Recently the US Commodity Futures Trading Commission (“CFTC”) announced two initiatives to encourage financial innovation and regulatory efficiency in the futures and swaps markets. With these new initiatives, the CFTC becomes the latest financial regulator to turn its attention to the promise of and risks posed by financial technology (“fintech”).
First, the CFTC announced Project KISS—“Keep It Simple, Stupid”—as a forum to examine how its existing rules might be applied in less costly and burdensome ways. Second, the CFTC launched LabCFTC as a way to promote responsible fintech and regulatory technology (“regtech”) innovation. Together, these initiatives appear to be a significant part of the CFTC’s response to calls for streamlined regulation from the industry, the White House and some members of Congress.
This Legal Update provides an overview of the political and legal context in which these developments arose and then analyzes what these CFTC initiatives mean for the industry.
Recent Fintech Development
On February 24, 2017, President Donald Trump issued Executive Order 13777 (“EO 13777”), which requires executive agencies to establish Regulatory Reform Task Forces to oversee agency efforts to streamline regulation and foster innovation.1
While the CFTC was not legally required to comply with EO 13777, the agency announced two initiatives in May 2017, Project KISS and LabCFTC, that represent its contribution to the recent government momentum favoring more efficient regulation of financial services and markets. The CFTC also has voluntarily designated a Regulatory Reform Officer to lead the agency’s task force in furtherance of Project KISS’ goals.
On May 3, 2017, the CFTC officially announced that it was seeking public comment on Project KISS, which Acting CFTC Chairman J. Christopher Giancarlo had previously described as an initiative to foster economic growth by reducing excessive regulatory burdens.2
Notably, the initial iteration of Project KISS does not propose specific changes to existing regulations.3 Rather, the CFTC has indicated that it will use Project KISS to solicit ideas on ways to modify how existing rules are applied. Using these ideas, the CFTC will consider implementing changes to agency guidance, opinions and interpretations but is unlikely to issue amendments to regulations.4 While decreasing the implementation burden on the agency, this informal approach potentially limits the depth and breadth of any changes that may be adopted.
The topics on which the CFTC is seeking comment in connection with Project KISS foreshadow potential areas of reform. The CFTC website specifically invites public input on the following five “KISS Initiatives”:5
- Registration—the process of becoming regulated by the CFTC as any of the several entity types that the agency regulates
- Reporting—all reporting obligations, including swap data and recordkeeping
- Clearing—clearing services in connection with various contracts and transactions
- Executing—the execution of futures and swaps transactions
- Miscellaneous—any topics not specifically enumerated above
Interested parties can submit comments via the CFTC website or by email until September 30, 2017.
In May the CFTC also launched its LabCFTC initiative, which is “aimed at promoting responsible fintech innovation.”6 This initiative is intended to enhance the agency’s involvement in fintech and regtech7 solutions and to support the goals of (1) providing regulatory certainty for fintech innovators and (2) enabling more efficient regulation through the use of emerging technologies. LabCFTC contemplates a variety of means to accomplish these objectives, including:
- Proactive outreach to and collaboration with the fintech industry to better understand the strengths and weaknesses of the CFTC’s current regulatory framework as applied to new technologies
- Participation in research and engagement with academia and professionals to harness and promote the advantages of fintech/regtech for the CFTC and the markets it regulates
- Collaboration with other financial regulators at home and abroad and the sharing of information about promising fintech applications and their potential risks
- The tracking of fintech developments to ensure that CFTC regulation supports rather than impedes innovation
The CFTC also announced that it is rolling out two initial “core components” of LabCFTC: “GuidePoint” and “CFTC 2.0.”
The CFTC intends for GuidePoint to provide fintech companies with a dedicated point of contact with CFTC staff. By facilitating a dialogue with the industry, the CFTC hopes to provide guidance to fintech companies that are considering bringing new products or services to futures markets. This guidance may be general, such as resources on registration and compliance processes and an explanation of the criteria most relevant to agency staff, or may be tailored to the questioner’s business model.
