Commodity Futures Trading Commission has been keeping busy

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Although not the best known federal agency, the Commodity Futures Trading Commission has had a busy period the last couple of years. It’s reorganized, established a new division and pursued a record setting agenda. For more, Federal Drive with Tom Temin turned to the CFTC chairman, Dr. Heath Tarbert.

Interview transcript:

Tom Temin: Dr. Tarbert, good to have you on.

Dr. Heath Tarbert: Great to be here Tom, thanks so much.

Tom Temin: And let’s begin with your status, you will still be a commissioner after January 20, but not the chairman — is that correct?

Dr. Heath Tarbert: That’s correct. I’m stepping down as chairman and chief executive of the agency, and I’ll be pursuing potential opportunities in the private sector. But until then, I’ll remain as one of the five commissioners on the agency.

Tom Temin: Alright. And just briefly, for people even in government sometimes get this mixed up, where does the CFTC lead off and the SEC begin here?

Dr. Heath Tarbert: Yeah, it is a great question, Tom. So I like to say that the CFTC is the most important financial regulator most Americans have never heard of. We oversee the derivatives markets. And so the derivatives markets are approximately worldwide about $700 trillion worth. And in the United States, somewhere between $300-400 trillion worth. So that encompasses swaps, options, and futures contracts, where the underlying asset is some kind of commodity. And that can be everything from gold or silver. It can be interest rates, and it can also comprise things like digital assets, like Bitcoin and ether. Where’s the SEC, they regulate securities, where you have a specific company, for example, that issue stock or bonds. Those are what the SEC focuses on.

Tom Temin: I guess you might say, one is pork and one’s pork bellies. And the CFTC has had a major reorganization, tell us what the result has been, how it’s different from where it was, and what some of the details were about getting that done.

Dr. Heath Tarbert: The CFTC, of course, being the sole regulator, the sole focused regulator of derivatives markets in the world, means that we have more data than most other financial agencies that focus on it. And so our markets also move in some cases at the speed of light, our markets are digitized in most cases. And so we have reams and reams of data, hundreds of thousands of transactions that occur every single day. So it became clear to me as CFTC chair that what we really needed to do to be a 21st century regulator was to create a new division of data, pulling out the various parts from other parts of the agency that had been focused on data for years and centralizing them in a single place. So we could take advantage of the unique data flows that the CFTC gets, but also be able to clean systematize and ultimately use that data with algorithms and other things that will make us a technology driven regulator. So that was the centerpiece of our reorganization.

Tom Temin: And let me just ask you one more question about that, though, that must be a difficult thing to manage, because the data comes in in large quantities on a continuous basis. And you need large quantities of data to do much of the analytical work. But on the other hand, you can’t store all of the data indefinitely, because it becomes costly. So what did you do as a management structure for that division to look at all those issues and make sure that it doesn’t get out of control?

Dr. Heath Tarbert: We had data coming in to three or four different offices and divisions in the agency. So the first thing we did was take out all of the data components of some of our major divisions, and put them all in a single place with a new PhD and Information Sciences to lead the division, who was the former chief data officer for the state of Illinois. And from there, we’re also going to determine, as you implicated, how much of that data do we store inside the agency? How much do we use cloud based solutions and also the various measures that we’re going to need to protect that data? So it was essentially going through the entire agency and asking the question, who are our various data experts thread throughout the agency, and let’s centralize them in a single place, giving them the tools and resources necessary to do that.

Tom Temin: Alright, and you were going to continue with the rest of the reorg.

Dr. Heath Tarbert: The rest of the reorg has some important aspects to one of the things we did actually prior to the reorg was elevate something called Lab CFTC, which is our innovation arm of the agency. And we moved it from being part of our legal division to a free standing office that can work with the other policy divisions on things like blockchain and other aspects. We also moved the number of individuals who were overseeing the market participants to the division that oversees clearing houses because we’ve seen new clearing houses and these are central market infrastructures, where basically all of the risk is managed. And so we’ve beefed up our oversight of clearing houses and risk. We’ve also moved, for example, our consumer education division, which was in our Office of Public Affairs to the same division that looks at all the other market participants. So the people that are looking at futures commission merchants, which is basically our version of broker dealers are also thinking about the customers of those broker dealers. And there were a few other changes as well. But again, the main one was, in fact, creating the new division of data.

Tom Temin: And you mentioned the speed of light to trading happens. And I’ve been reading recently that even the speed of light is not good enough for some trading groups. And they have been laying new cable and adding different capabilities to shave billionths of a second off trading speed, has that affected the work of the Commission in any way, or affected the markets in any way.

