“Harmonization: We’ll Have Lots to Talk About”

Good afternoon. Patrick [Moley], thank you for that kind introduction. It is a pleasure and a privilege to address this group of exchange and fintech leaders, along with the expert buy-side community that keeps you honest. These are exciting times for our Nation's capital markets, and this conference is a premier forum for taking the commercial pulse of top industry operators. For a policymaker who spends most waking hours in Washington, today is a valuable opportunity to hear feedback on our work, surface problems that warrant our attention, and explore ideas that improve our markets and benefit the investing public we serve together. I appreciate the opportunity to participate.

Please accept that I speak today in my official capacity as the Commission's Director of the Division of Trading and Markets. These remarks do not necessarily reflect the views of the Commission, the Commissioners, or members of the Division's staff.

Rich Repetto, my friend and sell-side research legend, launched this annual conference in June 2004. Rich had recently joined Sandler O'Neill, and "eFinance" was how the industry described the emerging collision of trading and technology. That collision accelerated over the next decade, disrupting the exchange and brokerage businesses, leading to innovation, productivity gains, and strategic combinations. Rich's conference was the place to hear from industry leaders in the arena, scaling platforms, driving competition, and creating shareholder value.

I personally participated in nine of Rich's conferences, including the inaugural, as a member of the equity market structure panel. It was always a lively discussion, but attendance was usually light as the audience opted for the more fertile fields of one-on-one management meetings. One could envision a Piper Sandler research salesman imitating Greg Marmalard, the granite-jawed President of Omega Theta Pi in the movie "Animal House," directing an underpaying client to his or her proper place at cocktails.[1] "Over there is Duncan Niederauer, CEO of NYSE Group. And that's Ray Killian, founder of ITG. And this is the equity market structure panel - Mohammed, Jugdish, Selway, and Clayton." But we did our best to contribute to the program. The 2004 panel topic was Reg NMS. Not everything evolves at a breakneck commercial pace.

Another regular contributor to the conference was Gary Gensler. Chairman Gensler joined this forum seven times, first as leader of the CFTC in 2010, and then as SEC Chairman in 2021. In 2013, I recall Chairman Gensler and BGC Partners Chairman and CEO Howard Lutnick engaging in a spirited lunchtime thrust-and-parry over the CFTC's limit order book requirement for swap execution facilities. I wonder if a future cabinet secretary sits in the audience today.

In January, I presented certain Division priorities under the leadership of Chairman Atkins, who incidentally spoke to this group in 2017.[2] Specifically, the Chairman has directed the Division to work on developing a framework to list and trade tokenized securities, with "innovation without arbitrage" as our guiding principle. We are also working with CFTC staff to identify ways we can harmonize SEC policies with those of the CFTC. We are working to facilitate a successful transition to 23-by-5 operation for equity markets by the end of this year. And we are working to develop recommendations to modernize legacy rules, such as Reg NMS and the Consolidated Audit Trail, to drive industry efficiency and competition. Given its rich history, and the product breadth and global perspective of its audience, this conference is an excellent forum to discuss SEC-CFTC harmonization.

At the most basic level, effective harmonization means efficiency and flexibility for registrants, as well as lower barriers to innovation. Speaking at FIA in Boca Raton in March, Chairman Atkins stated:

"Firms should not be shuffled back and forth between regulators when a product touches elements of both regulatory frameworks. Nor should a bureaucracy's penchant for indecision obscure accountability and stymie a timely, sure response. Nor should clarity itself depend on which agency happens to speak first. Where jurisdiction overlaps, the most effective response is a coordinated one."[3]

At present, the SEC and CFTC are working together, in parallel, to evaluate a number of novel product proposals. For example, on February 10, the SEC issued a notice of CME's application for an exemption to trade single-stock futures with cash, P.M. settlement.[4] And on May 22, the SEC approved Nasdaq PHLX's proposal to list and trade cash-settled Bitcoin index options.[5] Our agencies stand ready to engage constructively with market participants who seek a compliant path forward through our respective jurisdictions.

In addition, we are jointly evaluating areas in which our rulebooks lack clarity or compatibility.Here, we expect to benefit from industry expertise and investor experience by way of public input. Division staff have identified swap and security-based swap data reporting, portfolio margining, and product definitions as potential areas of initial focus. I ask members of this audience to consult with colleagues, clients, and counterparties, and bring us your best ideas to align our rules and reduce regulatory frictions.

Harmonization has re-surfaced long-standing questions that warrant resolution. One open question is the legal status of perpetual futures."Perps" are popular outside our regulatory perimeter, particularly for digital assets. At our joint roundtable last September, expert opinion was divided. Don Wilson of DRW argued that perpetuals were best classified as a futures contract, while CBOE's Craig Donahue suggested that swaps treatment was more appropriate under current law.[6] Last Friday, the CFTC approved Kalshi's proposal to trade perpetuals on Bitcoin as a futures contract,[7] while suggesting that perpetuals on additional underlying assets would be evaluated on a case-by-case basis.[8] I expect substantial industry comment in coming months.

Despite the many promises of SEC-CFTC harmonization, no one should assume the process will be easy.The marketplace is exceptionally competitive and the commercial stakes could not be higher. During that same roundtable panel previously mentioned, Polymarket's Shane Copland suggested to Terry Duffy that CME had benefited from his age and experience with respect to the regulatory landscape.[9] Terry responded with a hand signal that has a universal meaning known well outside Chicago's trading pits. [10] In all seriousness, successful harmonization will require patience and long-term thinking from market participants and investors alike. Venue shopping and unreasonable expectations will undermine our efforts.

It is claimed that Jesse Livermore, the "Boy Plunger" and terror of early 20^th century markets, once remarked that "another lesson I learned early is that there is nothing new in Wall Street" because "speculation is as old as the hills."[11] Unfortunately, experience teaches that such cynicism is often warranted. So as we consider the potential benefits of effective harmonization, let us be mindful of our shared, sacred responsibilities to the investing public. Amongst these, two stand out.

First, despite blurred technological lines and temptations outside U.S. jurisdiction, we must distinguish investing from gambling. Second, we must avoid the age-old, well-worn path to financial services perdition-extending unhealthy levels of leverage to the unsophisticated and unsuspecting. By delivering true innovations, and avoiding these twin pitfalls, your organizations can deliver value to your clients, your investors, your world-leading industry, and our great Nation. This is the promise of SEC-CFTC harmonization.

Thank you for your time and attention. I hope you enjoy the rest of the conference, and I look forward to your questions and comments.