Some regulators in the world of finance take office during periods of relative market calm. Other regulators ... not so much.
When Commissioner Summer Mersinger was sworn in at the Commodity Futures Trading Commission in March of 2022, global markets were still dealing with the shock from Russia's invasion of Ukraine. Throughout the summer, commodities markets felt the impact from geopolitical tensions, an energy crisis and other pressures. And as summer faded into fall, the energy crisis continued and headlines about a crypto winter morphed into headlines about crypto perp walks.
Through it all, Commissioner Mersinger has kept her eye on the markets and brought unique insights to the CFTC and the wider regulatory ecosystem. This episode covers a lot of ground as Commissioner Mersinger offers her perspective on topics ranging from crypto and geopolitics to agriculture commodities and renewables. She even draws entertaining (and accurate) parallels between youth soccer tactics and the task of regulating some of the wildest corners of today's financial markets.
Enjoy the show!
(Note: This transcript was created using artificial intelligence. It has not been edited verbatim.)
Sean McMahon 00:14
Hello, everyone, and welcome to the Modern Money SmartPod. I'm your host Sean McMahon, and today we've got a very special episode for you. My guest is Commissioner Summer Mersinger from the Commodity Futures Trading Commission. The reason I'm so excited about this interview is because since she joined the CFTC earlier this year, Commissioner Mersinger has been a breath of fresh air on many, many topics. In fact, you're about to get a taste of what Commissioner Mersinger brings to the regulatory table as we discussed crypto, geopolitics, various commodities, renewables and youth soccer. Yes … Youth Soccer. Now I know the World Cup has been going on, so soccer has been a hot topic for the last month, but leave it to Commissioner Mersinger to draw some parallels between youth soccer tactics and the task of regulating some of the wildest corners of today's financial markets.
Speaking of wild corners of the financial markets, if you just can't get enough of the collapse of FTX and Sam Bankman-Fried's wildly entertaining media blitz, be sure to check out the episode we did a few weeks ago featuring Walt Lukkan, the President and CEO of the Futures Industry Association. I interviewed Walt just days after the FTX collapse, so his views on some of the early lessons learned from that debacle are worth a listen.
Looking ahead, before we wrap up 2022, Colin Hogan will be back on this show so the two of us can reveal the SmartBrief 7. The SmartBrief 7 is our roundup of the seven most memorable stories from the year. That's always fun, so make sure you don't miss that episode later this month.
Now it's time for my conversation with Commissioner Mersinger. But before we kick things off, here's a quick word from the exclusive sponsor of today's episode, MFS Investment Management.
Commissioner Summer Mersinger 01:53
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Sean McMahon 02:27
Hello, everyone, and thank you for joining me for today's episode. My guest is CFTC Commissioner Summer Mersinger. Commissioner, how are you doing today?
Commissioner Summer Mersinger 02:36
I’m doing well, Sean
Sean McMahon 02:37
We’ve got a lot of ground to cover. But I want to kind of back up a second. You've been at the Commission now for about nine months or so. So what are your overall first impressions?
Commissioner Summer Mersinger 02:45
Well, because I was at the agency before, I had a pretty good sense of what the workload would be. What working with the different policy divisions and our enforcement division would be like, but it is definitely different being in the seat of the commissioner. There's a lot of decisions that you know, before you make as a staff person, but you're not ultimately held accountable completely. And so when your name is on the line, and your name is on the vote, it's definitely a different feeling. But we have a great group, the chairman and the other three ladies that I serve with great group of people, interesting backgrounds, everyone has a very different perspective. And you know it, despite some of the ups and downs and occasional stress, it's actually pretty fun.
Sean McMahon 03:42
Wow, fun. Okay, that's not a word I often hear just to describe work at the CFTC. But I'm glad you're enjoying yourself. And one of the reasons that you probably are so engaged that there's been a whole heck of a lot of news lately, you might have heard there's been a little bit of disruption in the digital assets and cryptocurrency space. So what's it been like for you to have a front row seat of all that,
Commissioner Summer Mersinger 04:02
It's definitely been challenging. There's a lot of information to digest, with not a lot of time to digest it, trying to understand what's happening, how the entity that we oversee how that's impacted, where things are going with the bankruptcy proceedings, and we have regular briefings. And on top of that, just trying to keep up on you know, the news and what everyone else is reading. So it's definitely a lot of information coming in at one time. But it also there's a moment where we have to stop and think through, okay, what does this mean for us going forward? And I think we're trying to really figure that out, both, you know, on the legislative front, but also kind of internally with our existing rules and how we're going to start looking at these interesting corporate structures where you've got At the cash market, being run by the same corporate entity that maybe is going to now run the derivatives exchange, it's a very different construct than what we're used to at the agency.
