April 27, 2010
When the initial legislation creating Significant Price Discovery Contracts (SPDC) was enacted, I was under the impression that there might be a half-dozen contracts that would fall into this category. The 90 plus ECM contracts initially identified as potential SPDCs and the subsequent in-depth analysis and Federal Register (FR) release of 41 of these contracts, frankly took me by surprise.
I commend the staff on their diligence in carrying out the provisions of the SPDC legislation and thank the public for their comments on the FR releases. During my briefing on the SPDC proposals we are considering today, I was struck by the time and effort expended by the CFTC staff to get us to this point.
ECMs were created by the CFMA of 2000, and SPDC determinations were mandated by the CFTC Reauthorization Act of 2008. If a local trader at an exchange had fallen asleep in 2000 and awoke today, that person would be hard pressed to recognize the futures industry. The trader would probably find himself in an abandoned trading pit. The contract he traded would likely have migrated to an electronic platform - globally accessed by multibillion dollar hedge funds through co-located, algorithm driven, high frequency trading strategies. The exchange itself, in all likelihood, would be a publicly traded company closely tied to a clearing house whose membership is made up of closely entwined global financial institutions.
Many of the changes in the futures industry have occurred since I was sworn in as a Commissioner in December of 2004. Since that time we have also witnessed a financial meltdown that has made us acutely aware of some of the inadequacies of our current regulatory system. Despite the fact that the CFTC has made structural changes since the adoption of a principal based regulatory régime in 2000, this agency has simply been outpaced by an ever-evolving industry and consistently asked to do more with less by Congress.
Today, while we still are working through the congressional mandates of our 2008 reauthorization, legislation that calls for more regulatory control and will place greater burdens on this agency is working through congress. Unfortunately, I do not know if we are ready for what we will be asked of us. My fear is that the trader who fell asleep for 10 years ago and woke today unable to recognize the modern futures industry, was easily able to identify a CFTC – because we haven’t changed enough.
I believe that it is time for the CFTC to undertake a complete restructuring to put it more in line with today’s regulatory needs. We need to accomplish a business reengineering of the agency that reflects the demands of what congress and the public expect of a futures regulatory agency.
Greater emphasis needs to be placed on such issues as consumer protection, global harmonization, regulatory information sharing, risk assessment, high frequency algorithm trading strategies and interconnectivity of industry institutions. As congress works on new legislation we must begin to think about structural changes at the agency to handle the regulation of swaps. We will need to develop the technical capabilities that will be needed for today and the future. We must begin planning now for the oversight that will be needed to regulate exchanges and clearing houses that will be offering services to accommodate swaps and products as yet to be developed.
Now is the time to take a look at the structure of the CFTC. Now is the time to determine what it will take to become an effective regulator of a modern and ever changing futures industry.
Again, I thank the staff for their work on these contracts and for helping me realize we needs to be done in the future to ensure we remain an effective regulatory agency.
Last Updated: June 14, 2010