THE CHALLENGE OF GLOBALIZATION
AND THE CFTC's NEW
OFFICE OF INTERNATIONAL AFFAIRS
REMARKS OF BROOKSLEY BORN
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 Communiqué 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.