As examples of some of the financial technologies that the CFTC is open to engaging on, the GuidePoint webpage specifically mentions the following examples:8
- Algorithmic Trading
- Blockchain and Distributed Ledger
- Cloud Computing
- Data Management and Analysis
- Machine Learning, Artificial Intelligence
- Money and Asset Transfer
- Network Cartography and Analysis
- Programmable Hardware
At the same time, the agency hopes to use its interactions with fintech companies to facilitate a regulatory framework that is conducive to innovation. By monitoring the types of questions submitted to GuidePoint and the types of companies submitting them, the CFTC hopes to gain a better perspective on industry trends. The agency plans to use this enhanced awareness to ensure that its regulatory policies are in tune with the evolving marketplace.
Importantly, however, feedback received through GuidePoint is non-binding on the CFTC, and the agency “is not required to follow or accept legal conclusions derived from information provided through GuidePoint.”9 Thus, a company that acts on GuidePoint guidance could nonetheless be exposed to enforcement risk and should exercise caution in relying on the guidance.
Like GuidePoint, CFTC 2.0 invites dialogue between the CFTC and fintech companies but with a focus on enhancing agency operations through fintech and regtech technologies.10 The initial CFTC commentary on CFTC 2.0 is general, but notes that it is the initiative’s goal to establish “a secure testing environment” to help staff gain experience with new technologies.11 The extent of this “walled-off workspace” and the opportunities for industry involvement, if any, are not yet clear. While this first foray by a US regulator into offering a sandbox of sorts might spur other US regulators to pursue their own, possibly more robust, sandbox offerings, it does not appear that CFTC 2.0 is intended to provide a regulatory sandbox for business proposals by fintech companies (as the Financial Conduct Authority has provided for certain UK companies).
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As the fintech space continues to increase in profile and expand in application, regulators are taking notice. While fintech activity in areas such as marketplace lending, cryptocurrency and payment systems becomes more established, opportunities for technological innovation in other financial markets continue to emerge. The CFTC’s Project KISS and LabCFTC initiatives are only two examples of how regulators are taking steps to grapple with the potential, and the risk, accompanying the swift advance of new financial technologies. The CFTC’s invitation for industry input may present an easy opportunity for fintech companies to have a say in the formation of agency policy.
(The firm wishes to thank Daniel Pearson, a summer associate in our Washington DC office, who contributed to the drafting of this Legal Update.)
1 Exec. Order No. 13777, 82 Fed. Reg. 12,285 (Feb. 24, 2017). In the months leading up to the issuance of EO 13777, at least four financial services regulators launched or updated initiatives to accomplish some of the same goals. For more on these developments, see our Legal Update by Melanie Brody et al., Three Financial Regulators Issue Reports on Product and Service Innovations, Mayer Brown LLP (Nov. 18, 2016), https://www.mayerbrown.com/files/Publication/2ae91e0e-098a-45c7-8377-c8b9706edba9/Presentation/PublicationAttachment/2e909cd0-5a38-4596-8b11-f3a836d6d226/161118-UPDATE-FSRE.pdf.
2 Press Release, CFTC Requests Public Input on Simplifying Rules (May 3, 2017); J. Christopher Giancarlo, Chairman, CFTC, Remarks at the 42nd Annual International Futures Industry Conference (Mar. 15, 2017), http://www.cftc.gov/PressRoom/SpeechesTestimony/opagiancarlo-20.
4 For example, the CFTC’s Division of Market Oversight recently emphasized that its review of the swap data reporting regulations, which may lead to amendments to the CFTC’s regulations in Parts 43, 45, and 49 of the Code of Federal Regulations, is not part of Project KISS. See Division of Market Oversight Announces Review of Swap Reporting Rules in Parts 43, 45, and 49 of Commission Regulations, CFTC Letter No. 17-33 (July 10, 2017).
5 CFTC, KISS Initiatives, https://comments.cftc.gov/KISS/KissInitiative.aspx (last visited July 31, 2017)
6 J. Christopher Giancarlo, Chairman, Address Before the New York FinTech Innovation Lab (May 17, 2017), http://www.cftc.gov/PressRoom/SpeechesTestimony/opagiancarlo-23; Press Release, CFTC Launches LabCFTC as Major FinTech Initiative (May 17, 2017).
8 CFTC, GuidePoint, http://www.cftc.gov/LabCFTC/GuidePoint/index.htm (last visited July 31, 2017).
11 CFTC, CFTC 2.0, http://www.cftc.gov/LabCFTC/CFTC2_0/index.htm (last visited July 31, 2017).