THE CHALLENGE OF GLOBALIZATION
AND THE CFTC's NEW
OFFICE OF INTERNATIONAL AFFAIRS
REMARKS OF BROOKSLEY BORN
CHAIRPERSON
COMMODITY FUTURES TRADING COMMISSION
BEFORE THE SECTION OF BUSINESS LAW
COMMITTEE ON REGULATION OF FUTURES
AND DERIVATIVE INVESTMENTS
AND THE DERIVATIVE INSTRUMENTS SUBCOMMITTEE
OF THE FEDERAL REGULATION OF SECURITIES COMMITTEE
AMERICAN BAR ASSOCIATION
SAN FRANCISCO, CALIFORNIA
I am very pleased to be here today with members of the ABA's
Business Law Section. Until I assumed office last August, I was a
member of the Section and of its Futures Committee, and it feels like
coming home to appear before you.
When I left the private practice of law last August, I knew I would
be joining the Commodity Futures Trading Commission during a
challenging time of change in our futures markets. One of the biggest
challenges is the sweeping change occurring in financial markets
around the world and the efforts to oversee them.
To emphasize the CFTC's commitment to assuring that our
regulatory regime stays abreast of global change, in July of this year
the Commission established an Office of International Affairs. Today,
I will address some of the changes occurring in global financial
markets and why we thought that, in light of these changes, it was
time to establish this Office. The Office will enhance the
Commission's ability to meet the challenges posed by the
globalization of financial markets in three important ways:
I am pleased that Andrea Corcoran, who previously served as the
Commission's Director of the Division of Trading and Markets, has
agreed to serve as the Office's first Director. Andrea has years
of experience and is already recognized as a leader in this field. She
is exceptionally well qualified to take on these new challenges.
Great changes are taking place in financial markets and financial
services regulation around the globe. The changes in regulation result
from revolutionary changes in the markets: round-the-clock,
round-the-globe trading; globally active market users and market
intermediaries; the technology of the information age; and the
increasing pace of market innovation. Moreover, market crises -- the
London tin crisis of 1985, the stock market crash of 1987, and the
massive losses of Barings Plc. in 1995 and Sumitomo Corporation in
1996, to name but a few -- have been catalysts for regulatory
change.
In the UK, the enactment of the 1986 Financial Services Act
established a "two-tier" regulatory and self-regulatory
framework. Recently, the UK initiated radical market reforms to
integrate into one entity -- the Securities and Investments Board --
the supervision of banks, securities firms and insurance companies and
the functions of many U.K. self-regulatory organizations. Thus, in a
relatively short time frame -- from 1986 to 1997 -- the UK has moved
to a single, all-embracing financial regulator.
In the United States, we too are considering changes in our financial
services regulatory structure. The appropriate activities and
regulation of banks are being reconsidered in financial services
modernization bills in Congress. In addition, legislation has been
introduced significantly to change the existing regulatory structure
relating to futures and other derivative instruments.
The proposals for regulatory change reflect an attempt to respond to
significant changes in the businesses and markets being regulated. If
regulators are not responsive to technological developments, business
changes and market evolution, we will have failed in maintaining an
effective regulatory system and will burden innovation and financial
market growth with regulatory inefficiencies and outmoded regulatory
structures.
The Commission plays a very active role in the international arena
and, indeed, is required to do so by the increasing globalization of
our markets. I would like to describe some of our recent international
activities and initiatives, which will now be centralized in the
Office of International Affairs.
The failure of Barings Plc. in 1995 and the dramatic losses incurred
in the Sumitomo Corporation's copper trading last year are two
recent events demonstrating the complexity and linkages affecting
financial supervision in a global marketplace. Markets today are
linked through products and market participants. Events in one market
can and do create regulatory concerns in multiple jurisdictions.
For example, the collapse of Barings Plc., a UK firm which traded on
numerous world futures markets including Singapore, Japan, Hong Kong
and the UK, and the copper losses suffered by the Sumitomo
Corporation, a Japanese firm trading on the London Metal Exchange,
required the CFTC promptly to assess the effects on any US interests
in the following areas:
Moreover, once such initial inquiries were complete and the immediate
crises had abated, we moved beyond crisis management to consider how
best to protect the domestic financial marketplace against future
shocks caused by extraterritorial events. For example, following
Barings, the CFTC co-chaired with the UK SIB a meeting in Windsor,
England. That meeting, and the resulting Windsor Declaration, set in
motion a series of international initiatives. One notable
accomplishment was the March 1996 Declaration on Cooperation and
Supervision for the sharing of information on large positions, which
has been signed by 20 regulators to date, and its companion agreement
among self-regulatory organizations, which has been executed by 62
exchanges and clearinghouses. The CFTC also spearheaded efforts in
IOSCO to produce international consensus documents on Cooperation
Between Market Authorities, Default Procedures at exchanges, and
Client Asset Protection.
Similarly, following the Sumitomo incident, the CFTC and the SIB,
along with the relevant Japanese authorities, the Ministry of
International Trade and Industry and the Ministry of Agriculture,
Forestry and Fisheries, co-sponsored a November 1996 international
regulators conference in London on physical delivery markets. The
conference focused on the special problems that physical delivery
markets pose for contract design, market surveillance and
international information sharing. The 17 countries participating
issued a Communiqu� agreeing on certain basic principles of
regulation and on a year-long work program. In June 1997 the London
conference co-chairs reported on the progress to date and released the
results of our survey describing regulatory practices in the
participating countries. Currently, we are working toward the
development of international "best practices" standards on
contract design, market surveillance and information sharing to be
released at a meeting in October 1997 in Tokyo.
