US Senate committee hearing on FTX fail brings gaps in regulatory authority to light

CFTC chair Rostin Behnam appeared before a Senate Agriculture Committee to talk about how FTX happened and how it could have been prevented.

United States Commodity Futures Trading Commission chair Rostin Behnam told a Senate Agriculture, Nutrition, and Forestry Committee meeting Dec. 1 that his agency’s regulations contain “core elements that have served the markets for decades.” But as the fallout from the FTX collapse gets sorted out, notable gaps in current legislation have come to light, Behnam and the senators agreed.

Sen. Tina Smith called the FTX collapse “shocking, not surprising,” and said that future crises will continue to occur as long as regulatory gaps remain. Behnam pointed out that the Securities and Exchange Commission has the authority to require basic safeguards be in place, such as separation of house and customer money and best execution of investment trades.

“We know how to do this,” Behnam said. Nonetheless, he had stated 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 lobbied for greater authority for his agency for months. He alluded to alleged conflicts between the CFTC and SEC when he dismissed talk of a “power grab.” Interagency cooperation is not new and will continue, Behnam said. Extending 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.

Behnam pointed to crypto derivatives and clearing platform and FTX subsidiary LedgerX as an example of successful CFTC regulation. But, “We at the CFTC do not have the legal authority to ask about an unregulated entity,” without a whistleblower, Behnam told Sen. Tommy Tuberville. In addition, Behnam told him:

“We simply do not have the authority to register cash market exchanges […] This is the gap.”

Tuberville also pointed out that FTX had high governance marks from ratings agencies. Can they be sued, Tuberville asked. Oversight of ratings agencies is another “potential gap,” Behnam replied.

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

Sen. Kristen Gillibrand, co-author of the Responsible Financial Innovation Act with Sen. Cynthia Lummis, told Behnam that there were “a couple of areas where I still see risk coming ahead.” Mergers and acquisitions were one such area. The CFTC paperwork to initiate the FTX acquisition of LedgerX amounted to “a notice filing” at best, Behnam conceded.

There is also a question of the impact of overseas companies on the United States and U.S entities trading offshore, Gillibrand added.