CFTC and SEC Chairs Face Appropriations Committee

SEC SealThe heads of American trading two most important regulators continued their journey through the gauntlet of the federal budget process.

Christopher Giancarlo, the head of the Commodities Futures Trading Commission (CFTC), and Jay Clayton, the head of the Securities and Exchange Commission (SEC), both testified in front of the Senate Appropriations Committee sub-committee on Financial Services and General Government.

Clayton testified in favor of a $1.658 billion budget request for fiscal year (FY) 2019, that represented a $6 million increase over the same request for FY 2018 noted Republican Senator James Lankford from the State of Oklahoma.

The CFTC’s request was for $281.5 million which represented a $32.5 million increase, Lankford noted.

Interestingly, Lankford also noted that SEC’s entire request would be paid for in fees charged to “national securities exchanges and associations and results in direct appropriation from Congress.”

But Lankford noted that “these fees are ultimately passed onto investors, US savers, and other market participants and the committee has a responsibility to see to it they are all spent wisely.”

Christopher Giancarlo, CFTC chairman
Christopher Giancarlo, CFTC chairman

The hearing in front of the appropriations committee is part of a larger budget process which occurs every in symbiosis between the president and Congress in which the president proposes a budget with each agency- CFTC and SEC included- listed as a line item.

Then Congress- specifically initially the appropriations committee- debates these requests and normally prepares its own budget; when done right, the President and Congress are negotiating a budget agreement throughout.

While Lankford, as head of the appropriations sub-committee related to financial services, would only normally appear in the trading world during the budget process, in his opening statement indicated he’s ready to propose legislation on “capital formation”.

Clayton noted in support of the request “would enable us to start lifting our hiring freeze and support approximately one hundred new hires to address current priority. Second, the budget relies on the SEC having access to the reserve fund to invest in information technology. Third, the SEC’s funding is deficit neutral and any amounts appropriated to the agency will be offset by transaction fees to the agency.”

The SEC currently has approximately 4,500 employees, Clayton noted.

Giancarlo in his opening statement, defended the role of derivative trading in US and global markets, while emphasizing the need for “well-regulated derivative markets” for a vibrant economy.

“While often derided in the tabloid press as ‘risky’, derivatives, when used properly, are tools for efficient price discovery and risk transfer, and risk reduction. It has been estimated that the use of commercial derivatives added 1.1% to the size of the US economy between 2003 and 2012. American derivative markets are the largest most developed and most influential.”

Giancarlo noted that the US was the only country in the world to have “a regulator specifically dedicated to the derivative market regulation and that is the CFTC.”

The ranking member- head of the opposition- is Democrat Chris Coons from the State of Delaware, but he was sick for the hearing.

His fellow Democrat from the State of Maryland, Chris Van Hollen, took over leading the questions for the Democrats in his place.

Van Hollen took the debate in a place hearings about trading normally don’t go, gun policy, and the 2nd amendment, which guarantees every Americans right to bear arms.

Approximately a month prior, a group high level executives met with SEC Commissioners in what Bloomberg referred to as “a routine meeting about a boring but key part of their business: derivatives regulation. Instead, they got a stern lecture on guns.”

SEC Commissioner Michael Piwowar, expecially, chewed out these executives.

Here’s more from Bloomberg: “Citigroup had announced it would curtail some of the business it does with companies that sell firearms. That didn’t go over well with Michael Piwowar, one of three Republican appointees on the five-member SEC.

“Shortly after the Citigroup executives arrived at his office, Piwowar, according to people familiar with the matter, began castigating them for straying into social policy. Glowering and speaking emphatically, he reminded them that Citigroup was given billions in government bailout money after the financial crisis.”

Chris Van Hollen, United States Senator
Chris Van Hollen, United States Senator

Van Hollen, in referencing this story, asked Clayton: “Would you agree that it would be inappropriate for a member of the SEC to suggest that the way a regulated entitly was treated depended on the position that entity took on something outside the purview of the SEC.

Van Hollen went so far as to ask Chairman Clayton if he had asked the SEC Inspector General, the office which would investigate waste, fraud and abuse at the SEC, to investigate this report.

“I am aware of the reports,” Clayton responded, “I have not asked the Ispector General to investigate those reports. I don’t think this would be the appropriate forum to get into those reports.”

Van Hollen would not let up stating that he and other colleagues- as is his privilege as a Senator- would ask themselves for the IG to investigate.