Sean McMahon 05:14
So obviously, I think our listeners know the primary story from the digital asset space we're talking about, we're talking about FTX. And the collapse of the empire that Sam Baker and freed has built. He's been on quite a bit of a media tour lately. So what have your thoughts been on that?
Commissioner Summer Mersinger 05:27
Well, at the agency is, it's a lot of noise that we hear in the background, when we are trying to really focus on the state of play with the registered entity that we oversee, that's part of the FTX complex, so we regulate ledger X, and they are separate from bankruptcy, they're so far, well capitalized, you know, no real concerns with that entity, but it's something that we have to watch and pay attention to. And all the other, you know, media and interviews and stuff, it's just a lot of background noise that, you know, we need to be aware of it, but we can't focus on it too much. Because we do have a job and a responsibility to make sure that the entity that we regulate, is doing what it's doing, what it's supposed to do that we are, we know where the money is, we know where the money's been. And it's just the it's an ongoing process to work with the bankruptcy court as well, because eventually, someone will buy that entity. And it's a little bit different when when they're buying a CFTC registered entity than if they were just buying some other piece of the business.
Sean McMahon 06:46
Yeah, I mean, one of the biggest takeaways that, you know, I've heard from the industry is that, you know, Ledger X is kind of the poster child for what smart and sound regulation can do. Because I think it's something like, you know, FTX Empire or something like 131 entities, perhaps the only one solvent and sound is ledger x, which was properly regulated. So it's kind of interesting to see that a lot of people the industry kind of cheering like, hey, look, when we do it, right, it can actually protect investors.
Commissioner Summer Mersinger 07:14
Yeah. I mean, our core principles for registered entities require segregation of customer funds, and a certain amount of margin being held at the exchange. And so there's a lot of safeguards that ensured the money was where it was supposed to be. And we do examinations. So we have examination teams that will go and look to make sure the money is in the account, and that it's not being moved around. And there's a lot of pieces that come with regulation, that provide that kind of assurance, where the money is being taken care of the way it should be in the entity. And I think we are seeing that with ledger X that because of the regulation, it's in a better place.
Sean McMahon 08:01
All right now, amid all this chaos in the digital assets, markets and crypto, you know, there's understandably a lot of uncertainty about the potential overlap between the jurisdiction of the CFTC. And the SEC. So how are you and your fellow commission members, you know, communicating with the SEC about how to tackle that potential overlap?
Commissioner Summer Mersinger 08:19
Yep. No. And it's been tough, because I think a lot of times when this comes up is in the face of an enforcement action, where there's been fraud, and it's who is going to bring the action? Is it going to be the the CFTC or the SEC, and then you have to worry about well, what's the court gonna decide? Is it a security or commodity? It leaves too many open questions. I think we have to sit down, the two agencies have to sit down. And this might be something that needs to be directed from Congress and legislation, have joint rulemaking to create a framework so we can give industry some certainty as to what falls into the category of a security and what falls into the category of a commodity. And what happens if they transform between the two? If the Howey tests worked for all digital assets, we wouldn't have these questions that, you know, are constantly being discussed. So clearly, there needs to be a new framework. We've done this before with other asset classes between the two agencies, and there's no reason we can't do it again.
We'll be right back.
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Sean McMahon 09:57
And now back to my conversation with Commissioner Mersingerr from the Commodity Futures Trading Commission. Now, obviously FTX. And that whole debacle has kind of sucked all the oxygen out of the room when it comes to, you know, media coverage of the digital asset space. But there's a whole lot more going on in that sector. And so as someone who's relatively new to the commission, what kind of approach do you take to try to wrap your mind around something that a lot of people just refer to as the wild wild west?
