The Year in Review

Sumitomo Settlement

In May 1998, the Commission issued an order finding that Sumitomo Corporation of Japan manipulated the copper market in 1995 and 1996. The Commission accepted simultaneously an offer of settlement in which Sumitomo neither admitted nor denied the findings. The company was ordered to cease and desist from further violations of the specified sections of the Commodity Exchange Act (CEA or Act) and to pay a total of $150 million. Of that amount, $125 million was due immediately as a civil monetary penalty. The other $25 million was placed in escrow for up to four years. During that period, the money may be used to provide restitution to persons injured by Sumitomo's unlawful conduct. The penalty took into account the serious harm caused by Sumitomo's actions to the U.S. copper market and copper users, as well as the constructive actions Sumitomo has taken and the losses it suffered since public disclosure of its misconduct. The settlement followed a cooperative investigation involving the CFTC, the regulatory authorities of the United Kingdom and the Japanese Government.

Agricultural Trade Options Pilot Program

The Commission, in April 1998, adopted a pilot program to permit the trading of agricultural trade options which are off-exchange options offered to a commercial producer or user of the commodity. Trade options on many agricultural commodities had not been offered for over 60 years. The Commission's review of the ban on agricultural trade options responds in part to the increasing need of those in the agricultural community for risk management tools. As part of its review, the CFTC convened a number of public meetings to discuss the potential benefits and risks of agricultural trade options and to hear the public's view on the regulations under which such options should trade. The Commission intends to re-examine these rules during the pilot program and at its conclusion.

Chicago Board of Trade Corn and Soybean Delivery Specifications

On May 7, 1998, the Commission granted the Chicago Board of Trade's (CBT) applications for contract market designation of its corn and soybean futures contracts. The granting of the applications concluded a process which began in December 1996 with the Commission's notification to the CBT that the delivery point specifications of its corn and soybean contracts no longer met the requirements of the CEA. The first proposal submitted by the CBT in April 1997 prompted comments from over 700 market participants. In November 1997, the Commission ordered the CBT to change and supplement the delivery specifications of the corn and soybean contracts. The CBT, in March 1998, proposed new contract terms for corn and soybean futures beginning with contract months in the year 2000. In granting the CBT's applications, the Commission found that the proposal met the legally required level of deliverable supplies for the contracts and otherwise met the requirements of the Act. However, the Commission directed the CBT to report annually for five years on the experience with deliveries and expiration performance in the revised contracts and on the extent to which particular locational price differentials may discourage or encourage deliveries to be made from each delivery location.

Over-the-Counter (OTC) Derivatives

In May 1998, the Commission issued a concept release on OTC Derivatives. The release requested public comment on a variety of issues concerning the OTC markets including transparency of transactions, the use of leverage, and the application of prudential controls. In addition, the Commission is examining the need for international coordination among regulators of the OTC markets. In late FY 1998, the financial troubles of various hedge funds, including Long Term Capital Management LLP, raised a number of important issues relating to hedge funds and to the increasing use of OTC derivatives by those funds and other institutions in the world financial markets.

Contract Market Designations

During FY 1998, the staff completed economic reviews of 27 applications for new futures contracts, 31 applications for new option contracts, and 141rule amendment packages for existing futures and option contracts.

In FY 1997, the Commission substantially streamlined the review process by adopting fast-track approval rules. Under the fast-track procedures, several categories of contracts are deemed approved in as few as ten days of their submission, while other categories are deemed approved within 45 days. FY 1998 was the first full year for the Commission's new fast-track review procedures. Of the 58 contracts approved, 38 were submitted by the exchanges for processing under the new procedures. Nineteen were approved under ten-day fast-track provisions and 19 were approved under 45-day fast-track provisions. During FY 1998, the Commission proposed further streamlining of the process for contract market designation. This year's proposal would further streamline the process by revising the requirements for the designation application and reducing unnecessary burdens associated with the process.

