"The CFTC's International Initiatives in a
Global Marketplace"
REMARKS OF BROOKSLEY BORN
CHAIRPERSON
COMMODITY FUTURES TRADING COMMISSION
BEFORE THE EXCHEQUER CLUB
WEDNESDAY, DECEMBER 17, 1997
I am pleased to be here today at the Exchequer Club to share with this
distinguished group some observations on how the Commodity Futures
Trading Commission ("CFTC"), the Federal agency charged with
regulation of futures and derivatives markets, seeks to achieve its
goals of ensuring market integrity and customer protection in an era
of increasing market globalization.
This subject is particularly timely. The recent volatility that has
shaken world equity and currency markets has demonstrated more vividly
than ever before that the markets are inextricably linked through
related products and common market participants. Therefore, events
that occur in one market can and frequently do cause global regulatory
concerns. The shocks to the world financial system caused by the
collapse of Barings Plc. in 1995 and the dramatic losses incurred by
the Sumitomo Corporation in 1996 illustrate that this is true for
derivatives markets as well as securities markets.
The CFTC, a small regulatory agency, quietly has become a leader in
encouraging international action to address the issues of systemic
risk posed by our linked markets and in encouraging worldwide adoption
of higher regulatory standards. In my remarks today, I would like to
review with you some of the recent international initiatives of the
CFTC. Those initiatives are designed:
to enhance international supervisory cooperation and emergency
procedures;
to establish concrete standards of best practices that set
international benchmarks for regulation of futures and derivatives
markets;
to improve the quality and timeliness of international information
sharing; and
to encourage jurisdictions around the world to remove any legal or
practical obstacles to achieving these goals.
The Commission has also expanded the opportunities for international
regulators to participate in these initiatives by working to eliminate
any inadvertent barriers to such participation.
Following the collapse of Barings Plc., a UK firm which traded on
numerous world futures markets including those in Singapore, Japan,
Hong Kong and the UK, the CFTC co-chaired a meeting in Windsor,
England with the UK Securities and Investments Board ("SIB")
-- which has since been renamed the Financial Services Authority
("FSA"). That meeting, and the resulting Windsor
Declaration, set in motion a series of international initiatives at
both the regulatory and the market level intended to enhance the
resilience of the financial marketplace against shocks or stress
caused by such defaults. These initiatives included:
I. the development of procedures to coordinate and to respond to a
market crisis;
II. initiatives to increase transparency of market protections and
procedures, including proposals for the strengthening of protections
accorded customer funds deposited for investment or safekeeping;
and
III. initiatives to encourage the development by all markets of
default procedures intended to isolate risks to the defaulting firm
and to restrict potential impact on other firms or markets.
In an era where exchange member firms and market participants
typically trade on multiple exchanges, no one regulator or market
authority will have the information necessary to evaluate the risks to
its markets. For example, at Barings, a rogue trader with high
exposures in Singapore claimed that his positions in the Japanese
markets were risk reducing, but there was no regulatory mechanism
available to any regulator to verify this claim. A notable
accomplishment resulting from the Windsor meeting which addressed this
concern was the signing in March 1996 at Boca Raton, Florida of the
Declaration on Cooperation and Supervision of International Futures
Exchanges and Clearing Organizations, an arrangement under which
the occurrence of certain triggering events affecting an exchange
member's financial resources or exposures prompts the sharing of
information among regulators. The Declaration, which has been signed
by 23 regulators to date, and a similar companion agreement among
self-regulatory organizations, which has been executed by 65 exchanges
and clearinghouses, facilitate the identification of large exposures
by firms that could have a potentially adverse effect on multiple
markets.
Similarly, in November 1996, following the revelations of huge losses
at Sumitomo and the related adverse effects on the global copper
markets, the CFTC and the UK SIB, along with the relevant Japanese
authorities, the Ministry of International Trade and Industry
("MITI") and the Ministry of Agriculture, Forestry and
Fisheries ("MAFF"), co-sponsored an international
regulators' conference in London on physical delivery markets in
international commodities. The London conference focused on the
special problems that physical delivery markets pose for regulators
and considered how contract design, market surveillance and
international information sharing can reduce the potential for, and
assist in the management of, manipulation and other market
disruptions. The 17 countries participating in that meeting issued a
Communiqu� agreeing on certain basic principles of regulation and
on a year-long work program.
That effort culminated on October 30 and 31, 1997. Representatives of
regulators from 16 jurisdictions responsible for supervising commodity
futures markets participated in a conference in Tokyo, Japan, jointly
chaired by the CFTC, the Japanese MITI and MAFF and the UK FSA, and
announced the completion of the work program contained in the London
Communiqu� issued in November 1996. At the end of the meeting,
the regulators issued a Tokyo Communiqu� which, among other
things, endorsed two guidance papers, one on best practices for the
design and/or review of commodity contracts and another on market
surveillance and information sharing. The guidances represent the
first occasion on which regulators responsible for overseeing
commodity derivatives markets have agreed to international standards
for the supervision of these markets.
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. We
anticipate that market authorities -- both regulators and markets --
will refer to the standards of contract design as reflecting an
international consensus as to the elements that should be considered
in order to reduce the possibility that a commodity contract may be
susceptible to manipulation or other disorderly conditions.