Commissioner Summer Mersinger 10:25
Yeah, no. And I think, because it's, it is this kind of space that we haven't figured out how to regulate it yet. And there's probably some things that need to occur through legislative channels to have appropriate oversight. For me, it's this idea of, you know, stay back and protect the goal. Also, in soccer, you know, when you have little kids playing soccer, a lot of them will run out after the ball. And my youngest, he always stands back, I don't know anything about soccer, but I asked him once, like, aren't you supposed to be chasing the ball too? And he said, No, my job is to protect the goal, I'd stay here and make sure that when the chaos comes my way, someone is here to help. Make sure it doesn't cause, you know, cause the other team to get a goal. So I've kind of looked at my role, as you know, the regulator, and the way I look at things as protecting the goal. So you know, making sure that what's going on that whatever chaos is going on in this market, it doesn't affect the derivatives markets that we regulate, that people need to use day to day for price discovery and hedging their risk, that there's not a contagion within our regulated entities. And really just keep that in mind when there's so much, you know, ball chasing on the crypto side.
Sean McMahon 11:56
Well, I gotta tell you, commissioner, I'm a huge soccer fan, huge soccer guy, Coach player, all my life, whatever played in college, and the World Cup is also going on right now. So your analogy is, you know, couldn't be more spot on.
Commissioner Summer Mersinger 12:08
Yeah, it's kind of like we, we didn't have soccer in South Dakota, it was more football. So yeah, I usually bring my soccer knowledge from my young children. What are you trying to do here? So
Sean McMahon 12:19
Gotcha. Well, like I said, The World Cup’s going on, which is obviously a whole global event. So I also want to kind of shift our conversation to other global events that have gone on this year and kind of get your reaction to how the markets performed. You know, we had beginning of this year, the war touched off in the Ukraine, there's been some other geopolitical things going on with OPEC, energy supplies and things like that. So what's your broad view on all that?
Commissioner Summer Mersinger 12:41
Well, the good news is, the markets that we regulate the derivatives markets are doing what they're supposed to be doing. And that's, you know, absorbing risk. So we have seen a lot of volatility in these in these markets prices, have they've taken some pretty wild swings. But, you know, that's part of, you know, why people hedge in our markets, you know, to try to buffer that. So, we really feel like, all the derivatives markets have operated pretty efficiently in the face of some really difficult, you know, geopolitical, and, you know, just fundamental issues. So that's been really good to see. But we also are looking at it from okay, how do we make sure this is sustainable? How do we make sure going forward, that the markets continue to operate the way they're supposed to, and it gets hard when you are looking at, you know, whether it's energy or natural gas? You know, there's a lot of underlying fundamentals that in the short term, you know, I think the markets can handle the volatility, but in the, in the long term, if there's not changes, then you start to see some distortions. And then we always worry about, you know, not having a smooth convergence. And so that's what we're trying to do right now is kind of look ahead and say, Okay, what's causing the volatility now? What happens if this continues for a long period of time? And what's the best way to approach that?
Sean McMahon 14:11
You know, obviously, I assume, you know, gas markets are one of the things you're talking about so much concerned with what's going on in Russia and supplies for Europe and things like that. But are there any other commodities out there that you kind of might be a little bit concerned about or trying to keep your eye on?
Commissioner Summer Mersinger 14:24
Yeah, certainly on on the agriculture side, wheat has been one that we've been watching closely just because of the issues around getting wheat shipped out of Ukraine. You know, when when you there were fungible, because agricultural products are fungible products, you know, when when you have expected product in the market and that it either doesn't get into the market or there's some other reason that it's delayed, or it's not getting planted. It has a pretty broad impact across the globe. Open. So that's one where, you know, they're not they're not getting the wheat out of the Black Sea, we know that the farmers in Ukraine are planting the same amount of wheat. So that's a market that we're watching closely natural gas, as I said, you know, some of the some of the other agriculture, soybeans and corn, some of that has to do with the way the markets are working, or, or at least more the way the planning seasons are working in South America. So there's a lot of factors in those physical commodities that that we're trying to keep an eye on.
