CFTC chair Rostin Behnam appeared before a Senate Agriculture Committee to talk about how FTX happened and how it might have been prevented.
The United States Commodity Futures Trading Commission (CFTC) chair told a Senate Agriculture, Nutrition, and Forestry Committee meeting on December 1 that his agency’s regulations have “core elements that have served the markets for decades.” However, as the fallout from the FTX collapse gets resolved, major gaps in the current legislation have come up, as agreed by Behman and the senators.
Sen. Tina Smith referred to the FTX collapse as “shocking, not surprising,” and stated that future crises will continue to happen if these regulatory gaps remain. Behnam pointed out that the Securities and Exchange Commission has the authority to need basic safeguards to be set in place, including separation of house and customer money and ideal execution of investment trades.
“We know how to do this.”
Nevertheless, he had said this in his opening remarks:
“Invariably, the questions we are all obligated to answer as regulators are: ‘How did you let this happen?’ and ‘How will you prevent this from happening again?’ […] Without new authority for the CFTC, there will remain gaps in a federal regulatory framework, even if other regulators act within their existing authority.”
Behnam has already lobbied for increased authority for his agency for several months. He pointed to alleged conflicts between the CFTC and SEC when he dismissed talk of a ‘power grab.’ Notably, interagency cooperation is not new and will continue, as mentioned by Behman. Extending the CFTC authority is “about filling a gap.”
“I think the responsibilities would be the same, between the SEC and CFTC with comprehensive regulation, and CFTC regulation works well when it is applicable.”
Behman pointed to cryptocurrency derivatives and clearing platforms and FTX subsidiary LedgerX as a viable example of successful CFTC regulation. However, “We at the CFTC do not have the legal authority to ask about an unregulated entity,” without a whistleblower, Behnam replied to Sen. Tommy Tuberville. Additionally, Behnam said:
“We simply do not have the authority to register cash market exchanges […] This is the gap.”
Tuberville also said that FTX had some high governance marks from rating agencies. Can they be sued, Tuberville inquired. Oversight of rating agencies is another possible gap as highlighted by Behnam.
CFTC Chairman Behnam says DCCPA wouldve prevented the FTX collapse.
DCCPA would apply to a Bahamian exchange? https://t.co/5RTpBZravM
— Miller (@millercwl) December 1, 2022
The co-author of the Responsible Financial Innovation Act with Senator Cynthia Lummis, Sen. Kristen Gillibrand, told Benham that there were several areas where “I still see risk coming ahead.” Mergers and acquisitions were one such area. The CFTC paperwork to initiate the FTX exchange acquisition of LedgerX amounted to “a notice filing” at best, Behnam acknowledged.
There is a question about the impact of overseas firms on the United States and U.S. entities trading offshore, according to Gillibrand.