Testimony of Chairperson Born before the U.S. House of Representatives on October 22, 1997

TESTIMONY OF

BROOKSLEY BORN, CHAIRPERSON

COMMODITY FUTURES TRADING COMMISSION

ON THE CFTC'S STRATEGIC PLAN

BEFORE THE U.S. HOUSE OF REPRESENTATIVES

COMMITTEE ON AGRICULTURE

SUBCOMMITTEE ON RISK MANAGEMENT AND SPECIALTY CROPS

OCTOBER 22, 1997

Mr. Chairman and Members of the Subcommittee:

I am pleased to represent the Commodity Futures Trading Commission before this Subcommittee today to discuss the CFTC's Strategic Plan as developed under the Government Performance and Results Act of 1993 (GPRA). The Commission strongly endorses the goals of the GPRA and believes that activities required by the GPRA can help it plan and administer its programs better. The GPRA also should enable us to allocate federal resources more efficiently and effectively.

The Commission's Mission Statement adopted as part of the GPRA process incorporates the fundamental principles embodied in our statutory mandate. The mission of the Commodity Futures Trading Commission is

to protect market users and the public from fraud, manipulation, and abusive practices related to the sale of commodity futures and options, and to foster open, competitive, and financially sound commodity futures and option markets.

The detailed goals, outcome objectives, activities and strategies included in our Strategic Plan are designed to support and to further the Commission's mission.

Throughout the development of our Strategic Plan, the Commission recognized the potential value to the agency of the GPRA mandates and directed that our planning and budgeting processes be managed together. To assure this coordination throughout the agency and the development of a meaningful plan with input from all of the Commission's operating divisions, the Commission created an internal staff task force in September 1996 to identify the activities, outcome objectives and goals that would support the Commission's mission and vision.

The Commission also consulted with numerous outside entities as directed by the GPRA. For example, in the initial stages of drafting, we reviewed the draft strategic plans of other agencies and consulted with other agencies. We also submitted a draft of our Strategic Plan to OMB, our Congressional oversight and appropriations committees, and the General Accounting Office this past August. Our staff engaged in discussions with representatives of these groups and received a number of comments and suggestions from them. We were able to incorporate many of those comments into our final plan.

We also reached out to all interested persons and the general public by publishing our draft Strategic Plan in the Federal Register on September 15, 1997, for public comment and by posting the plan on our Internet home page. While we have received only a few comments as of this date, several parties have advised us that they expect to comment in the near future. The Commission has also provided copies of its draft plan to all members of its active advisory committees and to each of our former commissioners asking for input.

The Commission's draft strategic plan served as the basis for the CFTC's initial Annual Performance Plan (APP), which was submitted to OMB last month as a part of our FY 1999 budget request, continuing the link between strategic planning and budgeting. The Commission will be working with OMB in refining the APP as the President's budget request is prepared, and the revised APP will be submitted to Congress in February 1998 along with the President's budget request. The Commission unanimously approved the final Strategic Plan submitted to the Congress on September 30, 1997.

While the Commission has submitted its Strategic Plan to OMB and Congress, its planning process continues, and the Commission welcomes additional comments as it reevaluates its Strategic Plan over the next five years. Indeed, the Commission will continuously assess whether to make modifications to the plan before the mandatory review in FY 2000 to ensure that the plan clearly reflects the Commission's mission. Minor adjustments, if any, will be reported to Congress in APPs submitted each year with the President's budget request, while major adjustments, if any, will be the basis for a revised Strategic Plan.

We recognize that successful implementation of our Strategic Plan requires the opportunity for input from all persons potentially affected by or interested in our regulatory activities. It also requires that we balance the often competing interests of those persons in a manner consistent with our statutory mandate and agency mission.

The Strategic Plan describes many of the on-going priorities of the Commission. For example, one of the Commission's top priorities this year has been to ensure that the agency is responsive to the competitive challenges facing the U.S. futures industry and its customers, while at the same time preserving important customer protections and market safeguards. This priority reflects each of the three strategic goals included in our Strategic Plan. These goals are:

(1) Protect the economic functions of the commodity futures and option markets;

(2) Protect market users and the public; and

(3) Foster open, competitive, and financially sound markets.

