Chairman James E. Newsome
Approval of U.S. Futures Exchange
Application for Contract Market Designation
At the CFTC Open Meeting Held on February 4, 2004
Philosophy since arriving at the CFTC
• I became a Commissioner at the CFTC in July of 1998. I brought to my job certain principles I believed were important to doing the job well.
• I believed you must go out and get an understanding of business issues from the people that were actually involved in the business.
• I believed hiring a good staff was vital.
• I believed it was important to develop relationships with market participants and customers in the industry that you can trust, and then LISTEN to them if you want to develop sound regulatory policy.
• I believed you should NEVER think that you are more knowledgeable than those people, although it’s ok to challenge them at times.
• I believed that in tough situations, you must be willing to listen to all sides, consider all arguments, but in the end, you must make decisions and stand behind them.
• Most importantly, I believed you must ALWAYS keep your word.
• These principles have guided me in my decision-making over the 5 and ½ years of service as both a Commissioner, and more recently, as Chairman of this Commission.
Regulatory experiences under the CFMA
• Since the passage of the CFMA in December 2000, I have been focused on the Commission’s implementation of that groundbreaking legislation in the way it was intended by the Congress. In an oversight hearing last year, our authorizing Committee in the House gave the Commission what I believed to be a positive grade for our implementation of the Act.
• Implementation was challenging in some respects because the new law required the Commission to retire most of its rigid, cookie-cutter rules and adopt more flexible approaches to compliance with the Act.
• Flexibility is always more challenging than prescriptive rules, since the former requires one to think more creatively and make decisions accordingly. Of course, the decisions that come out of this structure are also open to more criticism since they are based on interpretations, which can differ from that of some commenters.
• While it has been challenging, I remain a supporter of this more flexible approach because it has resulted in fewer regulatory restrictions on innovation, technological progress, and competition in the futures industry. I firmly believe all of these things are good for the U.S. position in and the general operation of the marketplace.
• Given the inherent subjectivity that goes along with flexibility, we have been careful to not disadvantage one group over another in our review of new rules and applications and have worked hard to develop regulatory policy that yields a level playing field.
• This has become especially important as new players enter the field.
• USFE is a good example since it is a new, formidable player.
Things that were important to me in considering this application
• It was important to me that we accomplished several goals in our review of this application.
• One, that we first ensured that the application demonstrated to our satisfaction that the core principles for contract market designation were successfully met.
• Two, that the public was able to comment on all parts of the application that were not commercially sensitive.
• Third, that the Commission consider all comments, respond to each of them, and be able to defend our decisions.
• Fourth, that we felt comfortable going forward with the designation. By this, I mean primarily that the applicant had a clear understanding of what was expected from a regulatory standpoint.
• I needed to have comfort that the applicant was willing to cooperate with the Commission in establishing a positive working relationship as it begins operations in the U.S. market under our regulatory oversight. The new, flexible structure inspired by the CFMA depends on solid working relationships between the Commission and those we oversee.
• And finally, I believed that once all legitimate issues were appropriately addressed, the Commission should act quickly on the application.
Difficulty in considering application
• It’s no secret to probably anyone here that there were bumps in the road during the consideration of this application and that those public disagreements lengthened and expanded the Commission’s review of this application.
• This was the first time the Commission reviewed an application under such detailed scrutiny by the public and the Congress. There were several industry participants, who at times even became emotionally charged (and from both sides of the issue I might add) in constant contact with the Commission either orally or through multiple comment letters expressing their views. Because of the unprecedented high level of interest, this may be the most thorough review ever undertaken by the Commission.
• Also, the Commission and the applicant had limited experience in dealing with each other, which led to differences of opinion at times, most notably over the Commission’s regulatory authority.
• These public disagreements led to, among other things, questions
from Capitol Hill to me asking if I had reversed by opinion since
testifying before the House Agriculture Committee earlier where I was
asked to outline the Commission’s authority related to
consideration of the USFE application. Obviously, I have not.
Why I am comfortable with designation now
• However, these issues are behind us now. I believe that we have achieved a level regulatory playing field through our analysis of this application, meaning there will be no REGULATORY advantages or disadvantages when USFE enters the United States.
• As for whether or not USFE will be successful in this marketplace, only market users will have an opportunity to decide that, not the regulator. I have stated many times that this is the way it should be.
• Given today’s staff presentation and multiple other briefings conducted during the last several weeks leading up to this meeting, I believe the core principles for contract market designation are indeed satisfied.
• I am also proud of how the Commission’s process of considering this application has been transparent from the beginning. Our decision to hold two public comment periods and a public meeting to formally consider the application also signifies that.
• I am satisfied that we have fairly considered and adequately addressed all questions raised throughout the process, including those received during the comment period, during our Congressional hearing, and through follow-up letters from interested members. I also am confident that our decisions are both defensible and consistent with the framework of the CFMA.
