TESTIMONY OF
THOMAS J. ERICKSON
COMMISSIONER
COMMODITY FUTURES TRADING COMMISSION

BEFORE THE
U.S. HOUSE OF REPRESENTATIVES
COMMITTEE ON AGRICULTURE
SUBCOMMITTEE ON RISK MANAGEMENT RESEARCH
AND SPECIALTY CROPS

AUGUST 5, 1999


Chairman Ewing, Ranking Member Condit and Members of the Subcommittee, I am pleased to appear before the Subcommittee on Risk Management, Research and Specialty Crops to discuss the Commodity Futures Trading Commission's (the "Commission") ability to address the competitive concerns of domestic futures exchanges. As you know, this is my first opportunity to testify before this Subcommittee as a Commissioner and I look forward to discussing this most important issue. My remarks this afternoon amplify a few of the points in the Commission's testimony summarized by Acting Chairman Spears. Before I do so, however, I first would like to spend a few moments discussing the Commission's legal authority.

The Futures Trading Practices Act of 1992 authorizes the Commission to exempt any agreement, contract or transaction, or class thereof, from the exchange-trading requirement of Section 4(a) or any other requirement of the Commodity Exchange Act (the "Act"), except Section 2(a)(1)(B). The Commission may exercise this broad exemptive authority by rule, regulation, or order. In enacting Section 4(c), Congress directed the Commission to make certain determinations in granting exemptions. For example, the Act requires that an exemption be consistent with the public interest, which the Conference Report deems to include "the prevention of fraud and the preservation of the financial integrity of markets, as well as the promotion of responsible economic or financial innovation and fair competition." Moreover, the Commission must determine that any exemption "will not have a material adverse affect on the ability of the Commission or any contract market to discharge its regulatory or self-regulatory duties under [the] Act." Again, according to the Conference Report, Congress intended that the Commission "look at the potential impact of the new product on such regulatory concerns as market surveillance, financial integrity of participants, protection of customers, and trade practice enforcement." Congress directed the Commission to use this authority "sparingly" and stated that it did not intend "to prompt a wide-scale deregulation of markets falling within the ambit of the Act."

The fact that the Commission must make these determinations is not an impediment to the Commission's ability to consider the issues raised in petitions for exemption. The Act is enormously flexible and allows the Commission to view the markets as a whole and to delineate lines of regulatory interest. In fact, I am certain that there are aspects of the Commission's existing regulatory framework which, after careful analysis and consideration of changes in the market, may prove to be unnecessary. In order to conduct such a review, I believe the Commission must have the benefit of public comment on any petition received under Section 4(c) of the Act. This process is essential for the Commission to make the determinations necessary to exempt markets or transactions from provisions of the Act.

As discussed more fully in the Commission's statement, the Chicago Board of Trade, the Chicago Mercantile Exchange and the New York Mercantile Exchange on June 25, 1999, submitted to the Commission a petition requesting broad relief from Commission regulation. Parenthetically, I might note that I received the petition having had only four days to warm my chair at the Commission. As a result, most process decisions with respect to foreign terminals and regulatory relief were already in place. I was pleased, however, that I arrived in time to participate in the Commission's action to propose a two-year pilot program allowing predesignation of new contracts. Just last week, I met with exchange officials in Chicago. My message to them was, and is today, that there must be direct dialogue between exchanges and the Commission on issues facing the exchange markets. Absent that dialogue, I fear the Commission could end up doing its level best in addressing yesterday's problems – not much help to an ever-changing industry.

In my view, there is no question that the Commission can and should consider the issues presented in the exchanges’ petition. To do so thoroughly, however, I believe the Commission must have the benefit of public comment and must encourage continued dialogue by Commission staff and the domestic futures exchanges. Therefore, I fully support publication of the specific and general requests included in the petition submitted by the exchanges.

The Subcommittee also has asked for comment on the introduction of foreign trading terminals in the United States. As I told members of the Senate Agriculture Committee during my nomination hearing on May 5, 1999, the Commission, the regulated industry, and the public interest are better served by rules that are clear, that are not unnecessarily burdensome, that apply equally to all petitioners and that provide legal certainty to transactions. The more we use the no-action process to resolve questions concerning new trading systems and instruments, the more we contribute to legal uncertainty. The no-action process has its place, but in significant areas such as foreign terminals, reasonable, workable rules would prove to be a far-better long-term solution. I am hopeful that the no-action process will be an interim step toward providing legal certainty through the Commission’s promulgation of rules.

I thank you for the opportunity to testify before you on this most important issue, and I look forward to responding to any questions you may have for me.