How recent US political changes will affect derivatives markets

A look at changes in leadership and potential priorities for 2021 and beyond

15 January 2021


In November, Democrats reclaimed the White House and held their control over the US House of Representatives. Then in January, the party gained two seats in Senate through a runoff election in Georgia, dividing power 50-50 between the two parties with Vice President-elect Kamala Harris able to break tied votes.

The change in control of the Senate will make it easier for the Biden administration to put its stamp on policy because it smooths the way for the new president to get approval for the people he chooses for his Cabinet and other key positions across the government. Senate confirmation of presidential nominations requires only a simple majority vote.

Congress agriculture
Left to right: Sen. Debbie Stabenow (D-Mich.) will take over as chair of the Senate Agriculture Committee in the new Congress, with Sen. John Boozman (R-Ark.) taking over as the ranking member. In the House, Rep. David Scott (D-Ga.) will serve as chairman and Rep. Glenn 'GT' Thompson (R-Pa.) will serve as the lead Republican.

The change in control of the Senate also will make a big difference within the Senate itself. When power is evenly divided, the party in the White House determines who chairs Senate committees. In effect, this allows Democrats to call hearings, guide debate and set legislative agendas for the first time since 2015. On the other hand, most legislation requires at least 60 votes to pass the Senate, which means some of the Democrats’ legislative goals will be complicated by the fact they do not have any votes to spare.

For the US derivatives markets, the most directly relevant implications are the change in the leadership of the Senate and House Agriculture Committees. These two committees hold jurisdiction over the US Commodity Futures Trading Commission, the primary regulator of these markets, as well as the laws that govern these markets. Both committees are now under new leadership, not only because of the change in control of the Senate but also because several veteran lawmakers on these committees either retired or lost in the recent elections.

Senate Agriculture Committee

Sen. Debbie Stabenow, a centrist Democrat from Michigan, will take over as chair of the Senate Agriculture Committee in the new Congress. This is not her first time in the role; she served as chair from 2011 to 2015.

Throughout her time on the committee, Stabenow has consistently expressed a strong interest in the protection of customers, particularly agricultural end-users, that use derivatives to hedge risks. She also has backed strict limits on speculative trading; when the CFTC finalized the position limits rule in October, Stabenow criticized the rule as not going far enough.

"In Dodd Frank, Congress clearly directed the CFTC to set reasonable limits that ensure speculators do not raise prices for consumers," Stabenow said in a statement shortly after the CFTC voted to approve the rule. "This final rule ignores Congressional intent and fails to protect our markets.”

Another key issue for Stabenow is strengthening the CFTC's capabilities by providing it with sufficient funding and ensuring its technology is not vulnerable to a cyberattack. During a recent CFTC-related hearing, she stated that “cybersecurity is arguably the greatest systemic risk that our financial system faces today” and said the “CFTC also must protect its own information systems, especially against cyberattacks by foreign adversaries and other bad actors.”

On the Republican side of the committee, Sen. John Boozman (R-Ark.) will take over leadership as the ranking member following the retirement of Sen. Pat Roberts (R-Kan). Boozman, a former optometrist who played football for the University of Arkansas, was elected to the Senate in 2010. A consistent theme in his legislative track record is the promotion of agricultural exports, and he has frequently expressed strong support for the principles of free trade. In 2019, he sponsored legislation to promote regulatory deference and preserve cross-border access for US derivatives market participants.

House Agriculture Committee

Although the election did not change control of the House, the top two members of the House Agriculture Committee both left office. Rep. Collin Peterson (D-Minn.), who chaired the committee numerous times over his 30-year career in the House, lost his bid for re-election, and Rep. Mike Conaway (R-Texas), opted to retire. As a result, two new faces are taking over leadership of the committee. Rep. David Scott (D-Ga.) will serve as chair and Rep. Glenn 'GT' Thompson (R-Pa.) will serve as the lead Republican.

