Newly introduced legislation aims to improve the research and testing capabilities of the Commodity Futures Trading Commission, with the goal of helping the agency better understand and support emerging financial technologies.
Rep. Austin Scott (R-Ga.) introduced HR 6121, the Commodity Futures Trading Commission Research and Development Modernization Act, on June 14. A key purpose of the proposed legislation is to give the CFTC research and testing authorities around emerging “fintech” innovations so they can better understand these technologies.
“The bill aims to better equip the CFTC with the tools it needs to maintain fairness and transparency in our commodity trading markets,” Scott said in an interview with MarketVoice, and to make the agency “agile enough to respond to emerging technologies and more effectively watch over derivatives markets.”
The bill does that by amending the rules that govern the CFTC's acquisition of technology. Procurement and acquisition regulations can create burdensome delays for fast-moving technology companies, Scott explained. “Every agency is just too slow with its current procurement process, but that’s particularly true here with the pace of change in fintech,” Scott said.
The bill also would expand the procurement process to include iteration and testing of new technologies. That would give the CFTC much more flexibility than the traditional model, which assumes direct purchase of off-the-shelf products.
Prospects for Passage
Scott, a former insurance broker who is now in his fourth term in Congress, is a senior member of the House Agriculture Committee and chairs the subcommittee that has jurisdiction over the CFTC. His bill has attracted support from several other members of the House. H.R. 6121 is co-sponsored by five Republicans—Rep. Roger W. Marshall (R-Kan.), Rep. Bob Goodlatte (R-Va.), Rep. Mike Rogers (R-Al.) and Rep. Doug LaMalfa (R-Calif.), Rep. David Schweikert (R-Ariz.) —as well as one Democrat, Rep. Darren Soto (D-Fla.)
"The idea that the CFTC can’t share information with these firms just doesn’t make sense in this day and age."
- U.S. Rep. Austin Scott
The bill is long way from becoming law, however, and it may face opposition from other members of Congress. According to Congressional sources, some members are concerned about the lack of clear guardrails on the innovation process to ensure that only legitimate and responsible companies participate. Another concern is that the bill could set a precedent for other agencies and lead to a more general loosening of the rules around technology procurement. Last but not least, it may be difficult for some Democrats in Congress to get on board with any bill that may be seen as reducing regulations and increasing potential risks.
But Scott argues that his proposal will help the CFTC keep up with trends in overseas jurisdictions.
“When other countries are being allowed to team up and share info between regulators and new technology firms, that gives them an advantage,” Scott said. “This bill will help the private sector as much as regulators.”
Scott added that agencies like the CFTC cannot simply sit idly by as technology rapidly evolves. Instead, it’s important to “play in the sandbox” with innovators to help them succeed and help tailor regulations accordingly.
“The idea that the CFTC can’t share information with these firms just doesn’t make sense in this day and age,” Scott said.
The CFTC already has moved to promote technology innovation by making it easier for entrepreneurs and market participants to engage with the agency and by exploring ways to adopt fintech for its own uses. Starting under former CFTC Chairman Tim Massad, a Democrat, the agency established an internal working group to engage with fintech companies and learn about the latest technology. The current chairman, Chris Giancarlo, a Republican, took the initiative to a higher level and launched LabCFTC to advance the agency's commitment to keeping pace with changes in the derivatives markets, and identify emerging regulatory opportunities, challenges and risks.
LabCFTC has hosted innovators across the nation, ranging from startups to established financial institutions to leading technology companies, to help inform the commission’s understanding of emerging technologies.
Daniel Gorfine, the agency's chief innovation officer and director of LabCFTC, explained that HR 6121 will support that initiative by allowing the CFTC to develop “proofs of concept” to test and better understand fintech and keep up with the pace of innovation.
“The idea that we’d put out a request for proposal with specific requirements and ask people to build it and then we buy it from them is not at all what you’re trying to do with this research and testing,” explained Gorfine. “The traditional procurement process doesn’t allow us to be iterative, and engage more with innovators to better understand technologies. It’s just too static.”
“Better understanding, in the long run, drives better policymaking on a range of topics, including cybersecurity and machine learning” he added. “It will also create a better informed technology strategy within the agency going forward.”
He noted that the U.S. has acknowledged the importance of public-private partnerships in other parts of the government. For example, NASA and the Defense Advanced Research Projects Agency have created research partnerships that are structured to keep apace of an evolving technology landscape.
He also noted that some foreign regulators have already partnered with fintech firms in a way similar to the structure envisioned in Scott's proposal. He pointed specifically to the Bank of England’s proof of concept program as a leading example.
“We just can’t do that yet, and that’s the issue we see,” Gorfine said. “The bill would put us on par with what other regulators are doing and would really put the ‘Lab’ in LabCFTC.”
Gifts of Information
Another stumbling block is that under current rules, the CFTC cannot easily seek outside data or engage with software prototypes that may help it better understand and regulate markets. That’s because these items are deemed to be “of value” and therefore must be treated as "gifts" to regulators, which triggers a host of restrictions.
Gorfine gave the example of a fintech firm working on distributed ledger technology that might want to give the CFTC a working example of its product to show how regulatory reporting could be accomplished.
“If they wanted to build something and give it to us to test and experiment with, they couldn’t do that because the technology itself would be deemed something of value and technically a gift and the current rules are very restrictive,” Gorfine said. “But clearly we’re not trying to buy capital markets infrastructure. That just doesn’t make any sense.”
Scott explained that under his bill, such gifts would be allowed, but would be subject to an annual reporting requirement and a five-year sunset clause. “The definition of a gift here is not a cup of coffee, but rather data and software that the CFTC can use to understand and develop its rules and regulations,” said the lawmaker.