TESTIMONY OF

BARBARA P. HOLUM, COMMISSIONER

COMMODITY FUTURES TRADING COMMISSION

�BEFORE THE

UNITED STATES HOUSE OF REPRESENTATIVES

COMMITTEE ON AGRICULTURE

SUBCOMMITTEE ON RISK MANAGEMENT, RESEARCH AND SPECIALTY CROPS

MAY 18, 1999

�

Mr. Chairman and members of the Subcommittee, thank you for the opportunity to testify concerning reauthorization of the CFTC. The views I am expressing are my own and are not the views of the Commission. I wish to commend the Subcommittee for recognizing that reauthorization of the CFTC raises important policy questions concerning both US and global financial markets.

While the three main purposes of the Commodity Exchange Act:

1. financial security,

� 2. market integrity, and

3. customer protection

remain valid, evolutionary change in the marketplace demands new approaches in achieving these objectives.

I view this reauthorization process as an important and positive opportunity to eliminate a regulatory posture which simply does not fit current financial markets and institutions. We should not continue to try to make our dynamic and innovative markets conform to outmoded regulatory programs. Instead, we as regulators of the most creative and successful markets in the world should be looking ahead and working closely with industry participants to craft regulatory oversight which works.

A better approach would develop guidelines or principles granting regulated entities needed flexibility in meeting common regulatory objectives. This approach, incorporating business or conduct codes, could improve the effectiveness of regulation and at the same time reduce regulatory costs.

I would like to briefly review for you three recent examples of why we must move quickly away from the rigid, prescriptive micro-management approach to regulation.

The CFTC's unilateral effort to initiate expanded regulation of the over-the-counter derivatives market failed to achieve acceptance among those with either a business or regulatory interest. The concept release on OTC regulation, which included more than 70 questions about the best approach to regulate that market, succeeded only in increasing legal uncertainty. As a corrective measure, we must adopt an open and cooperative attitude toward working with our fellow regulators, the SEC, the Treasury, the Federal Reserve Board, and the Congress, as was not done with OTC derivatives.

Similarly, a burdensome approach in regulating agricultural trade options failed to expand risk management tools available to agricultural producers and consumers. Although the CFTC received overwhelming comment from agricultural interests cautioning against the implementation of detailed prescriptive rules, the CFTC nonetheless promulgated extensive and costly regulatory mandates. The result to date is that not one person has registered as an agricultural trade option merchant. We must listen when market participants advise us on the design of risk management programs, as was not done with the agricultural trade options program.

Current debate surrounding the CFTC's proposed rules on access to foreign terminals again shows that a rigid or formulaic approach to regulation is inapplicable in the modern business environment. As part of this initiative, there has been a moratorium on any action to permit the placement of foreign terminals in the US since late 1997, which has imposed an unfair burden on competition and denied end-users in the US the benefits of access to foreign markets. The CFTC should never again propose rules and regulations prior to adequate consultation with the industry and with all CFTC commissioners.

As you may know, I am chairman of the CFTC's Global Markets Advisory Committee. The purpose of GMAC is to advise the Commission on issues concerning the competitiveness of US markets and US firms engaged in global business. Recognizing the critical importance of addressing the competitive regulatory issues facing US exchanges, I have formed a steering committee within GMAC. That committee has agreed to identify and recommend solutions to address the regulatory parity issues surrounding automated access to foreign exchanges. I believe that we must recognize and respond promptly to the very real concerns regarding the regulatory burdens impacting the competitiveness of US exchanges. Our domestic exchanges have been and should remain at the forefront of this industry and should not be impeded by unnecessary, burdensome, and archaic regulations. At the same time, we must ensure that our markets remain the safest and soundest in the world.

We cannot stop the technological advances that are rapidly redefining the way the industry does business. Instead, we must recognize the extraordinary benefits of these vast new technologies. New technology benefits us as regulators by providing new tools that enhance our market and trade practice surveillance capabilities. Likewise, the exchanges must be permitted to maximize the benefits of new technology on their trading floors and in their surveillance departments. To do so, they must not be subject to the same set of requirements designed for a different era of trading.

As we chart a course to take us into the next millennium, we should not attempt to micro-manage our markets through an outmoded regulatory program. To assume that the CFTC should adopt regulations to control all risk contingencies, no matter how remote, for every new technological advancement would constitute poor public policy. Such an approach risks regulatory gridlock that stifles innovation, impedes productivity growth, and harms US competitiveness.

In conclusion, as we work together over the next several months on this reauthorization process I hope our end product will reflect the following three elements: cooperation, flexibility, and democracy. We are a free society overseeing a free market adopting rules and regulations in concert with, not in spite of, all other regulators and market participants.

Thank you. I would be pleased to answer any questions members of the Subcommittee may have.