Scott, who ran an advertising business before joining the House in 2000, grew up on a family farm during segregation. He will be the first African-American chairman of the House Agriculture Committee. Over the years, Scott has been a leader in preserving open and fair access to derivatives markets for US market participants and has worked closely with the CFTC on shared priorities. In 2019, Scott invited FIA president and CEO Walt Lukken to testify on behalf of the industry in a hearing about Brexit and other cross-border issues that may impact US derivatives markets.

Thompson, a former vice-chair of the committee, comes from a long line of dairy farmers. He represents Pennsylvania’s geographically largest congressional district, which encompasses most of the upper west portion of the state. Thompson has been vocal in hearings about the importance of futures markets for agricultural producers, and about the need to modernize CFTC regulations to keep pace with modern business practices.

The new political landscape

In many ways, it is challenging to predict what actions might be taken that would affect financial services or derivatives markets broadly. Much depends on who President Biden nominates for key roles in the administration, including chairpersons for both the CFTC and the Securities and Exchange Commission. With tight margins for voting in both the House and Senate, the Biden administration will find it difficult to pass major legislation, and will likely seek to advance many of its priorities through executive action or through regulatory agencies instead.

Despite the uncertain outlook, there are a few priorities that are likely to be on the agenda in 2021.

Climate change and sustainable finance

The incoming Biden administration has elevated climate change to one of its top priorities, appointing a special presidential envoy for climate to coordinate efforts.  

This issue is also a priority for Democrats in the House and Senate. In 2020 they issued comprehensive reports, recommending several steps financial regulators should take to address climate risk – including disclosure, stress testing, scenario analysis, and governance. These reports may serve as a blueprint for regulatory action at the Federal Reserve, SEC, CFTC, and elsewhere.

Derivatives market participants should expect an increased focus on climate risk from US regulators as well as more coordination with foreign jurisdictions, governance bodies and international standard-setters that are shaping global climate policy.

An early sign of emerging policy in this area came from a report issued by the CFTC's Market Risk Advisory Committee. Under the leadership of CFTC Commissioner Rostin Behnam, who worked for Senator Stabenow before coming to the agency, the advisory committee formed a "Climate-Related Market Risk Subcommittee" to analyze the potential risks to the US financial system. That subcommittee released a report in March with 53 recommendations. These included calls for setting a price on carbon and promoting "financial innovation" to encourage more investment in reducing emissions. 

Cross-border issues

The incoming administration will face several important cross-border issues, including the aftermath of Brexit, the prospects of new trade deals with the EU and the UK, and bipartisan apprehension about China opening their financial markets to the world.

In addition, Congress appears divided on how to approach cross-border trading issues, with some favoring stronger restrictions on imports and others looking to lower barriers to trade. The agricultural committees traditionally have fallen into the second camp, reflecting the fact that the US agriculture sector is reliant on exports and generally benefits from cross-border access to derivatives markets.  

The Trump administration’s move last fall to restrict US investment in securities issued by companies connected to the Chinese military complicates matters. These sanctions, which were implemented through an executive order, took effect on Jan. 11, and market participants have wrestled with uncertainty about their impact on futures, options, exchange-traded funds and other related products. Several prominent members of the Congress have ardently supported these sanctions, but it is not clear whether the Biden administration will keep them in place or not.

Digital currencies and emerging fintech

This area has been a hot topic for both regulators and members of Congress in recent years, and also an area where Democrats and Republicans have found a shared interest in promoting innovation. On Capitol Hill, there are various caucuses devoted to establishing the US as a leader in these emerging sectors. But on the regulatory side, it is more challenging to predict what action we might expect. However, due to incredible growth in both digital currency and fintech and after recent actions from the CFTC such as the commitment in the agency’s 2020-2024 Strategic Plan to develop a holistic framework to promote responsible innovation in digital assets, regulators are likely to remain focused on these areas.   

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