Sean McMahon 15:38
Okay, now, one of the other corners of the commodities markets that I try to keep an eye on is anything related to renewable energy, you know, and there's a lot of concern about, you know, short supply on precious metals and things like that. So what's your view on those kinds of commodities,
Commissioner Summer Mersinger 15:52
With metals, it's interesting when you start to talk to the exchanges about it and start talking to the traders about it, because it's going to be kind of this emerging area where there's going to be a lot of demand, there's a lot of questions around where the supply is going to come from, who's going to control that supply. And you know, how it's going to get into the market. And you would think that a derivatives product on those metals would be really helpful, especially like if you're looking at a car battery manufacturer that absolutely has to produce these batteries, or produce these cars, and they need these metals. And they're facing all these risks, so they will want to hedge it. But when you don't have the visual line of sight into the market itself, the cash market, it makes it really difficult to have a functioning derivatives market. So my the energy and environmental markets Advisory Committee, we've got five advisory committees at the commission. And that's the one that I sponsor. And we're starting to look into these critical metals where we already have derivatives products, and what we're seeing in those markets, where others may develop, and what the demand will look like and where the supply is coming from. And I think that's a story that no one's really telling in renewables and an energy transition, I think there's just this assumption that we're going to move to, you know, a lot of electrification or you know, renewable energy sources. But to do that you need these metals, and to make sure that consumers can afford the renewable energy or the electric car, there has to be some sort of, you know, price management. And traditionally, that's where you would see companies using derivatives markets. So, you know, we want to make sure that that opportunity is there, it's a different market fundamental than we've seen with some of our other physical markets.
Sean McMahon 18:04
So with the passage of the inflation Reduction Act, the renewable sectors anticipated just grow and grow in the next five to 10 years even farther out there. So when you look at that corner, the markets, you know, what are the biggest concerns you have? Where do you think there's the most potential for sound growth and expansion? And what kind of role do you think the CFTC has in kind of shepherding all that?
Commissioner Summer Mersinger 18:25
Well, it's kind of twofold. I mean, one of it is on renewables and creating, you know, new forms of energy. And when you have mandates in place that say, you have to have, you know, a certain percentage of your, of your power coming from renewables, you know, what has to happen for for that to occur? And what is that going to do to prices? So, we've been looking at it from the standpoint of, you know, a lot of these markets that we already regulate, will have to transition, you know, we'll be moving away from oil will be moving towards more solar and wind and other power sources. And so how do you allow industry to hedge during that transition? And that's been a little bit complicated, because, you know, where sometimes it's traditional, you know, we know we need this much X amount of oil for our business. Now, it's maybe some point you got to slowly transition and how do you hedge the price of different forms of energy? So we're trying to look at that and and make sure that, you know, there are functioning markets that allow for legitimate hedging in this area. And then just broadly on kind of the environmental side, we already have, we're seeing a lot of derivatives products that are based in some of the carbon credits. And you know, we have to make sure those those contracts are are sound, they're not subject to manipulation. And there's a lot of interesting questions about the underlying cash market when you're looking at some of these carbon credits. And so we're trying to dig into things like validation, retiring the credits, those sorts of pieces to the puzzle that that really allow a robust futures market. So it's kind of we're looking on two sides here, when it comes to, you know, we are looking at the renewable side, but we're also more broadly kind of on the environmental piece looking a lot at like carbon credits, and what that how those are functioning within the derivatives markets.
Sean McMahon 20:43
And now, you mentioned the advisory committee, and I know that you do a little bit of work with the Federal Energy Regulatory Commission. So, you know, what does that experience been? Like? I know, you're probably talking about some of these exact topics you've addressed with transmission and metals. But what's your overall takeaway from the usefulness of those meetings in that advisory committee,
Commissioner Summer Mersinger 20:59
Part of it is just bringing the right people together to have the discussion. So we have some jurisdictional overlap with FERC. And, you know, we have a memorandum of understanding that we are supposed to work under from years ago, but if you don't have continual dialogue, you know, people leave New people come in, and you kind of lose that, you know, the working relationship. And so, we've been trying to bring Firkin on our meetings with energy and environmental markets committee and stakeholders that have interest in both the futures markets and a lot of the electricity transmission markets and kind of bring people together to have those conversations. And just, you know, it's a forum where people can talk. And we can collectively gather knowledge from stakeholders, and try to use that to see if there are policy changes or policy initiatives that can help when there are concerns.
Sean McMahon 22:05
And now shifting back to the CFTC, you've been, I would say relatively outspoken about some of the ways that it conducts its business with regard to self registration, no action letters and things like that. So what are you hoping to change from the inside?
