COMMODITY FUTURES TRADING COMMISSION
CHICAGO KENT-IIT COMMODITIES LAW INSTITUTE
OCTOBER 24, 1996
I am pleased to be with you today and to share some thoughts about the competitiveness of U.S. futures markets. It has been about ten years since I last spoke at this Conference, and I am very happy to be back.
I have been in office less than two months, and during that time a great deal has happened. In response to concerns expressed by domestic exchanges about their competitiveness, bills have been introduced in both houses of Congress which would amend the Commodity Exchange Act in significant ways. The House Banking Committee has held hearings on the Sumitomo matter. The CFTC's Agricultural Advisory Committee has convened to discuss risk management in agriculture. A week ago the Commission held a Roundtable on Exchange Order and Trade Automation. During the past week the Commission has hosted its sixth annual training seminar for international regulators here in Chicago. I have attended several meetings of international and domestic regulators of financial markets. Finally, the Commission has taken a number of enforcement and regulatory actions. You can see from this brief description that it has not been a quiet time at the Commission.
As I mentioned, some U.S. futures exchanges have expressed concern about staying competitive in a changing world market. I certainly share that concern and would like to address it in the balance of my remarks.
The futures markets have changed significantly in the twenty years that the Commodity Futures Trading Commission has been in existence. The volume of futures contracts traded on domestic exchanges has grown exponentially, exchange-traded options have become a significant part of the market, and futures and option contracts are now predominantly based on financial instruments rather than agricultural commodities. The assets in commodity pools and managed accounts have mushroomed. At the same time, we have seen even more dramatic growth in the number and trading volume of foreign exchanges. There has also been a tremendous growth in over-the-counter derivatives transactions among sophisticated parties.
Some domestic exchanges have expressed the view that they have suffered from competition by foreign markets operating under less rigorous regulatory regimes. Of course, virtually all foreign markets are subject to some type of regulation in their home countries. Furthermore, while the CFTC does not directly regulate foreign exchanges, it does regulate the offer and sale of foreign futures and options to U.S. customers.
The enormous growth in transactions on foreign futures exchanges has certainly not been primarily at the expense of U.S. exchanges. U.S. transactions have generally continued to grow as well. Although some foreign futures contracts are directly competitive with domestic futures contracts, many others relate to their own home markets and do not compete with any U.S. futures contracts. In my view, heightened international awareness of the significance of derivatives markets in risk shifting and price discovery has clearly benefitted domestic exchanges and undoubtedly has resulted in increased transactions on them.
Some domestic exchanges have also complained about competition by the over-the-counter market and the level of regulation over it. Unlike the futures exchanges which we regulate, the domestic over- the-counter market is restricted to contracts between sophisticated persons or institutions and does not involve the participation of the general public. In my view, it is appropriate that regulation of this market should be limited to issues relating to fraud and manipulation.
Our exchanges provide reference prices and hedging opportunities for the over-the-counter market. That market has created new customers for financial services and new arbitrage and other opportunities for U.S. futures markets. Thus, the over-the- counter market has brought new business to the exchanges as well as new competition.
U.S. futures exchanges are the most competitive, most dynamic and most innovative futures markets in the world. I believe that historically the regulatory scheme governing those markets has been an important factor in their success. Market participants around the world have recognized that U.S. markets are fair, honest and transparent, and therefore they have felt secure in trading here.
Nonetheless, the world is changing, and neither the exchanges nor the CFTC can ignore that reality. I believe that it is entirely appropriate to reexamine the Commodity Exchange Act to determine whether it continues to be effective and efficient in regulating our markets. The Commission is currently examining the bills which have been introduced in Congress. We are developing views on whether their provisions would enhance or impair our ability to regulate the markets and to prevent and to police fraud and manipulation. In addition, the Commission is considering whether any additional legislative changes are necessary to make the Commission's regulatory authority more effective or to bring the Commodity Exchange Act up to date.
Along the same lines, I have asked the Commission staff to examine various CFTC regulations to see if they are unduly burdensome. I firmly believe that our regulations should be well- designed to accomplish the Commission's statutory mandate and should not impose unnecessary burdens on the industry. Our rules should be clearly stated and vigorously enforced by the Commission. I would welcome suggestions from the industry about any specific regulatory provisions which they believe are unduly burdensome and unnecessary to accomplish the Commission's regulatory mission.
