Regulation: principles rather than prescription
Firstly, I would like to thank the World Federation of Exchanges (WFE) for allowing me to join its 59th Annual Meeting in Singapore earlier this month. I was pleased to take part in one of a series of talks entitled 'The Changing World' - such a fitting topic, recognising that the infrastructure supporting our markets has existed in a constant state of change for decades, evolving to serve a global purpose.
This has been made possible through technological advancements, human ingenuity, and a willingness to embrace creativity. I recently read an interesting article in The New Yorker entitled What 2018 Looked Like Fifty Years Ago
[1]. The article examined the book Toward the Year 2018
[2], a compilation of predictions published in 1968 (shortly after the WFE was founded) of what the world would look like in 50 years. Some predictions were not particularly remarkable, such as that 'machines will do more of a man’s work'
[3]. Others were especially clairvoyant: 'The transmission of pictures and texts and the distant manipulation of computers and other machines will be added to the transmission of the human voice on a scale that will eventually approach the universality of telephony'
[4]. While the foresight of the book’s contributors is incredible, perhaps more astounding is the adaptation of regulatory structures that have permitted these technological advances to become commonly accepted and utilised.
As recently as the year 2000, the Commodity Futures Trading Commission’s (CFTC) Technology Advisory Committee considered an agenda that included Oversight of Electronic Order Routing and Execution Systems. While common in today’s modern market structure, at the turn of the century electronic trading was the innovation that occupied regulators’ attention. Twenty years later, we continue to explore adaptations such as how distributed ledger technology is sensibly applied to the regulated derivatives markets.
So how does a regulator keep up with the rapid pace of change? My own view is largely informed by the unique manner in which the CFTC has historically approached regulation through principles rather than prescription. I believe the markets regulated by the CFTC have been well served by regulatory principles that are nimble enough to adapt, and that rigid regulations are simply not well suited to a constantly evolving marketplace. Writing prescriptive regulations simply renders the rules outdated almost as soon as they are constructed. Core principles that can be applied flexibly yield better results by encouraging innovation, while also achieving a high standard of integrity through serious compliance expectations.
In addition to a principles approach to rule-making, coordination is essential to effectively fulfill our regulatory mission in the ever-changing, increasingly global derivatives markets. We need partners, both in the private sector and among fellow regulators.
We rely upon the infrastructure of exchanges and central counterparties while also demanding a high degree of adherence to standards by these providers in order to ensure that this trust and confidence is respected. We share a common goal of well-functioning markets and while we have different charges, our efforts are naturally complementary. We must maintain an open line of communication. Regulators need to hear from infrastructure providers. It is our best view into the changing marketplace and the dialogue is a critically important element of the information we require.
As for what necessitates a partnership among regulators, never was it more evident than in the midst of the recent financial crisis. Ten years ago, when the leaders of the G20 nations were struggling to respond to the financial crisis, they agreed to develop a coordinated response to change the handling of over-the-counter derivatives. We should build upon, rather than ignore, our progress in fulfilling that vision. If we remain committed to applying comparable regulations globally, there is no need to duplicate supervisory requirements. Such redundancy may actually prove detrimental to the markets we are charged to protect.
At the CFTC our mission is to promote the integrity, resilience, and vibrancy of the U.S. derivatives markets through sound regulation. In order to do so we must recognise the dynamic nature of these markets is constantly impacted by an ever changing world.
The writer is a CFTC commissioner and the views expressed are her own.
[1] Jill Lepore, What 2018 Looked Like Fifty Years Ago; the New Yorker, Dec. 31, 2018, https://www.newyorker.com/magazine/2019/01/07/what-2018-looked-like-fifty-years-ago.
[2] Foreign Policy Association, Toward the Year 2018 (Emmanuel G. Mesthene ed., 1968).
[3] What 2018 Looked Like Fifty Years Ago, supra note 1, quoting Charles R. DeCarlo.