges for climate change, right, across the board. And I would say that the biggest takeaways from the exercise at the advisory committee with respect to stress testing, because you're right, it does make sense. Why wouldn't you evaluate the resiliency of these financial institutions as they face these climate events? But it has to be a consistent, and not only does it have to be consistent, Domestically, it's got to be consistently internationally. So there's been a number of efforts overseas. One that some of your listeners may know is the Network for Green in the Financial System, and that's being housed out of the Banque de France, the French Central Bank. And many of the recommendations, and this was an interesting observation from my perspective, was that the committee was committed to making sure that whatever recommendations they had, specifically in the stress testing space, that it was consistent with international conclusions. So that we Although we have different particular metrics with which we stress test institutions for traditional financial stress in the U.S., Those would be relevant, but the more important thing would be to make sure that we coordinate and do it on a consistent basis internationally. So ultimately, it's data points. It's…

AI assessment note: “come up with a standardized, reliable, consistent set of scenarios so that then each”

Q How do you think about this juxtaposition of decentralization, right? The blockchain in, in theory, perfectly transparent to everyone, and then a regulatory body, which to some extent in Satoshi's white papers, the antithesis of decentralization.

A It's another good question and something that we're dealing with now because it's decentralized finance, right? We're taking the decentralized institution, whether it's a bank or a regulator in that sense, out of The equation. And I'm sure a lot of the stakeholders would say we've been hitting roadblocks since day one, but I think as the market evolves, and this is an interesting time, and we'll just use Bitcoin as the reference price, but I think you can see correlations across the asset class with the different coins that they've had quite a positive run-up. It's a sore value, low interest rate environment. People are looking for safe harbor, and Bitcoin is, and the other coins have become something of a safe harbor. I'm sure there's a Bunch of speculation going on as well that's driving the price up, but we have to be very cognizant of the role that these crypto assets, these digital coins are going to play, and we have to work within the sort of confine of what we have and really send a message to folks that, look, there are a number of different laws, whether it's the Commodity Exchange Act, whether it's the Bank Secrecy Act, whether it's any number of rules and laws that affect Consumers, counterparties. There's a lot of reasons why crypto assets can be used for not such savory reasons. There's a lot of reasons why cash can be used for not such savory reasons. But I think…

AI assessment note: “I know there's a way, To combine these two very opposite forces”

Q So as you went through this whole process and came out with this report, why don't we walk through some of that? And I guess first frame out, what are those key issues from your lens as the commissioner? How did you define what the issues are?

A Yeah. So there was a few things that I thought about very carefully in Mapping out the plan and the vision for the report. The first thing and the most important thing was getting the right people. In the end, out of those 90 or so applicants that we got, we signed up 34. In 34, we have large, both domestic and international banks. We have institutional and some smaller investors representing, I think, over six or seven trillion dollars of AUM. We have exchanges. We have intermediaries, data providers. We have agricultural end users, agricultural companies, energy companies, large oil and gas companies, academics, public interest. We have environmental groups. So broad spectrum of the economy, certainly a broad spectrum of financial markets and the sort of financial market ecosystem. And in my view, policymaking one-on-one, right? How do you get something done? How do you work through roadblocks? How do you work through friction? And barriers is just to build the most diverse coalition possible. How do we get as many people from different perspectives agreeing on something and saying, this is important. This is a challenge. Government and policy needs to step in and be a part of this conversation. Testament to the members and their willingness to participate, but that was a huge, huge victory to be able to get this coalition together and agree ultimately to a report that's both…

AI assessment note: “The first thing and the most important thing was getting the right people.”