The staff is currently exploring possible regulatory revisions. For example, I have asked the staff to consider whether we can further streamline the contract designation process. Today the Commission is averaging about 90 days to approve new futures contracts. This represents a great improvement over the time taken several years ago. Nonetheless, I have requested examination of a possible two-track approach to contract designation. Under this approach proposed contracts that did not raise significant issues could be reviewed quickly and go into effect automatically. Proposed contracts that did raise issues of regulatory concern would be subject to the full review currently undertaken.
We also plan to continue our work with other regulators in an effort to streamline and to coordinate our regulatory requirements to avoid unnecessary duplication and burden on those subject to the oversight of multiple regulators.
On a different front, the Commission is addressing the competitiveness concerns of domestic exchanges by working closely with foreign regulators to encourage more vigorous regulation of their markets. The U.S. regulatory scheme for futures markets is acknowledged to be a model for the world, and the CFTC has been a leader in efforts to encourage foreign regulators to adopt comparable systems of regulation.
As I noted earlier, we have just completed our sixth annual week-long training seminar for foreign regulators. Seventy-nine regulators from twenty-nine different countries attended the training seminar. In addition to this annual seminar, the CFTC provides a great deal of technical advice to foreign regulators interested in improving their regulatory oversight and enforcement capabilities.
At the end of November, the CFTC will be co-sponsoring an international conference of regulators on physical delivery markets in international commodities. The U.K. Securities and Investments Board and the Japanese Ministry of International Trade and Industry are also co-sponsors of the conference. The conference will focus on the special problems that physical delivery markets in international commodities pose for contract design, market surveillance and international information sharing. We believe that the conference will serve as an educational vehicle to encourage more effective regulation of physical delivery markets worldwide.
The Commission is preparing comments in response to a request by the SIB seeking input about its regulation of the London Metals Exchange. Our comments will point out some comparative strengths of the U.S. regulatory system and will encourage the SIB to adopt appropriate measures to strengthen its oversight of the LME.
The Commission has also spearheaded efforts to encourage international information sharing among regulators and markets. A multilateral information sharing agreement was signed by fifteen regulatory authorities this year, adding to a large number of bilateral memoranda of understanding that the CFTC has entered during the past decade.
We believe these efforts not only improve our ability to regulate domestic markets and market participants by raising the level of international regulation and fostering global cooperation among regulators. They also benefit U.S. exchanges by working toward a more level international regulatory playing field. The playing field may be leveled more appropriately by raising the general level of regulation abroad than by reducing protections at home.
While the CFTC should be sensitive to the competitive needs of domestic markets, the ability to compete effectively in a dynamic and changing world ultimately depends on the actions of the domestic exchanges and market participants. In a climate of change, a willingness to innovate is crucial to continued success. Some U.S. industries have been doomed by resisting change in an era when their foreign competitors have embraced automation and greater efficiency. In my early years of law practice in the field of international trade, I witnessed one domestic industry after another -- the watch industry, the textile industry, the shoe industry -- falter because they were unwilling to conduct research and development and to invest the necessary capital to modernize. The Commission wants to encourage our markets to adapt to change. For that reason last week the Commission sponsored an Automation Roundtable bringing together technology experts, exchange officials and market participants. We hope that the candid discussion initiated at that Roundtable will continue and will assist the exchanges in implementing the necessary innovations that the future requires. There is no reason why U.S. futures exchanges should not continue to be at the cutting edge, as they have been so effectively in the past.
The Commission must not allow preconceived regulatory notions to interfere with market innovation. However, the exchanges must realize that the need for innovation and change does not in any way diminish the responsibility of the Commission to protect against fraud, customer abuse, manipulation and financial disruption. While we can and should be open-minded and flexible, we have a statutory obligation to enforce the law. We have the most admired regulatory system in the world in part because of our willingness to enforce our laws vigorously. I plan to continue the Commission's strong commitment to its enforcement program.
Finally, I would like to reiterate my invitation for you to share your views with us on how the Commission can improve its regulatory oversight. I plan to maintain an open door and an open mind.
Thank you very much.