Dr. Heath Tarbert: It has. As our markets develop new risks come from those markets. And so one of the things that we see, for example, with electronic trading in the enforcement area is spoofing. That’s essentially where basically computer and other algorithms basically create a number of bids and asks, but then ultimately withdrawal those and then come in on the other side, thus potentially manipulating the market. So that’s something we didn’t see when we had the open outcry pits of yesteryear. And we’ve sought to investigate those matters using our own algorithms. On the other side, we’ve also seen potential risk involved with electronic trading. And so we came up with risk principles for electronic trading that was just recently promulgated on a bipartisan vote of the commission to enable both exchanges as well as the CFTC to continue to monitor those risks and adjust accordingly. That said, despite the fact that there are increased risk, what I will say is all of that technology has actually been beneficial on the whole to our markets. Because if COVID had happened 25 or 30 years ago, our markets potentially could have completely stopped. And in fact, it was technology that allowed them to remain orderly and liquid.

Tom Temin: And let’s talk about some of the functions of the commission over the last couple of years, you’ve had a record number of final rules and rulemaking. And so my first question is how much of the rulemaking and decision making of the commission is actually bipartisan? Because it’s one of those commissions where the President appoints republicans-democrats, like so many other commissions. how much of it is actually partisan? Is any of it?

Dr. Heath Tarbert: Very little. The short answer is that we pride ourselves and being a consensus, collegial, and expert driven agency. And you see that at all levels of the agency, but even at the commission itself. So when I look back, I think if you look at all of the matters, we vote on, and some of these, the public never sees their enforcement matters. There are other things that come through. It’s something like 98% are unanimous when you look at the rulemaking. So these are really the most important policy decisions at the agency. There were 40 final rules promulgated under my chairmanship, which is probably a record in terms of the amount of time the Commission’s worked incredibly hard, nearly 90% of those rulemakings were bipartisan, and nearly 80%, were actually unanimous. So I think that goes a long way to showing that ultimately, while there is partisanship in Washington, we try to keep it out of the commission as best as possible. We try to work together and we try to convey to the rest of the country that yes, you can have a situation where we’re deciding important matters of public concern. But at the same time, we can be adults in the room.

Tom Temin: And on the other side of the reorganization and the busy agenda, we had the COVID-19 pandemic overlay all of this on every federal agency, what were some of the ways the CTFC adopted to be able to keep working at this high level  through the pandemic?

Dr. Heath Tarbert: Yeah, the pandemic itself may very well have been the greatest challenge to our agency in our 45 years of existence, because not only did the COVID-19 pandemic challenge our federal workforce, as it has throughout the federal government, but it also made us one of the most important agencies at this time, because the markets were more volatile than they had ever been due to COVID. So the health and the economic crisis created lots of volatility in the markets. And that meant that the CFTC arguably had to be more busy than ever before, issuing, for example, 19, specific directed, targeted regulatory relief measures to allow the markets to remain open, because as we were sitting at home and working, so we’re the traders and many of our rules and regulations were written for people trading on trading floors, so we had to make sure that our markets were orderly and liquid so farmers, ranchers, energy professionals could continue to hedge during this crisis. At the same time, of course, it also challenged our agency. So we over a weekend, tested out our telework capabilities, and then literally moved to full telework and we’ve been that way ever since since March.

Tom Temin: And just for the record, how large is the CFTC, how many employees do you have?

Dr. Heath Tarbert: So we have 700, about 700 full time employees and about 300 contractors, so about 1,000 people all together over four offices. Our headquarters in Washington, and then field offices in New York, Chicago and Kansas City.

Tom Temin: Many agencies and I’m sure yours as well have looked a new at the diversity question in light of public events that have happened over the past year or so past six months. What about the CFTC?

Dr. Heath Tarbert: Yeah, and we haven’t actually looked at it necessarily a new after the events. When I started as chairman, we voted on a new mission, vision and set of core values at the agency and the vision and the core values were actually new. We had employees submit ideas for the agency. And then we had a final employee vote where ultimately people chose various core values. And one of the core values was teamwork, and it has a specific reference to diversity. And so we started on this path maybe 18 months ago or so. And we have my management team and senior leadership have more women and people of color than I think ever before in the agency’s history. And then when the events over the summer and other times took place, we even double down on those efforts. So we have, for example, invited Deloitte to come in as a consulting firm to look at our diversity and inclusion efforts and see if we could do more work in that area. So they are finishing up their study and will present us with a report that it’s very important diversity and inclusion because there’s a market regulator. I want this agency’s employees to be reflective of the diversity of the people that use our market.

Tom Temin: Dr. Heath Tarbert is chairman of the Commodity Futures Trading Commission. Thanks so much for joining me.

Dr. Heath Tarbert: My pleasure Tom. Thank you so much.

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