Japan: A Business / Economic / Regulatory Perspective
Joseph B. Dial, Commissioner
Commodity Futures Trading Commission
MFA/FIA East West `97 Conference
April 9, 1997
I would like to thank the Managed Futures Association and the Futures Industry Association for inviting me to participate in this ground-breaking conference. The explosive growth of derivatives markets in the Asia-Pacific region and the impending change in Hong Kong's status make this an ideal time and place for this historic gathering.
At first glance, it may seem strange for a US regulator to be part of a panel on business, economic and regulatory developments in Japan. However, in today's global marketplace -- where capital moves across borders with the tap of a computer key and trading goes on around the clock, around the world -- I believe it is entirely appropriate. I see my participation here today as symbolic of both the need for, and the growing reality of, international regulatory cooperation. In that context, I would like to devote my allotted time to a US perspective on the regulatory reaction to the Sumitomo affair, an event that illustrated only too well the globalization of the marketplace and the critical importance of cooperation among markets and regulators.
The Immediate Response
On June 13, 1996, the Sumitomo Corporation informed the CFTC and the UK Securities and Investments Board (SIB) of unauthorized trading by a Sumitomo trader that ultimately resulted in a $2.6 billion loss. Even though Sumitomo's positions were held on the London Metal Exchange, the CFTC was concerned about the effect of any resulting volatility on US firms and markets, particularly the New York Mercantile Exchange. Thus, we sought and received express assurances from Sumitomo, prior to its public announcement of the trading loss, that it would stand behind its positions and obligations. At about the same time, we invoked the March 1996 Declaration on Cooperation and Supervision of International Futures Markets and Clearing Organizations and began sharing information with British regulators. We also requested advice from US exchanges concerning the need for improvements to market surveillance. In addition, we began an investigation, which is still ongoing, into possible violations of US law in connection with the Sumitomo affair. We are very grateful for the excellent cooperation we have received from our counterparts in Japan and the UK in this effort.
The Longer Term Response
The most significant response to the Sumitomo affair, however, was the convening of an international conference in London, during November 1996, hosted by the CFTC, the SIB and the Japanese Ministry of International Trade and Industry (MITI), in conjunction with the Japanese Ministry of Agriculture, Forestry and Fisheries (MAFF). The Sumitomo events had demonstrated that physical commodity markets like copper, where delivery involves warehouses, railroads, trucks and boats, can raise different regulatory issues than financial instruments, which can be delivered by wire transfer. Therefore, the hosts convened the London Conference bringing together regulatory authorities from 17 countries responsible for overseeing physical delivery commodity markets.
The regulatory authorities reached consensus and issued a Joint Communiqu on a broad range of objectives generally aimed at achieving common standards of best practice in contract design, proper market surveillance techniques, and appropriate information sharing practices, including the sharing of large trader position information. Let me briefly summarize those objectives and the current status of the program to accomplish them.
(1) Initiate surveys in the areas of contract design and market surveillance -- The IOSCO private sector Consultative Committee has agreed to participate in this and the other initiatives arising out of the London Conference, thus creating a parallel private sector effort to accomplish the London Conference objectives. Drafting committees have been appointed and draft reports on the surveys will be circulated for comment to all London Conference participants and Consultative Committee members by May 15th.
(2) Designate contact persons to communicate surveillance information -- A market surveillance emergency contact list questionnaire has been distributed and a number of jurisdictions have already responded. The final deadline for this questionnaire is April 11.
(3) Invite all London Conference Authorities to participate in the International Regulatory Summary (describing each country's derivatives regulatory system), which is compiled by the CFTC and maintained by IOSCO on the Internet -- The invitation has been extended to those regulators not already represented in the Regulatory Summary and additions to the Summary are due to the CFTC by April 16th.
(4) Initiate efforts to amend the March 1996 Boca Raton Declaration to permit all London Conference participants (as well as other appropriate governmental authorities) to become signatories -- It was announced at the March 1997 International Regulators Conference in Boca Raton, that six additional countries had signed the Declaration, bringing the total to 20. In addition, 62 exchanges and clearing organizations have signed the companion exchange MOU. We anticipate that amendments to the Declaration, to allow additional signatories, will be implemented in the near future. Hopefully, Japanese regulators will also sign up to the Declaration, perhaps during the final meeting of the London Conference participants tentatively scheduled for October 30-31, 1997, in Tokyo.
(5) Develop standards of best practice and guidelines in the areas of contract design and market surveillance -- The actual drafting of the standards is being done by one working party on contract design, chaired by the CFTC, and a second working party on market surveillance and information sharing, co-chaired by MITI/MAFF and the SIB. The working parties met in Boca Raton in March and will meet again in London in June and in Bergenstock, Switzerland, in September (all in conjunction with previously- scheduled international regulators' meetings). The final documents are scheduled to be completed by the October 30-31 Tokyo meeting.
(6) Support efforts of others to prioritize information which market authorities may share during specific market events -- Sumitomo brought to light a potential information sharing problem under the Boca Declaration. Say, for example, during a market emergency, Regulator "A" needs information from Regulator "B." A makes a very broad request, to make sure it gets all the data it might need. B may not fully appreciate just why A needs all this data and what A plans to do with it. While these questions are being resolved, the information exchange is delayed. To address this type of problem, the CFTC and SIB proposed to IOSCO a framework for information sharing. This system would identify the types of information that may need to be shared on a fast-track basis in various kinds of market emergencies, including: (1) a financial crisis at a firm (e.g., Barings); (2) a major market move caused by supply/demand factors (e.g., the 1987 crash) or political actions (e.g., the Gulf war); or (3) price distortions or unusual volatility in a particular contract (e.g., Sumitomo). Looking to our hypothetical, appropriate guidelines will expedite information sharing between A and B because: (1) A will know in advance the nature and scope of data to request, based on the emergency at hand; (2) B will have advance notice that the information requested is appropriate; and (3) both parties will know the types of information they need to maintain and share. At its September 1996 meeting, the IOSCO Technical Committee agreed to begin drafting such information sharing guidelines.
That's really all the information I can squeeze into my allotted time. I hope that this rather narrow review of the regulatory reaction to the Sumitomo events has served to illustrate my broader points concerning both the need for, and the growing reality of, international regulatory cooperation. The ultimate goal of this exercise and others that are ongoing, or yet to come, is to establish appropriate minimum regulatory standards for the global exchange-traded derivatives marketplace.