Consistent with its strategic goals, since the beginning of 1997, the Commission has taken numerous actions to streamline and to modernize our regulatory regime. For example, this past Spring the Commission implemented new "fast-track" procedures for processing contract designation applications and exchange rule changes. These new procedures significantly streamlined the review process for most new exchange contracts and many exchange rules, permitting approval within 10 days for many types of contracts and within 45 days for certain other contracts. Since adoption of these procedures, 15 new contract designations have been filed with the Commission, seven of which were eligible for "fast-track" review. The Commission has approved all eligible contracts within the fast-track time period. The "fast-track" process addressed a competitive need of the futures exchanges to be able to introduce new contracts quickly while not compromising the interests of market users and the general public. It is a good example of how we must balance the needs and often divergent interests of interested persons while achieving our broader mission.

In June 1997 the Commission approved an interpretation permitting streamlined procedures for allocation of customer orders which are bunched for execution by commodity trade advisors (CTAs). We believe the streamlined procedures for bunched-orders have brought significant benefits to futures commission merchants (FCMs) and CTAs, without compromising the interests of the customer.

In our most recent regulatory reform action taken in early September, the Commission proposed amendments to its rules governing the risk disclosure obligations of FCMs and introducing brokers (IBs) . If adopted, the proposed rule amendments should speed the account opening process for the sophisticated customers identified in the rule and provide flexibility to FCMs and IBs.

The Commission also has adopted a number of initiatives designed to permit commodity professionals to take advantage of the increased efficiencies and reduced costs made possible through the use of electronic media. In June 1997 the Commission opened the way for 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. Also in June 1997 the Commission authorized CTAs and commodity pool operators (CPOs) to provide risk disclosure documents to their customers via electronic media.

The Commission also has adopted measures to permit the electronic filing of documents with the Commission. In April 1997 the Commission adopted a rule allowing CTAs and CPOs to file their required disclosure documents with the Commission electronically. We also have undertaken a program to permit FCMs to file required financial reports with the Commission electronically. These electronic media initiatives should increase the timeliness of information flow, reduce the administrative costs of commodity professionals and allow all members of the industry and their customers to reap the benefits of technological advances.

Many of the Commission's actions over the last year were undertaken in direct response to concerns raised by regulated entities and persons, a process encouraged by the GPRA. Others were undertaken following an internal review and recommendations of Commission staff. The Commission currently is working on several additional regulatory initiatives, most of which are in direct response to issues raised by members of the futures industry.

For example, in response to concerns expressed by certain futures exchanges and the FCM community about the need to address the special needs of large institutional market participants, the Commission intends to undertake a review of whether to permit certain non-competitive, off-floor transactions executed subject to the rules of a contract market. The FCM community also has requested that the Commission review whether post-order allocation of bunched orders could be allowed with respect to orders of sophisticated customers with their consent.

The Commission also intends to review whether it should use its exemptive authority to expand permitted investments of customer funds by FCMs or US clearing organizations to include certain additional categories of liquid and readily marketable investments. The Commodity Exchange Act currently restricts investment of such funds to obligations of the United States or any state and obligations fully guaranteed by the United States. The Commission also intends to consider a request from industry representatives that it permit futures-style margining of options. With respect to each of these proposals, the Commission will seek to accommodate the needs of the industry and its customers with our mission to protect market users and to foster market integrity.

The Commission's ongoing commitment to streamlining its regulatory requirements and to fulfilling its responsibilities under the Commodity Exchange Act in an efficient and cost-effective manner is further evidenced by its recent delegation to the National Futures Association (NFA) of certain Commission functions. The NFA, a self-regulatory organization of commodity professionals designated by the Commission under the Act to perform certain regulatory functions, has been actively seeking such added responsibilities.

During the past year, the Commission delegated additional authority to the NFA in several areas including:

� registration decisions relating to floor brokers and floor traders with disciplinary histories;

� ethics training of commodity professionals; and

� various registration and processing functions relating to non-U.S. firms.

The Commission continues to welcome the submission of ideas for regulatory reform for consideration by the Commission.

Mr. Chairman, I would like to conclude by once again thanking you for your interest in this matter. I would also like to assure all members of this Subcommittee that we remain committed both to the spirit and to the letter of GPRA and welcome the opportunity to work with Congress, the OMB, other financial agencies, the regulated industry, users of the futures markets and interested members of the public in refining our Strategic Plan.

Thank you. I would be pleased to answer any questions.