• I am comfortable that USFE now understands our regulatory expectations and I look forward to continuing the development of this relationship. I believe it’s now headed in the right direction.
• Lastly, I believe it’s important to point out that the Commission is acting on this application as expeditiously as we possibly could have. That has been important to me. I do not believe the government should determine winners and losers through artificial barriers or regulatory delays.
• I’ve been disturbed by recent reports suggesting that we were stalling the approval process. I can assure the public that this is far from the truth. Our staff has worked tirelessly, late at night and on weekends, and even through recent inclement weather.
• It’s worth mentioning that even with all of the interest in this particular application, we are still considering approval roughly six weeks prior to the end of the 180-day statutory timeframe.
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Statement of Commissioner Walter Lukken
Commodity Futures Trading Commission
USFE Designation Hearing
February 4, 2004
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.
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Statement of Commissioner Sharon Brown-Hruska
Commodity Futures Trading Commission
USFE Designation Hearing
February 4, 2004
Thank you, Mr. Chairman. It is a pleasure to finally gather here today for what may someday be seen as an historic moment in the history of futures trading, both in this country and globally. I also would like to recognize the efforts of the staff.
In the Commodity Exchange Act, Congress instructs the Commission “to promote responsible innovation and fair competition among boards of trade, other markets and market participants.” This morning we are gathered to consider an application consistent with this instruction of the Act. As we are all aware, the application of the US Futures Exchange to become a designated contract market has raised a number of unique and challenging issues. The staff has not only had to endeavor to be inquisitive and thorough in their task, but open minded and fair. In short, in light of the issues raised throughout the application process, the staff had to get to the bottom things. In this respect, the staffs of the Divisions of Market Oversight and Clearing and Intermediary Oversight have worked tirelessly in this effort. I would especially like to thank and congratulate Mike Gorham and Jim Carley for the work they have put into this effort and ask them to personally extend my thanks to those in their divisions who have put in the countless hours and who have sacrificed evenings, weekends and holidays to get us to where we are today.
I would also like to commend you, Chairman Newsome, for your astute management of the challenges posed by this market designation and your leadership on this issue. I look forward to our deliberation today and thank you for the opportunity to consider this matter.
As a student of markets for many years, the significance of the US Futures Exchange’s application for designation as a designated contract market is not lost on me. The rise of EUREX, the parent of US Futures Exchange, and its successful endeavor to establish an electronic marketplace in Europe for futures trading was probably the most significant innovation in the futures industry since the Chicago Board of Trade invented the first financial futures contract on GNMA mortgaged-backed certificates in 1975. Ironically, these two great exchanges, which have recently worked as partners to establish electronic trading in the United States, are now poised, along with another great exchange, the Chicago Mercantile Exchange, to vie as competitors in the markets.
Certainly, this has raised consternation with some with the thought of a foreign entity attempting to move in on what has been for more than a century an American institution. But as with other sectors of the economy, and perhaps most notably so, the financial sector, the futures markets are increasingly a global industry. I would note, however, that without the Chicago Board of Trade and the Chicago Mercantile Exchange and the innovations they have brought to the futures industry, we would not sit here today discussing EUREX or its startup exchange, the US Futures Exchange. Moreover, without the assistance of these two American exchanges, it is unlikely that we would have seen the establishment and growth of futures markets across Europe and Asia to the extent that we have. I do not expect for one second that these exchanges will rest on their laurels. I expect them to build on their substantial competitive advantages and to take their innovative spirit to an even higher level, in products, markets, and services here and abroad.
As an advocate of global markets and the economic potential that such markets create, I look forward to the innovations and progress that will come from the competition between the exchanges. In fact, before the US Futures Exchange has even traded one contract, we have seen the benefits of competition in the form of lower exchange trading fees for customers. As I have mentioned in the past to many of you here, I am a strong proponent of the development of global clearing links that offer the promise of greater capital efficiency and potential savings for customers in the hundreds of millions of dollars. I look forward to learning the details of these developments in the coming months.
And for the city of Chicago, there is the prospect of another gem to be added to their crown of futures marts. Contrary to the parochial concerns and dire predictions that have surfaced throughout the extended comment period, I believe that the entry of the US Futures Exchange into the US futures industry will usher in a new era of futures trading in the United States and globally. As we have seen in other markets, as in the US options markets for example, I do not believe that this will be a winner-take-all proposition. I believe that all will be winners, that volumes will continue to expand as more users are attracted to the options and futures markets, and our markets will evolve to offer more useful risk management products to consumers and investors both here and abroad.
It is thus my pleasure to cast a vote today in the application of the US Futures Exchange as a designated contract market. I would also like to take this opportunity to wish all of the exchanges success in their future endeavors. And I would also like to thank the exchanges and all those who provided comments, advice, and even criticisms. These comments make us think more thoroughly about these issues. Your input has made us do a better job and I for one, appreciate the opportunity to fully consider this matter and render my decision.
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