Commissioner Summer Mersinger 22:18
Well, I've always thought that if we have a policy that doesn't work for industry, that we have a responsibility to work with the industry and and find a way forward. And the way that's been done is, you know, through staff, no action liar that says, We're not going to, you know, we're not going to enforce this on you because it doesn't work. And for me, I want permanent solutions. I don't want temporary solutions. I don't want industry to have to come back in a year or however long and say, okay, still doesn't work. You didn't fix it, we need another letter. So I've been really trying to push this narrative of if we have these situations where we have rules that don't work, we know they don't work. Industry has told us that they don't work. Let's sit down and figure out how to make it work. Let's let's do the rulemaking, let's go through the process. Let's fix it so that we're not constantly putting band aids on the situation. And that's, you know, something, I think it's, to me, it's low hanging fruit. You know, if the industry agrees, it doesn't work, we put a letter saying we agree, and we won't enforce it. I'm not sure where there's any kind of friction in the system that we can't fix these policies. But it's just a matter of prioritizing them. So a lot of my statements related to these no action letters are you know, let's just do it. Let's just fix it, you know, hoping eventually, that keep saying it over and over again. Eventually, you'll see some movement. And we have, we've got another, you know, in November, we did some rulemaking around some clearing organizations, some of their data that they had to file with the agency that just didn't work the way the rulemaking was done. And so, we've had no action relief out there. But we're actually now fixing the rules to
Sean McMahon 24:13
I mean, geez, Commissioner, who do you think you are trying to come up with permanent solutions to perpetual problems? Gosh, what a concept, right. And then, real quick, I mean, I've covered the CFTC for a long time. And one thing I've noticed is that when individuals join the commission, sometimes they come in with certain kinds of passion projects, we'll call it. Other times, those topics will kind of arise while they're on the commission. You know, I remember, for example, Scott O.Malia when he was on the commission, you had a passion for like tackling the tech issues. Yeah. The actual technology, the CFTC has regulate markets. So I guess there's two part questions you either a join the commission with kind of already an idea where you want to focus or now that you've been there a while has something cropped up that has caught your attention. Do you think yeah, I'm gonna try Don't kind of really dive deep on that,
Commissioner Summer Mersinger 25:02
It's kind of a combination, I don't think I had a, you know, targeted, this is what I'm going to focus on. And this is going to be my number one talking point, I think just given my background, I did have a lot of interests and continue to have a lot of interest in the agricultural markets and how they're used by, you know, end users to actually provide hedging opportunities. And same thing on energy. Some of that is because I'm from an agriculture state grew up on a farm, my family still farms, you know, the second, you know, the largest input cost, and farming tends to be, you know, whether it's gas for fuel for the trucks and the equipment, or, you know, the input that goes into the fertilizer, it's, it's a big cost for farmers. And so, I think the, the agriculture and energy side was something that I knew that I would just kind of naturally gravitate towards, and especially when you are because we're seeing a lot of volatility, and we're seeing high prices, you know, trying to make sure that the markets function is are supposed to, and that nobody's taken advantage of, you know, these highs and lows. So that's, that's kind of the one thing I knew that I was probably most interested in and just kind of naturally gravitated towards. But I have, you know, certainly on the no action, you know, coming up with some permanent solutions, you know, not kicking the can down the road, giving some certainty to industry, where our rules aren't clear, trying to offer some clarity. Sometimes that's as easy as putting out Staff Advisory, explaining the the role and trying to encourage that where I think we are seeing, you know, if we see people who are confused by the rules, you know, let's let's just proactively put out something, you know, further clarifying it. And then on the enforcement side, you know, I'm not sure I really thought about how I want to approach managing enforcement. But just naturally, I look at it, as you know, yes, we want to go get the bad actors and punish them for, you know, the bad things that we're doing in our market. But there are times when, you know, maybe our rules weren't clear, and, and somebody wasn't really trying to be the bad actor. Or maybe they did everything they could have thinking they were abiding by our rules, and they just didn't understand. Or maybe we're trying to go after a legal argument that feels a little bit like we're trying to make public policy through the court system. And that's where I tend to, you know, speak up on on enforcement and dissent a little bit is this idea of, we shouldn't be enforcing rules that aren't clear. We shouldn't be making public policy through the courts. And we have to be judicious in the use of our enforcement powers. It's not a, you know, it's not an end all be all, you know, we can do whatever we want with it. We have limitations, and we need to stick to those limitations.
Sean McMahon 28:17
Well, I gotta tell you, I mean, starting with end users on the agriculture community, and going right, all the way over to, you know, making the CFTC more efficient, fingers crossed. It sounds like you got your eye on quite a few things that are very, very important. So, Commissioner, I really appreciate your time. A lot of great insights here and thank you for your service.
Commissioner Summer Mersinger 28:35
Thank you. It was fun being on the podcast.
Sean McMahon 28:41
Well, that's our show for today. But before we get out of here, I want to say one final thank you to the exclusive sponsor of today's episode, MFS Investment Management.
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