Bunched Orders

In another streamlining effort, the Commission approved amendments to its rules which allow certain bunched customer orders to be placed on U.S. futures exchanges by investment advisers and commodity trading advisers without individual customer account identifiers either at the time of order placement or at the time of report of execution. The rule permits these orders to be allocated to customer accounts no later than the end of the day the order is executed. The rule responds to the growth in managed funds business and the increasingly common practice of bunching multiple orders for different accounts into a single order for placement. Customers for whom such orders are placed must meet criteria for financially sophisticated market participants, and the account manager must make certain disclosures and certifications to comply with the rules.

Amended Risk Disclosure Rules

In FY 1998, the Commission streamlined its rules as they apply to sophisticated investors, adopting amendments to its risk disclosure rules governing futures commission merchants and introducing brokers. The amendments are designed to speed the account opening process for certain categories of financially sophisticated investors. Specifically, this relief applies primarily to institutional investors and high net-worth individuals. The changes eliminate current requirements that futures commission merchants and introducing brokers provide such customers with standardized risk disclosure statements and, in return, receive a signed acknowledgment of such disclosures when opening accounts for these customers.

Designation of Cantor Financial Futures Exchange

In September 1998, the Commission approved the Cantor Financial Futures Exchange's (CFFE) application for designation as a contract market for the computer-based trading of U.S. Treasury bond futures contracts and ten-, five- and two-year U.S. Treasury note futures contracts. The CFFE was formed by an agreement between the New York Cotton Exchange (NYCE) and Cantor Fitzgerald, LP, an interdealer broker in the U.S. Treasury securities market. Its contracts will trade over the same automated system that Cantor Fitzgerald uses for trading government securities.

International Regulatory Cooperation

Financial markets are increasingly international in nature. In October 1997, the CFTC and the United Kingdom Financial Services Authority (FSA), along with the Japanese Ministry of International Trade and Industry and the Ministry of Agriculture, Forests and Fisheries, sponsored a meeting in Tokyo. The meeting concluded a year-long work program initiated in London in November 1996. Regulators responsible for the supervision of many of the world's leading commodity futures markets issued the Tokyo Communiqué which announced, among other things, the first best practices standards agreed upon internationally on market surveillance of commodity markets and on the design and approval of commodity futures contracts.

During FY 1998, the Commission created a new advisory committee, the Global Markets Advisory Committee, to provide a forum to address the myriad of complex and novel issues raised by the increasing globalization of futures markets. The Committee will explore the many competitive and regulatory issues facing U.S. markets and firms engaged in providing services on a global basis. The membership of the Committee consists of 30 individuals representing U.S. futures exchanges, regulators and self-regulators, financial intermediaries,

market users and traders directly involved in and affected by global operations. The Committee, chaired by Commissioner Barbara P. Holum, held its first meeting in May 1998.

New York Mercantile Exchange Specialist Market Maker Program

The CFTC approved a New York Mercantile Exchange (NYMEX) proposal to develop liquidity in new or low volume futures contracts by establishing a Specialist Market Maker Program. The Specialist will be a NYMEX member or member firm appointed by the exchange as a market maker in a designated contract market. The Specialist will be required to maintain a continuous physical presence on the floor of the exchange throughout the regular trading session and to maintain a two-sided market in the contract for which he or she has been appointed. The program will be terminated for each designated market once volume reaches a certain level.

New Website

In September 1998, the Commission unveiled its redesigned website, a valuable source of news and information about Commission activities. Committed to providing current and accurate information about its regulatory mission and consumer protection initiatives to meet the informational needs of the public, the CFTC designed the new website to provide more information more quickly and in a more readily accessible format. Enhancements to the website include a navigational tool bar which features a search engine allowing full text searches throughout the site. In addition, the agency added a comprehensive site map, an updated and expanded set of links, and an "Ask CFTC" page which provides answers to frequently asked questions and includes contact information for key CFTC programs and personnel. The Commission's website address is www.cftc.gov.

Year 2000

In 1998, the Commission issued Advisories to make clear its expectation that, based on existing Commission rules, all registrants must have a program for elimination of Year 2000 computer problems and must report or disclose promptly any anticipated Year 2000 problems. The Advisories also identified the reporting obligations of the industry's self-regulatory organizations and the independent public accountants who serve the industry. The Com-mission continued efforts to ensure that its own software, hardware and systems will not be affected by any Year 2000 computer problems.

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