I would like to begin by commending the staff of the Commission for the thorough presentation this morning and the diligent work they have put in over the past few months in evaluating the various aspects of the USFE proposal. This has been a truly massive effort involving all divisions of this agency, and I want to thank everyone involved at the Commission for their hard work.
As you know, Mr. Chairman, I came to the Commission a year and a half ago after serving on the staff of the Senate Agriculture Committee, one of our agency’s authorizing bodies. I was privileged to participate in the development and writing of the Commodity Futures Modernization Act of 2000. I was present when legislators agreed to its passage and when the CFMA was ultimately signed into law by President Clinton. As a result, I have strong views about this law and its public objectives.
One of the enumerated objectives of the law is to foster “fair competition” among exchanges, and that is why we are here today. Congress understood that competition is the very essence of our free market system. It is the force that sparks the inventive spirit, lowers the costs of goods and services for consumers, and raises standards of living for our society. Since Congress tasked our agency in statute to promote fair competition, I take this responsibility seriously.
But the existing exchanges are not unarmed in this battle. Much of the CFMA was devoted to untying the hands of the exchanges by providing them with the necessary tools and products to succeed on a global scale. The CFMA transitioned the regulatory structure of the CFTC from prescriptive rules and regulations to a principles-based approach. Unlike rigid regulations, core principles allow exchanges the flexibility to use “best practices” in achieving statutory requirements.
Furthermore, the CFMA provided exchanges with the authority to implement new products and rules without prior CFTC approval through a self-certification process. Before the CFMA, approval time for new futures contracts was, on average, 90 days. Today the process of listing a new contract is almost instantaneous. Exchanges have taken advantage of this new authority by certifying 438 new products since the CFMA’s enactment, a sizeable jump from the 175 new products approved during the three years leading up to the CFMA. These tools and others afforded by the CFMA have allowed existing exchanges to respond rapidly to the evolving and expanding marketplace. I expect that this innovative resilience of the current markets – already displayed in anticipation of USFE’s arrival – will continue long into the future.
But to meet our public mandate, Congress did not task this agency with promoting unbridled competition; they specified “fair competition” as our goal. And as regulators, it is our job to ensure fairness of process. In regard to the USFE application, certainly there has been ample opportunity for public discussion and comment. For the first time, the Commission posted the non-confidential documents of a designated contract market application on our website for public viewing. In addition, our agency has held two comment periods to solicit public input. One of our oversight bodies, the House Agriculture Committee, held a hearing on the USFE proposal – the first time to my knowledge that one of our oversight committees has ever conducted such a public meeting. And several Members of Congress have written us to ensure this agency is properly fulfilling its statutory mandate. Today’s public meeting of the Commission – the first since I joined as Commissioner and one that I strongly supported – is further testament to the transparency of this process. Such openness bestows fairness and legitimacy on important policy decisions.
I have read the Designation Memorandum before us, all 142 pages of it, and I believe that this public document – along with the answers to our questions here this morning – indicate that the staff has carefully and prudently evaluated the multitude of issues raised by the USFE application. Staff has considered all the comments seriously and that analysis is reflected in this memorandum. In addition, I place great weight on the comments of the Federal Reserve Board and the Department of Treasury, as well as the analysis submitted by the Federal Trade Commission. All of these agencies point out the potential economic benefits that will ensue from the designation of another U.S. futures exchange. The bottom line is that, after all of this is taken into account, the Commission has appropriately carried out its responsibilities to protect the public interest in the matter of the USFE application.
I do want to credit staff for completing this application in a timely manner, despite the magnitude of the application and the several unique issues presented within. The USFE application is before us today well in advance of the March 16th completion date required by statute. I have been disappointed to read stories in the media that have implied that the Commission has somehow been dragging its feet on this application. I take strong exception to these assertions. Any slowing of the process has been caused solely by the novel issues raised with the Commission during the latter stages of this submission period. Given the complexity of these concerns, staff should instead be commended for completing the analysis in time to allow a Commission vote within three days of USFE’s target startup date.
It is also important to address the concerns of some critics that if USFE’s application is approved today, the exchange will be able to restructure itself free from regulatory scrutiny – a so-called “regulatory bait and switch.” These individuals misunderstand the oversight role provided the Commission by statute. Section 5(d) of the Act states that, “To maintain the designation of a board of trade as a contract market, the board of trade shall comply with the core principles specified.” This recognizes that compliance is not measured by a snapshot in time, but is rather an ongoing duty of exchanges. Our staff is in constant daily contact with the markets we oversee to protect against violations of our statute. Our agency also conducts periodic rule enforcement reviews and self-regulatory organization audits as a means of monitoring these markets.
The fact is that our Commission’s oversight of USFE would not end with an affirmative vote today – in a very real sense, it would only just begin.
We are, as Commissioners, public stewards of the futures marketplace with the substantial responsibility today of acting on an application for a new exchange. The documentation and analysis has been presented to us and the recommendation has been made. All that remains is the vote. But before we do, I want to reiterate my confidence that, should our vote be affirmative, the competitive forces unleashed by that decision will provide significant benefits to market users and the public in general. This is what Congress envisioned with the enactment of the CFMA and it is what guides my vote today. Mr. Chairman, I look forward to our vote on this application.
Last Updated: July 22, 2007