CryptoDad. J. Christopher Giancarlo

2008 financial crisis.

      When I arrived at the CFTC, my focus was still on the recent past—the 2008 financial crisis and the regulatory response to it. I was determined to complete derivatives reform, but I was also resolved to do it in a way that would promote market efficiency and economic growth. I was particularly focused on two outstanding Dodd–Frank implementations: swap execution facilities and position limits.

      Within three months of my swearing-in, an important change occurred in the commission's composition. Commissioner Scott O'Malia stepped down to join the International Swaps and Derivatives Association, or ISDA. During his almost five-year tenure, O'Malia had been a minority commissioner, meaning that his political party held no more than two seats on the five-member CFTC Commission. Under the CFTC's authorizing statute, up to three seats and majority voting power were with the other party, the party of the president, Barack Obama. Under that structure, O'Malia had nevertheless mastered the role of a minority commissioner, negotiating rule improvements when he could and issuing vociferous and well-articulated dissents when he could not. Even for CFTC rule proposals he voted against, O'Malia always seemed to be in detailed negotiations to the very end.

      I would miss O'Malia's tutelage. His unexpected departure left me as the only Republican alongside three Democrats. Tim Massad, an exacting Wall Street lawyer, was the new chairman, giving him control of the entire agency staff and its agenda. Mark Wetjen, an earnest and approachable former high-ranking Senate staffer, was the most senior commissioner. Sharon Bowen, who had been paired with me during our Senate confirmation hearings, was a principled lawyer and consumer advocate.

In American football terms, I was a defensive free safety covering a capable quarterback and two skilled receivers. In that role, I had no authority to call the plays or direct the staff's rule writing and implementation. I had only a slightly better chance to get their focused attention. I had to use other means to influence it. I chose the written word. With the help of my brilliant staff counsel, Amir Zaidi, who had previously advised O'Malia, I set to work on the promised white paper. Writing it occupied much of the autumn and winter, including the holiday break.

White Paper

      On January 29, 2015, we published the 80-page work. It was the first time in CFTC history that a Commissioner's office had ever written such an extensive treatise. The white paper reviewed how swaps worked and examined their social and economic utility. It laid out the structure of the global swaps markets. It explained why swaps did not trade on exchanges like stocks and futures, but in over-the-counter markets like corporate bonds. It also explained the role of swaps dealers and other market participants.

      The paper then argued that Congress did not give the CFTC the power to dictate market structure or appropriate business models for swap exchange facilities. The correct regulatory structure, it continued, would be one in which the CFTC registered and oversaw these facilities, but otherwise left them to conduct their business according to broad principles rather than restrictive operational constructs. Despite frequent talk about Dodd–Frank's supposed electronic execution model and its exchange trading “mandate,” there is no such requirement in Dodd–Frank. Instead, the law expressly allowed SEFs to operate “by any means of interstate commerce.” That meant, the paper concluded, that such facilities were entitled to exercise economic freedom in choosing their trading methods.

      The most important audience for the white paper was the CFTC staff itself. I hoped it would dissuade them from applying the commission's ill-conceived rules in a rigid and restrictive fashion. Yet, I also knew the white paper would receive attention from Capitol Hill policymakers and financial media. I hoped it would convey that one can be in favor of market reform and yet oppose a peculiar implementation of the reform.

The white paper made a huge impact. It got very positive reviews from members of the influential Futures Industry Association, the global association for those who work with exchange-traded futures and options. Together with the ISDA—the association for those who work with derivatives not traded on exchanges—these two organizations were the leading resources on these markets for public officials and investors worldwide.

      For years, I had known the friendly and fair-haired FIA president, Walt Lukken. We worked in the same building in lower Manhattan following the financial crisis. Lukken and I agree on many things, including love for rhythm and blues. He has done and said more about the issues I care about than anyone I know.

      Lukken told me that the white paper was getting compliments for the quality of the writing, its comprehensive analysis of a range of issues, and its formulation of workable alternative proposals. Many market participants said that it addressed concerns that they had raised when the SEF rules were being proposed that had never been addressed. Lukken directed an FIA group to draft a set of specific rule-change proposals to bring to the CFTC.

      More important was the paper's impact on the CFTC staff. In conversations, I could tell that they were becoming more conversant with the characteristics of over-the-counter swaps markets distinguishable from the exchange-traded futures markets with which the staff had long-standing expertise. Market participants told me that staff interactions were increasingly substantive and better informed. One long-standing CFTC watcher told me that the white paper encouraged agency staff to have a more open-minded approach to Dodd–Frank implementation.

      Some of this change was undoubtedly due to the new collegial approach of Chairman Massad. Still, the white paper played a key role in this awakening with respect to swap exchange facilities.

      Lawyer Steven Lofchie had this to say in his blog, the Cadwalader Cabinet:

“The [current] CFTC SEF trading rules did not receive substantial support from either the buy side or the sell side. Whether or not one agrees with the specific recommendations made by Commissioner Giancarlo, it is difficult to see the logic of the CFTC's continuing defense of market structures and trading rules that few participants favor and that do not contribute to market stability in any way. Significant credit should go to the Commissioner for his persistence in compelling the CFTC to revisit these flawed rules.”³

      In August 2015, the first significant changes occurred. The agency staff agreed to recognize additional methods of swaps trading as acceptable under CFTC rules, as was reported, for instance, by Reuters' Mike Kentz.

      “CFTC staff has deemed auction-style execution protocols for over-the-counter swaps as allowable under the Dodd–Frank regime for trading derivatives on swap execution facilities, putting to rest a controversial issue that had been playing out behind the scenes for over a year …

      “The decision solidifies the use of another method of execution alongside the existing request-for-quote and central limit order book methods, which so far have not been enough to attract activity to the nascent trading platforms that launched two years ago …

      “The CFTC had pushed back on approving auctions over the last year for fear of scuppering efforts to increase pre-trade transparency in OTC swaps, a key tenet of the Dodd–Frank Act.

“The argument that Dodd–Frank provides specifically for flexibility in execution methods via language that states SEFs may execute trades “through any means of interstate commerce … was first expounded by now-commissioner Christopher Giancarlo at the outset of the rule-making process five years ago, when he was executive vice-president at inter-dealer broker GFI Group … Giancarlo has stuck to his point but thinks the agency needs to codify the change publicly with more detail.”⁴

      This decision was an essential step in allowing swaps trading some of the flexibility that Dodd–Frank authorized.

Action by No Action

A greater breakthrough came the following January 2016, almost a year after the white paper's publication. It was my first day back in Washington after Christmas break at our home in New Jersey. In the office, I met with