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

AUGUST 5, 1999


Mr. Chairman and members of the Subcommittee, thank you for the opportunity to testify concerning the joint petition of the Chicago Board of Trade, the Chicago Mercantile Exchange, and the New York Mercantile Exchange. The views I am expressing are my own.

In 1992, Congress in its wisdom granted the Commission authority under Section 4(c) of the Commodity Exchange Act to exempt certain markets and products from the requirements of the Act. This provided the Commission the necessary flexibility to allow market innovation and development. However, a conference report cautioned against using the newly adopted provisions to prompt wide-scale deregulation of the markets. As I have stated publicly, I remain committed to the principles of market integrity and customer protection and to preventing systemic risk so that our markets remain safe, sound and competitive in the evolving global marketplace.

There has been a dramatic change in the futures trading landscape, which can be attributed primarily to the proliferation of electronic cross-border trading vehicles. The Commission has played an active role in the continuing efforts of the International Organization of Securities Commissions (IOSCO) to promote international regulatory harmony and to prevent protectionist policies. In 1990, the Commission chaired the IOSCO committee, which wrote the original ten principles for the oversight of screen-based trading systems. In fact, the Commission for years has played a key role in IOSCO’s efforts to develop international benchmarks for oversight of the global markets and to increase the coordination and cooperation among the various international regulatory bodies.

On June 25, 1999, three U.S. exchanges submitted petitions under Section 4(c) of the Act in response to the Commission's Order of June 2, 1999, lifting the moratorium on placement of foreign terminals in the U.S. The exchanges seek authority to: 1) list new contracts without pre-approval, 2) adopt new rules 10 days after submission to the Commission without approval, and 3) adopt trading rules comparable to a competing foreign exchange’s rules immediately upon notice to the Commission without approval.

Perhaps a chronology of events leading up to this point may be useful. In 1989, a U.S. exchange received recognition in the United Kingdom (UK) as an overseas investment exchange, which permitted that exchange to offer its products through electronic terminals located in the U.K. In May 1990, a U.S. exchange was permitted to place electronic trading terminals in France. In 1993, the Japanese authorities permitted a U.S. exchange to place terminals in Japan. Today, in 1999, U.S. exchanges have over 125 trading terminals in seven foreign jurisdictions.

By comparison, not until February 1996 was the first foreign country, Germany, permitted to place electronic trading terminals in the U.S. In 1997, a moratorium was imposed on reviewing other applications for placement of foreign terminal in the U.S. On June 2, 1999, the Commission lifted the moratorium and, on July 23, 1999, a U.K. futures exchange was permitted to place terminals in the U.S.

Simultaneously with the lifting of the moratorium, the Commission determined to address the regulatory parity issues facing our U.S. exchanges. To that end, the Commission’s Global Markets Advisory Committee, which I chair, appointed an ad hoc Committee on Regulatory Parity to form specific recommendations. The ad hoc committee adopted three resolutions to address regulatory parity and presented a report to the full GMAC in July 1999. It is significant to note that the GMAC is comprised of 30 members representing U.S. exchanges, financial intermediaries, market users, the National Futures Association, the Futures Industry Association, the Managed Funds Association, and attorneys representing foreign and domestic market users, among others. The primary mission of GMAC is to obtain input on international market issues that affect the integrity and competitiveness of U.S. markets. The committee’s report and resolutions, along with comments received at the full GMAC meeting, will be presented to the Commission for its consideration.

This series of events, roughly covering a ten year period, now brings us to the exchanges' Section 4(c) exemption petition, which is substantively similar though not identical to the ad hoc committee resolutions. The issues raised by the exchanges' petition present important and fundamental policy questions, which we are considering carefully.

The U.S. boasts the safest and soundest futures markets in the world. I believe, and many agree, that this can be attributed to a regulatory regime that is grounded in the principles of market integrity, financial integrity and customer protection. In the course of discussion at the various GMAC meetings, brokers, traders and end-users alike have indicated that they would oppose radical deregulation of the exchange-based markets. At the same time, our markets have evolved and in fact may not need many of the regulatory safeguards designed for a different market serving a different customer base.

As a Commissioner and as Chairman of GMAC, I am committed to do whatever is required to ensure that our exchanges remain competitive. Our exchanges have been and should remain at the forefront of this industry. We cannot stop the technological advances that are rapidly redefining the way the industry does business. As we enter the next millennium, we must not attempt to micro-manage our markets. Such an approach could stifle innovation, impede productivity, create regulatory gridlock and harm U.S. competitiveness.

With reauthorization of the Commodity Exchange Act now underway, it is an optimal time for all of us to consider whether broad revision of regulatory mandates would constitute an appropriate response to the changing competitive landscape of the global marketplace.

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