MARCH 14, 1995

Good afternoon Mr. Chairman and members of the Subcommittee. Thank you for inviting me to present the President's fiscal 1997 budget request for the Commodity Futures Trading Commission. With me this afternoon are Madge Bolinger, Director of the Office of Financial Management, and Andrea Corcoran, Director of the Division of Trading and Markets.

Mr. Chairman, I would like to have my written testimony included in the record and I will briefly summarize it.

As you know, the President's request for the CFTC is $56,601,000. This request represents a modest increase of $3 million, or 5.6 percent, over the fiscal 1996 level.

Since the Commission last appeared before your Subcommittee, we have made progress in six important areas. First, with additional funds provided last year, the Commission is making critical improvements to its market surveillance computer system. In particular, we are planning to add daily options data to our large trader reporting system. Currently, we have daily large trader reports for futures, but only weekly reports for options. As options volume has grown over the years, our surveillance picture has become less complete. We must have a modern system that captures the whole picture for today's dynamic, and sometimes volatile, markets.

Market volatility over the last week underscored the need to improve our surveillance system. When markets become extremely volatile, we need to know immediately the financial exposure of large traders in both futures and option markets, and the potential impact they may have on other market participants. Our new surveillance system will allow us to do this.

Second, we have taken a number of steps to strengthen our enforcement program. Our goal is to send a clear message that fraud and other violations of the Commodity Exchange Act will be promptly and thoroughly investigated and vigorously prosecuted. During fiscal 1995, the Commission brought a number of significant enforcement cases and imposed over $11 million in civil penalties. We are concentrating our enforcement resources on matters that will have the greatest deterrent impact against wrongdoing in the marketplace.

Third, we devoted considerable time last year to dealing with the collapse of Barings Bank. The CFTC was particularly concerned about the potential impact of the Barings collapse on U.S. markets and U.S. firms, and we worked to protect their interests. In the wake of the Barings crisis, the CFTC and British regulators hosted a meeting to address international regulatory issues. At the conclusion of the meeting, regulators from 16 countries issued a statement, known as the Windsor Declaration, outlining recommendations that include:

cooperation among market authorities;

protection of customer positions, funds, and assets;

default protections; and

regulatory cooperation in emergencies.

The CFTC has taken many steps domestically and internationally to implement these recommendations. I am pleased to announce two important signings that will take place tomorrow. First, 12 foreign regulators will sign a Declaration of Cooperation and Supervision of International Futures Exchanges. Second, 48 futures exchanges and clearing organizations will sign a companion Memorandum of Understanding. This Declaration and MOU represent an unprecedented commitment to information-sharing and cooperation among world futures exchanges, clearing organizations, and regulatory authorities that will significantly enhance the international safety net for financial markets.

Fourth, the Commission worked to ensure compliance with the enhanced audit trail standard that became effective in October 1995 for higher volume exchanges. The exchanges have made significant improvements that will benefit customers.

Fifth, the Commission has demonstrated concern for competitive issues in its regulatory program. For example, in response to petitions from futures exchanges, the Commission has established a pilot program that will allow exchanges to create markets for sophisticated traders that will be exempt from many of the requirements of the Commodity Exchange Act. These less regulated markets will allow U.S. exchanges to compete more effectively with over-the-counter derivative markets and foreign exchange-traded instruments without sacrificing customer protection.

Finally, the Commission has promoted an ongoing dialogue with industry by holding public roundtables to discuss regulatory reform initiatives. Recent roundtables have addressed the disclosure framework for managed funds, risk-based net capital rules, and agricultural trade options. We are considering a roundtable on internal controls in the future.

These roundtable discussions have been followed by concrete action. After the roundtable on managed funds disclosure requirements, for example, the Commission issued final rules completely revamping the disclosure framework. Following the roundtable on net capital rules, the CFTC issued a proposal to harmonize its capital rules with those of the SEC and industry self-regulatory organizations and is collecting the information needed to consider further changes.

In closing, the Commission recognizes that this Subcommittee faces difficult appropriations decisions this year. Nonetheless, we believe that the modest increase we have requested for fiscal 1997 is essential for us to continue enhancing our enforcement and surveillance programs. Additional funding in fiscal 1997 would enable the Commission to heighten its surveillance in major market centers and ensure that the upgrade of its surveillance system stays on schedule. Additional funding also will enable the Commission's enforcement program to respond more quickly to fraud and other wrongdoing in the marketplace, provide a greater level of customer protection, and better promote market integrity.

For these reasons, we believe that the President's request is fully justified. I would be happy to answer any questions you may have.