Should There be One U.S. Super Regulator?
Should the Commodity Exchange Act be Overhauled?
New Regulatory Models
Barbara Pedersen Holum*
Chicago Kent College of Law
Illinois Institute of Technology
22nd Annual Derivatives and Commodities Law Institute
*Commissioner, Commodity Futures Trading Commission. The views expressed herein are those of the author and do not necessarily reflect the views of the Commission.
I’m delighted to be here for the Chicago-Kent College of Law’s 22nd annual Derivatives and Commodities Law conference. This conference provides a valuable service; not to mention the chance to see so many familiar faces. And, on that score, I want to thank each of you for being here at this early hour.
Well, what a difference a year can make! You will recall that, at this time last year, Congress took the extraordinary step of enacting a six-month moratorium to halt any Commission action on the now-defunct OTC Derivatives Concept Release. This year, I’m happy to report, the news is much better.
The Commission now has a new chairman and is headed in a new direction. Although Chairman Rainer has been with us now for only a little over two months, his leadership has already brought us a new set of priorities, which is vitally important as we head into this reauthorization cycle.
Today’s topic is regulatory parity--an issue now at the forefront of the Commission’s agenda. And it is an issue that I have focused on in my capacity as Chairman of the CFTC’s Global Markets Advisory Committee (GMAC). GMAC was established in February 1998 in recognition of the reality that, as derivatives markets have become increasingly global and technology-driven, change is taking place at an ever-increasing pace. The markets have evolved to a point where many of our regulations must change as well. We cannot stop the technological advances that are rapidly redefining the way our industry does business but we can reshape our regulatory landscape.
GMAC stands as a forum to review the many international market issues that impact the integrity and competitiveness of U.S. markets and firms. I am pleased to say that we have an active, creative, and diverse membership, which includes 30 individuals who represent U.S. exchanges, financial intermediaries, market-makers, the National Futures Association, the Futures Industry Association, the Managed Funds Association, and foreign and domestic market-users.
The decade of the 1990s has brought a dramatic transformation to the derivatives trading landscape, due largely to the recent proliferation of electronic and cross-border trading vehicles. While the U.S. exchanges currently have over 125 trading terminals in seven foreign jurisdictions, it was only three years ago that the first foreign country, Germany, sought and received permission to place terminals in the U.S. Shortly thereafter, in June of 1997, the then CFTC Chairman unilaterally imposed a moratorium prohibiting the placement of additional foreign terminals in the U.S. It is not surprising, therefore, that the first issue for GMAC was the placement of foreign exchange terminals in the United States.
The GMAC Working Group I on Electronic Terminals, ably chaired by Leo Melamed of Sakura Dellsher Inc., played a crucial role in reaching a new consensus after the proposed rules on foreign terminals were issued for public comment in March of 1998. It was soon recognized that prescriptive, one-size-fits-all rules could only result in regulatory gridlock and would not serve us well in light of the rapid changes brought about by technological innovation. In early June of 1999, the Commission withdrew the proposed rules, lifted the foreign terminals moratorium, and began to process no-action requests from foreign boards of trade. Using the general analytical framework established in 1996 to review the first no-action request, the staff considers requests on a case-by-case basis. To date, four no-actions have been granted, and four are pending. Two of the systems are operating in this country.
GMAC quickly turned its attention to the regulatory parity issues raised by the lifting of the foreign terminals moratorium. I asked Leo Melamed, former Commissioner Gary Seevers of Goldman Sachs, and NFA President Bob Wilmouth, the co-chairs of the GMAC steering committee, to appoint a chairman and an ad hoc Committee on Regulatory Parity. A committee was assembled, chaired by Leo Melamed, and in July it adopted three resolutions, which called on the Commission to take immediate action to permit exchanges to:
1) list new contracts without prior approval;
2) adopt new rules or rule amendments upon ten-days notice; and
3) adopt rules that are comparable to those for competing contracts on foreign exchanges.
Since that time, the Commission has issued two sets of deregulatory proposals, which address these resolutions. These proposals call for a two-year pilot program to allow established exchanges to trade new contracts one-day after filing and for the expansion of the scope of the Commission’s expedited rule review and approval procedures. The comment periods on these proposals have now closed.
In the meantime, a parallel track to regulatory reform was established when the CBOT, CME and NYMEX filed a joint petition for regulatory relief in late June. The three issues raised by the exchanges’ petition are substantively similar to the three GMAC resolutions. In their petition, the exchanges argue that:
1) U.S. exchanges should be permitted to list new contracts without being subject to the Act’s review and approval process in order to remain competitive with foreign boards of trade that have been or will be allowed to place electronic terminals in the U.S.;
2) U.S. exchanges designated as contract markets should be permitted to provide notice of new rules or rule amendments to the Commission ten days in advance of the effective date. New rules or rule amendments submitted under this procedure could be stayed or delayed only if the Commission determined that the rule was likely to cause fraud, render trading readily susceptible to manipulation, or threaten the financial integrity of the market; and
3) U.S. exchanges designated as contracts markets should be allowed to meet competition from foreign boards of trade by immediately implementing rules and procedures, which would only apply to the foreign contract in direct competition with a U.S. exchange’s contract, upon submission of the following materials: (a) the text of the rules and procedures to be adopted, and
(b) a certification that the foreign exchange employs comparable rules and procedures for a contract that directly competes with a contract listed by the U.S. exchange.
The comment period on the exchanges’ petition closed a little more than two weeks ago. We heard from eight commenters, who generally supported ending CFTC micro-management of the exchanges. Every commenter agreed that the Commission should permit exchanges to list contracts without prior approval, and most supported automatic adoption of rule changes ten days after filing. There was somewhat less unanimity on allowing exchanges to adopt trading rules comparable to those for competing foreign contracts upon notice to the Commission without approval. Some commenters stated that the Commission should have prior review and oversight of rules adopted by U.S. exchanges to meet foreign competition and expressed concern that antitrust and public policy concerns might be ignored. Overall, however, strong support was expressed by all the commenters.
Because foreign competition has increased dramatically, our exchanges and firms face considerable pressure to change and adapt to meet these new realities. It’s certainly not too much to ask the CFTC to do the same. And I want to assure all of you that strong winds of change are blowing at the CFTC, and real change is imminent and timely. We are not alone in recognizing this need for change. The structural change that the UK regulatory system has undergone in recent years is indeed interesting. While we all will watch this new system of regulatory consolidation with great interest, I believe that type of structural change is unlikely here at this time, particularly in light of the on-going success of the President’s Working Group in promoting cooperation among all financial regulators
So, these are exciting times. Given our new leadership and the emerging consensus for far-reaching regulatory reform, I predict that at next year’s Chicago-Kent law conference we’ll be saying it again--what a difference a year can make.