February 18, 2011
Good morning. I am pleased to join Chairman Schapiro in welcoming the members of the Joint CFTC-SEC Advisory Committee on Emerging Regulatory Issues to our fifth public meeting. This is the third time this week that Chairman Schapiro and I have shared a table. I had the honor of testifying alongside Chairman Schapiro before Congressional committees in both the House and Senate on implementation of the Dodd-Frank Act. We also are focused on strengthening our markets to prevent similar events as those that occurred on May 6 of last year.
I would like to thank Chairman Schapiro, her fellow Commissioners and the staff of the SEC for all they have done on the May 6 review as well as our strong collaboration with regard to the Dodd-Frank Act.
I also would like to thank the staff of the CFTC for all of their hard work planning this meeting, reviewing the circumstances surrounding May 6 and working with the Committee.
I want to recognize and thank my fellow CFTC Commissioners, Mike Dunn, Jill Sommers, Bart Chilton and Scott O’Malia.
Today’s meeting is intended to give the Joint Advisory Committee an opportunity to share their recommendations with the CFTC and SEC. They have had several months to review and consider the joint staff report our staffs released last year as well as hold four open meetings to hear from witnesses or staff on the factors contributing to the May 6 market events. The Committee is comprised of thoughtful, experienced experts whose advice will help inform future decisions that both Commissions will face. I look forward to hearing their recommendations.
At both the CFTC and the SEC, one thing that we can be quite sure of is that means of communication and technology will continue to advance and affect our markets. This was true in the 19th century when the telegraph led to the introduction of the ticker tape. This also was true in the early 20th century when telephones first allowed a central quote system where market participants could get instantaneous bid and ask prices. It was further true during the last decade when the markets the CFTC oversees went from largely open outcry to now approximately 90 percent electronically traded.
Where market makers used to be on the floor of the exchanges, they now often sit at computers miles away or even on another continent. While market participants used to be involved in each of their trades, they now often rely on algorithms to execute their trades. Humans are much more frequently relying on the judgment programmed into machines to execute their trading strategies.
The markets have evolved to where we increasingly find more Watsons competing with the Ken Jennings and Brad Rutters. Regulators cannot assume, however, that the algorithms in the markets are as well tested or as well supervised as Watson apparently was to win Jeopardy. Our regulations have to adapt as the markets increasingly move from man to machine.
The events of May 6 were stark reminders of the need for regulators to evolve as rapidly as the markets. Only through adaptive regulation can hedgers and investors have confidence in the markets and can there be market integrity. We must be sure that we as an agency make the necessary investments in technology as it continues to advance. We must ensure that regulators advance as well.
The CFTC will consider the joint advisory committee’s recommendations as we look for ways to strengthen the derivatives markets. I thank them for their thoughtful and expert advice. It comes at a particularly important time as we are in the midst of writing rules with regard to the swaps market. We are going to share these recommendations with all of our staff who are working on rule-writing and include the report in our official comment files. In particular, I think the Committee’s recommendations with regard to cross-market circuit breakers, pre-trade risk safeguards, effective testing of risk management controls and supervisory requirements regarding algorithmic trading will inform the CFTC’s rule-writing process.
We look forward to hearing the public’s views as well. We will post the committee’s report to our website today and open a comment file so that the public can submit their views on each recommendation. Comments will be invaluable as the Commission considers the committee’s findings. Instructions for posting comments can be found at cftc.gov after the conclusion of today’s meeting.
I again thank Chairman Schapiro and the SEC, my fellow CFTC Commissioners and staff from both agencies, as well as the Joint Advisory Committee for their hard work on this issue.
Last Updated: February 18, 2011