These efforts demonstrate the commitment of regulators from around
the world to cooperate with one another. By creating international
best practices standards, we hope to establish world-wide regulatory
benchmarks, which can help each regulator to assess how its standards
and practices compare with the benchmarks and to consider possible
regulatory improvements. The CFTC wants to encourage the enhancement
of regulation around the world through these efforts, which complement
our technical advisory and educational services to other
regulators.
International cooperation has broadened dramatically since the
1980's, when regulators concentrated on addressing fraudulent
activities occurring on a cross-border basis. Early cooperative
efforts focused on entering bilateral memoranda of understanding or
nonbinding statements of intent to cooperate in enforcement
cases.
Today, our information arrangements are more expansive. They address
surveillance issues, fitness, location of funds and custodians, and
the organizational structure of multinational firms. The use of such
arrangements has proven remarkably successful. A recent check of an
IOSCO database on the Internet indicated the existence of over 224
bilateral arrangements involving 50 jurisdictions. In fiscal year 1996
there were approximately 190 instances in which the CFTC requested
information from a foreign regulator and 65 instances in which a
foreign regulator requested information from us.
International regulators also are working to ensure that information
sharing will occur quickly and efficiently. The Sumitomo incident
provided the first concrete test of the information sharing
arrangements in the March 1996 Declaration. The Declaration's
information sharing arrangements worked, but they could have worked
more efficiently. Given the competition between derivatives markets
whose products are similar, it is not surprising that invocation of an
information-sharing arrangement that seeks information on large
positions could raise questions regarding whether the inquiries are
motivated by competitive reasons rather than supervisory concerns and
regarding the proper scope of information requested.
To address these problems, the CFTC and the SIB jointly proposed to
the IOSCO Technical Committee a project to provide guidance on the
types of information which regulators should be prepared to share
under a variety of market scenarios. The market events to be covered
include a firm financial crisis such as Barings, a major market move
such as the 1987 stock market crash, and price distortions or unusual
volatility in a particular market such as the Sumitomo situation.
Agreeing in advance upon the type of information which may be required
to address systemic concerns affecting markets, firms and customers
should facilitate information-sharing when such an event occurs.
The globalization of the markets presents opportunities for
international regulators to learn from one another and to eliminate
redundancies in our oversight programs in order that our regulatory
systems do not unnecessarily burden innovation and financial market
growth. At the CFTC, we have been examining our regulations to
determine whether they are unduly burdensome or require updating. This
effort has already resulted in some significant streamlining in the
way we regulate our markets. For example, we recently created a
"fast track" process by which our exchanges may obtain CFTC
approval of new contracts on an expedited basis. Certain contracts may
now be approved within 10 days and others within 45 days. Similarly,
we have created a new fast track process for exchange rule
approvals.
Also, in June of this year the CFTC opened the way for FCMs to make
use of electronic media in communicating with their customers. The
Commission's new guidance permits FCMs to deliver monthly
statements, trade confirmations and other account statements solely by
electronic media to customers who consent to electronic transmission
in lieu of receiving paper documents. We have also authorized
commodity pool operators and commodity trading advisors to provide
risk disclosure documents via electronic media. The Commission has
also approved in principle two part disclosure documents, simplifying
the information provided to potential customers. Financial reporting
requirements for regulated persons have been harmonized with the
SEC's requirements.
The need to streamline burdensome regulatory requirements will also
play an important role in harmonizing regulatory schemes
internationally. The US and the UK have approved a generic risk
disclosure statement, which can be used by participants in either
jurisdiction. Indeed, the multinational participants in our markets
require and deserve international regulatory harmonization to
facilitate their business operations and to reduce the burdens of
conforming to many differing national regulatory schemes. As
technology enhances the ability to do cross-border business, these
needs will only increase. International regulators have a
responsibility not only to streamline and modernize our domestic
regulatory programs, but also to pursue actively the elimination of
unnecessary regulatory divergence on an international level.
The Commission has also been working to improve access to our
markets, while at the same time increasing access for US investors to
foreign markets. In May of this year, for example, we approved the
linkage arrangement between the Chicago Board of Trade and the London
International Financial Futures and Options Exchange, which permits
the cross-listing of the CBOT's and LIFFE's major financial
futures and options contracts. This linkage will facilitate the price
discovery process on an international scale. In June of this year, the
Commission approved the NYMEX-Hong Kong linkage arrangement that
permits the placement of NYMEX ACCESS terminals in Hong Kong. We have
also issued Orders relating to the UK, France, Australia, Singapore,
Canada, Japan, Spain and New Zealand which permit duly authorized
members of exchanges in those jurisdictions to solicit US investors
based on compliance with comparable regulatory requirements imposed by
their home country regulator.
Obviously, we will not reach a level of complete global harmonization
any time soon. Very different regulatory approaches have led to
equally successful results, and no one system will work in all
jurisdictions. But I believe that our new Office of International
Affairs will play a key role in an evolving process leading toward
harmonization of regulations which ensure market innovation and access
while maintaining needed customer and market protections.
Investors' choices should not be limited by geography; regulators
should provide basic protections to investors and the markets in every
corner of the globe.