Contract design, however, is merely part of an overall market
regulation approach, and accordingly, the regulators issuing the Tokyo
Communiqu� also endorsed standards of best practices for market
surveillance and information sharing. Among other things, the guidance
on market surveillance and information sharing recommends that
regulators should have access to information about the exchange
positions of large traders. Also, they should have access to such
traders' related cash and over-the-counter positions in order to
be able to assess fully the risk of such traders' positions to the
markets.
Significantly, the regulators at the Tokyo meeting agreed that they
should move beyond the mere adoption of statements and expressly
committed that they would seek the removal of domestic legal or other
barriers to ensure access to the information that permits them to
detect and to deter abusive practices and disorderly conditions in the
markets, including information on concentrations of positions and the
overall composition of the market. This commitment is significant
because many regulators need new or expanded powers in order to attain
this goal.
The best practices guidances adopted in Tokyo demonstrate an
international consensus on how to regulate commodity derivatives
markets and a commitment on the part of regulators to enhance their
regulatory effectiveness. They also form a framework within which
increasing harmonization of regulation may develop. In a world of
global markets, the safety of our economy depends on improved
regulation around the world. Our exchanges deserve a level competitive
playing field in which foreign markets are subject to effective
regulation. Market participants should also be free to use markets
around the world without the burdens of unnecessary regulatory
complexity and diversity. It is true that differences in regulatory
approaches will continue, reflecting different cultures and legal
systems. However, it is incumbent on regulators to work toward
harmonization so that regulation does not unnecessarily impede market
access, investment decisions and economic innovation.
The Tokyo Communiqu� also encouraged regulators to participate
in and to make use of the arrangements for sharing large exposure
information which are set out in the Boca Declaration. However,
we recognized that restrictive language in the Declaration made it
impossible for certain regulators of commodity markets to join in that
arrangement. Accordingly, the CFTC and the UK FSA, as co-chairs of the
Windsor Declaration, successfully led an effort to amend the
Declaration. We are pleased to report that on October 31, 1997, the
Japanese MITI and MAFF were the first regulators to execute the
amended Declaration, thus becoming the first Japanese market
regulators to enter into a formal multilateral arrangement for
information sharing. Their entry into this arrangement is a welcome
and important addition to the global network of information exchange
established by the Declaration.
The Sumitomo incident provided the first concrete test of the
information sharing arrangements in the Boca Declaration when the CFTC
asked the UK's SIB for information. The Declaration's
information sharing arrangements worked, but they could have worked
more efficiently. The SIB and the CFTC discussed issues regarding the
relevancy and scope of information requested, which initially slowed
the exchange of information.
In response to this experience, the CFTC and the UK FSA jointly
proposed a practical solution to the Technical Committee of the
International Organization of Securities Commissions
("IOSCO"). Our solution was to settle issues of relevancy in
advance by developing guidance on the types of information which
regulators should be prepared to share under a variety of market
scenarios.
This work was taken forward within IOSCO where the CFTC helped to
draft a guidance within an IOSCO working group. The guidance developed
includes actual lists of questions that regulators could be expected
to ask each other during various market crises. The guidance was
adopted by the IOSCO Technical Committee at its recent meeting in
Taipei in November. Moreover, the guidance had immediate practical
use; several members of IOSCO stated that they had relied upon the
draft guidance during the October market volatility.
The Commission also took steps this year that resulted in IOSCO's
interpreting its membership criteria to allow specialized commodity
regulators to become associate members. As a result, MITI and MAFF of
Japan became members of IOSCO in November. This action ensures that
the regulators of important commodity markets participate fully in the
ongoing development of global regulatory standards.
Cooperation by national regulators in an increasingly international
market 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 for the first time an Office of International Affairs. We
hope that the new Office will enhance the CFTC's ability to meet
the challenges posed by the globalization of financial markets in
three important ways:
I. to respond quickly to market crises that have global systemic
implications;
II. to remain an effective supervisor in a global marketplace;
and
III. to eliminate unnecessary impediments to global business.
Our new Office of International Affairs will play a key role in an
evolving process of the harmonization of regulation which facilitates
market innovation and access while maintaining needed customer and
market protections.
In advancing these international initiatives, the Commission has not
encountered any pressure from other countries to accede to lower
regulatory protections as the price for achieving international
consensus. On the contrary, we have experienced wide support
internationally for raising the level and quality of regulation
worldwide. This attitude reflects an international recognition that a
regulatory regime featuring strong protections is essential to
maintain investor confidence in markets and that confidence fosters
liquidity.
Our futures markets are widely recognized as the strongest and most
competitive markets in the world. The success and growth in U.S.
futures markets are derived in large part from the world-wide
perception that US exchanges are fair, liquid and transparent --
characteristics that have been developed under the regulatory scheme
of the Commodity Exchange Act. Emulating the success of the US
markets, other countries have developed their own futures and option
markets during the past decade, and many of those countries look to
the U.S. regulatory scheme as the world model. The success of the
Commission's international initiatives depends upon the
international recognition of the critical importance of maintaining
high levels of market and customer protections. The CFTC plans to
continue to play an active role in fostering this emerging
international regulatory consensus.
Thank you.