I am incredibly grateful to the World Federation of Exchanges for their invitation to be a part of this conference and participate in these important conversations.
(I must provide my standard disclaimer that the views I express today are my own and do not necessarily reflect the views of the Commodity Futures Trading Commission or my fellow commissioners.)
I am incredibly honored to be serving as one of five commissioners of the U.S. Commodity Futures Trading Commission (CFTC). The CFTC is the U.S. regulator of futures, swaps, and options products, including market infrastructure providers that are registered with us as futures exchanges, clearinghouses, and swap execution facilities.
Since I am still new on the job with just five months served as a commissioner at the CFTC, I would like to start by sharing a little about myself. I have entitled these remarks “Field of Dreams” because I grew up on a farm in the middle of South Dakota, a sparsely populated state whose economy depends on agricultural production. My parents still grow and harvest row crops to make a living. When you hear about the fields of wheat and corn as far as the eye can see, that was my childhood.
I share this with you for a few reasons. First is because I often share stories from my life on the farm, and growing up in that setting impacts so much of my approach to my work as a regulator. That way of life is truly the lens through which I view the world. After all, while the markets the CFTC regulates include a wide variety of products and participants, they have their roots in – and continue to serve as a means for – helping producers and end-users of agricultural commodities discover prices and manage the risks that are inherent in producing, selling, buying, and consuming these commodities. I know firsthand about these risks because I lived them.
As a result, the ability of end-users to effectively manage these risks through orderly and efficient markets is of paramount importance to me.
Second, while this may strike some of you as odd, I often find that analogies from the farm apply to our financial markets, too. For example, farmers must carefully plan and cultivate their fields to successfully profit from their crops, including tracking what past crops grew on the fields and what that means for suitability of the soil for the next crop. At the same time, the farmer is looking ahead at what might happen to the fields in the future, identifying risks and threats to the crops planted for future harvests. I think there is a good analogy to the work of our global clearinghouses and exchanges, which must use lessons of the past to cultivate the markets of today, while also planning for risks and threats lurking in the future.
Where the Corn Grows
Continuing with my farm analogies, I have always been fascinated by the straight rows of a corn field as the plants grow and mature. When the kernels sprout, the first leaves push through the soil, creating an illusion of green stripes standing stark against the dark soil in between the rows. In the summer months, as the corn stalks grow and the leaves broaden, the plants appear to wave in the wind as though they are a line of dancers celebrating the warm breeze. I used to ride my bike down the gravel roads each weekend to see how much the plants changed as the heat of summer accelerated their development.
As the corn plants continued to grow taller, they eventually formed tassels and produced ears of corn that stuck out randomly throughout the once linear crop rows. Yet, even with the young cobs growing at odd angles, you could still find a direct view of the sun spreading light down the rows of corn stalks, peeking through the foliage like a beacon to the opposite end of the field.
Over the years, I learned that, of course, these crop rows were not inadvertent. First, it is easier to plant and harvest crops in row. These lines provide a uniform direction for the farmer to follow in the care and tending of the crop. In addition, these rows also provide a level of support and protection for the plants. A single corn stalk might not stay upright in the wind and could easily dry out in the scorching summer sun without protection. But the crops standing in the row prop each other up, and their leaves offer some level of protection to the plants around them.
So why all this talk about corn? Because, just like the rows of corn from my childhood that I just described, the exchanges and clearinghouses from around the world that have come together to address shared challenges, risks, and opportunities, must pull in a common direction for success. Yes, some of you may be competitors individually, but collectively, you are united in the common goals of maintaining liquid, vibrant, and resilient markets under the protections of best practices and industry standards to transition those markets safely into the future.
As we have seen, stable markets can turn volatile in a matter of moments. While some days the markets are quiet and everything is routine, in the face of sudden change, exchange trading and central clearing must react seamlessly in order to ensure stability and protection to weather the storm and intense heat. This is not an easy feat, but one that is critical to the stability of the global financial system.
Reaping What We Sow
And the global financial system recently has reaped concrete benefits of your efforts. From the start of the pandemic, clearinghouses and exchanges identified where routine processes needed to change to adapt to a new environment. We should all pause for a moment to appreciate just how remarkable it is that, despite the unprecedented circumstances, our markets continued to function successfully. This is a testament to everyone in this room. Without your leadership, ingenuity, and nimble actions, the economic realities of the pandemic could have brought these markets to the brink. But instead, they not only continued to function, but they also became the real heroes of the financial system, absorbing major shocks to the system from numerous challenges caused by the pandemic and the global economic shutdown.
Planting New Seeds
Yet, here we are today, facing new challenges that may make the pandemic seem like yesterday’s news. The landscape around us continues to change rapidly.
In the world of derivatives where I spend my time, we are seeing new contracts focusing on emerging market trends such as “ESG” criteria, new products such as “event contracts” being offered by new exchanges, and new offerings directed at retail traders, including proposed new business models to offer retail access to margined products outside the traditional intermediation model.
Many of these new challenges, of course, are driven by new technology. Technologies like blockchain and Web3 are innovative and groundbreaking, presenting amazing opportunities for consumers and businesses alike. And we simply need to look back at history to see that technological innovations of the past have made markets safer and more efficient.
For example, our regulated derivatives markets and their operational infrastructure are no strangers to technological adaptation. Well-functioning trading pits dominated the scene before the birth of electronic trading. While electronic trading was in its infancy, the trading pits continued to operate as the primary method of trading. As electronic trading usage expanded, the trading pits operated alongside new, electronic markets. But the efficiency offered through electronic trading eventually led to the closure of most trading floors. This orderly shift was proof of the ability of global exchanges and clearinghouses to responsibly evaluate and respond to innovation.
Fast forward to today, and we see the same scenario playing out. While policymakers wrestle with the dangers posed by unregulated platforms and products, regulated exchanges and clearinghouses have been unceremoniously adopting blockchain technology where it makes sense, and have begun offering financial products involving various digital assets. As with the evolution of electronic trading a few decades ago, progress has been methodical – and undoubtedly too slow for some. But there is so much to understand and digest in this brave new world that slow growth seems appropriate.
But the pace of technological innovation should not detract from its success. This story of success is not the narrative of any one entity, but rather a story written by efforts of the global exchange and clearing community. Meetings where exchanges and clearinghouses from around the world come together to apply the lessons of the past to the challenges of today while looking ahead to the future, will continue to be invaluable as we face whatever changes come next.
This speech was delivered at the WFE’s Annual Meeting in Malta, Sept 27-29.
The views, thoughts and opinions contained in this Focus article belong solely to the author and do not necessarily reflect the WFE’s policy position on the issue, or the WFE’s views or opinions.