WELCOMING REMARKS OF
CFTC CHAIRPERSON BROOKSLEY BORN
SEVENTH ANNUAL CFTC TRAINING SEMINAR
FOR INTERNATIONAL MARKET AUTHORITIES
CHICAGO, ILLINOIS
OCTOBER 20-24, 1997
INTRODUCTION
It is a pleasure to welcome you to the seventh annual CFTC Training
Seminar on Regulation of Derivative Products, Markets and Financial
Intermediaries. We have tried to design this seminar to share with you
what we have learned in more than 20 years of trying to foster market
integrity and customer protection in U.S. futures markets.
By providing risk shifting and price discovery functions, futures
markets serve an important economic function that complements capital
formation. Risk shifting provides a means for customers to hedge
against future fluctuations in prices, while price discovery
facilitates transactions in the underlying cash markets.
In order properly to perform these functions, derivatives markets
must operate in an orderly, fair and efficient manner. If futures and
option products are susceptible to manipulation as a result of poor
product design or inadequate surveillance and monitoring, traders will
lose confidence in the integrity of the marketplace. Market
participants are also entitled to a trading environment that ensures
fairness and minimizes the potential for default and systemic risk. An
appropriate regulatory structure therefore is essential for a market
to function well.
International regulators agree that the proper goals of regulation
are market integrity and customer protection, but they also
acknowledge that different methods may be used to achieve these goals.
The U.S. system which we will be explaining to you during the seminar
has permitted our markets and firms to operate soundly and has ensured
a high degree of customer protection while at the same time fostering
innovation that has enabled our markets to remain competitive. As you
learn more about our regulatory system, we encourage you to reflect on
those aspects of the U.S. regulatory approach that would be useful in
your own country, taking into account the resources which you have
available, as well as other factors particular to your markets,
culture and legal system.
In 1974, by an Act of Congress, the CFTC was created as an
independent regulatory agency of the U.S. government and was given
exclusive authority to regulate futures and commodity options trading
in the U.S. The U.S. system of futures regulation addresses:
-- the fitness, competency and sales practices of commodity
professionals engaging in trading for customers, providing trading
advice or handling funds;
-- the surveillance and supervision of markets to prevent market
abuses and to foster financial integrity; and
-- the exercise of enforcement powers to insure compliance with the
law.
At the CFTC, we have been examining our regulations to modernize and
to streamline them. For example, we recently created a "fast
track" process for CFTC approval of new contracts on an expedited
basis. Moreover, in June of this year, we allowed futures brokers to
use electronic media in communicating with their customers. You will
hear more about these and other regulatory reform efforts in the days
ahead.
Cooperation by national regulators in an increasingly international
financial environment is not an option; it is a necessity. 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, which is
coordinating this week's training seminar. We hope that the office
will enhance the CFTC's ability to meet the challenges posed by
the globalization of financial markets in three important ways:
to respond quickly to market crises that have global systemic
implications;
to remain an effective supervisor in a global marketplace where no one
regulator has all of the information or resources to regulate its
markets or its firms; and
to eliminate unnecessary impediments to global business while
preserving core protections for markets and customers.
The failure of Barings Plc., followed in quick succession by the
dramatic losses incurred by the Sumitomo Corporation's copper
trading, are two recent events underscoring the complexity of
financial supervision in a global marketplace. Markets today are
linked through fungible products and common or related market
participants with the consequence that events which occur in one
market can and frequently do cause regulatory concern in multiple
jurisdictions.
Following Barings, international regulators tried to enhance the
resilience of the financial marketplace against shocks or stress
caused by such market-wide events. Barings led to the Windsor
Declaration, relating to international cooperation in emergencies and
protection of customer funds and assets in the event of cross-border
default. It also led to the March 1996 Declaration on Cooperation and
Supervision for sharing large exposure information, which to date has
been signed by 20 regulators world-wide, and its companion agreement,
which to date has been executed by 62 international exchanges and
clearinghouses.
Similarly, following Sumitomo, the CFTC and the U.K.'s Securities
and Investments Board, along with the relevant Japanese authorities,
MITI and MAFF, co-sponsored an international regulators conference in
November 1996 on physical delivery markets in international
commodities. The London conference focused on the special problems
that physical delivery markets pose for contract design, market
surveillance and international information sharing and resulted in the
issuance of the London Communiqu�, setting forth an ambitious
work program to address regulatory issues raised by the Sumitomo
losses.
The London Communiqu�'s work program is on track for its
scheduled completion date in a few days at a final meeting in Tokyo.
In anticipation of that meeting, the participants have been developing
"best practices" standards for contract design, market
surveillance and information sharing. These "best practice"
standards will establish regulatory benchmarks that can help each
national regulator assess its own standards and practices.
The CFTC is also working in other international forums, such as
IOSCO, on issues of common concern to regulators and self-regulators
around the world. One major initiative involves the development of
further guidance on implementing information sharing agreements,
including identification of the types of information which may need to
be shared in a particular type of market emergency. Market emergencies
being explored include a firm financial crisis, such as Barings, a
major market move caused by supply and demand factors, such as the
1987 market crash, and price distortions or unusual volatility in a
particular market, such as the Sumitomo situation. Advance
understanding of the information needed will facilitate sharing of
information when such an event occurs.
Another major initiative of IOSCO in which we are participating is
identifying the core elements of an effective regulatory system. With
the rapid growth of futures trading around the world and the many
linkages among markets and systems, agreement by regulators on the
fundamentals of regulation is a top priority.
Notwithstanding the progress we have made in the area of
international cooperation, global harmonization of financial
regulation will not be reached anytime soon. Luckily, different
regulatory approaches have led to successful regulatory results.
Indeed, regulatory diversity within the framework of internationally
accepted standards may enhance regulatory innovation and improve
supervision.
In conclusion, I hope that you will find this seminar's
discussions about the U.S. regulatory system relevant to the issues
which you are currently facing in your own countries. I hope you will
find the seminar instructive and thought-provoking and that you will
share with us your experiences in important regulatory areas.
Moreover, I hope this seminar provides an opportunity to get to know
some of your fellow regulators in other countries. Those relationships
will provide the foundation for increased cooperation in the years to
come. Thank you.