Commissioner James E. Newsome
Commodity Futures Trading Commission
Future Industry Association’s
Futures and Options Expo ‘99
November 11, 1999
I am delighted to be here today to give my views on some issues that might be of interest to you. I would like to thank FIA for not only organizing this expo, but also for the excellent job they do in representing your interests. Chairman Rainer sends his regards and regrets that he was unable to be here today.
Today is a new day at the Commission, with new leadership and a new vision. It is also the most exciting, interesting, and challenging time during my tenure. Some of the questions we are now asking include: Where is the industry headed in the next few years? Where will business grow, and where will it falter? And how will the regulators respond? With the technological, legal, and political landscape changing so rapidly and so dramatically, it will take some farsighted thinkers to anticipate and address the numerous issues facing our industry. Many of those people are here at this expo.
Over the last two weeks, you have heard general thoughts and ideas of a different regulatory direction from the Commission. If I may, I’d like to take a few moments to add my thoughts to the discussion of an appropriate regulatory agenda, and to share some ideas about how and when you can have input to accomplish these changes.
Given my background and experience, I tend to look at issues from the private-sector point of view. This leads to two basic points I want to make today and that I have previously emphasized: first, I believe we need to appropriately deregulate our domestic exchanges to allow them to compete fairly, from a regulatory standpoint, in today’s global financial markets, and second, we need to provide legal certainty for over-the-counter markets to allow them to continue to thrive.
How do we accomplish an appropriate regulatory agenda? Although it may seem overly simplistic, I believe as a crucial first step, regulators should engage in cost/benefit analyses before taking any action whatsoever. Too many times the government acts, even with the best of motives, without giving due notice of and attention to the costs of its action. We cannot afford to do that. So I will start from the premise that we take regulatory actions when, and only when, the benefits of such actions clearly outweigh the costs.
Now to the more difficult query: how do we determine the costs? The short answer is, the regulator listens to the regulated. As many of you already know, I believe that regulatory reform should be industry driven, and there’s a good reason for that: the markets know best what’s best for the markets. We need to hear what the problems are, but more importantly, we need to hear suggested solutions. Obviously, we will get competing concerns, and competing resolutions, but we cannot make appropriate decisions without industry input.
I believe there is a fundamental question that should be asked prior to our taking regulatory action: what is the federal interest? In other words, has Congress vested within our regulatory purview a specific interest to protect? And do we have the flexibility to act appropriately? If not, then we should not, indeed, cannot act. Federal agencies can, even with the best of intentions, become unwieldy vehicles, precisely because they are not driven by market forces; that is all the more reason for us to act only upon specific authority, only within our particular area of federal interest, and only with an appropriately targeted focus. We should not embellish or embroider what Congress charges us with doing, and we should recognize that our public service can be best accomplished with regulatory prudence rather than zealousness.
As I’ve stated previously, I believe that market discipline and adherence to best-practice standards can achieve better enforcement of fundamental market integrity concerns than can any amount of overlaid regulation. This does not mean that I slight in any way the Commission’s duty to protect the public—indeed, just the opposite is true. I believe we best accomplish that goal by protecting the integrity of the markets we oversee, and we do that through sensible use of our antifraud and anti-manipulation authorities. Ultimately, an appropriate regulatory focus should protect the public, ensure safe, sound, and competitive markets, and otherwise get out of the way so people can get on with the business of doing business.
It has become apparent to me that the umbrella approach of regulating all markets the same is antiquated. Markets have changed, competition has changed, and regulatory needs have changed. We must develop a system that recognizes levels of sophistication, levels of need, risk of manipulation, and regulate accordingly.
I have yet to mention technological change, but I don’t believe this discussion can be relevant without addressing the issue. In other words, talking about the CFTC’s upcoming role means talking about dealing with electronic trading systems. The dramatic and rapid evolution of these systems has, and will continue to have, a profound impact on all aspects of our industry—from the way transactions are effected, to the place they are effected, to the manner in which they are cleared, and to the business structure of the entities that are operating execution and clearing functions, just to name a few.
Recognizing these market innovations, the Commission is in the process of organizing a new advisory committee, called the Technology Advisory Committee (TAC). This committee will replace the Financial Products Advisory Committee (FPAC), which some of you may be familiar with. The Commission plans to hold a public roundtable during the week of December 6 to discuss the direction of this new important committee. I believe it is imperative that the CFTC keep informed of the ever evolving technological environment, the impact of technology on our markets, market professionals and other market participants, and to consider regulatory reform as appropriate.
The Technology Advisory Committee’s charter directs the committee to assist the Commission in
1) reviewing emerging technologies utilized by financial services and commodity markets and their participants,
2) identifying technology providers for the financial services and commodity markets,
3) analyzing the impact of emerging technologies on financial services and commodity markets,
4) reviewing the CEA and Commission regulations to assess their applicability to electronic issues and to ensure the Commission’s ability to exercise appropriate fraud and manipulation authority, and
5) examining ways that the Commission may respond to the increasing use of technology in financial services and commodity markets.
I anticipate the Technology Advisory Committee will provide a valuable forum for information exchange and advice on these matters. The committee’s membership will include representatives of the technology-driven marketplace, firms and market users most directly involved in and affected by the technological evolution of the industry. This membership will be balanced in terms of points of view represented. Toward that end, the Commission is considering for membership a broad cross-section of persons representing technology providers, exchanges, regulatory organizations, financial intermediaries, end-users, traders and academics. I look forward to working with this advisory committee and to the information and advice it provides the Commission.
Most of you have probably heard about the speech given by the CFTC’s new chairman, Bill Rainer, here a couple of weeks ago at the Chicago Kent conference, as well as Tuesday’s release of the President’s Working Group (PWG) Study on OTC Derivatives Markets and the Commodity Exchange Act, which was unanimously approved by the members of the PWG. While I can only give you my personal thoughts on the document, I am very excited about its content. I believe the general goals of the PWG report are to enhance competition and efficiency, to encourage innovations through technology, and to mitigate systemic risk by encouraging clearing houses for OTC instruments. The challenge, as I see it, will be to define how we implement these goals, not only for OTC markets, but also for financial futures. I can assure you that the Commission will not take this challenge lightly, nor will the Commission operate in a closed environment.
Chairman Rainer recently set up an internal task force consisting of 9 CFTC professional and experienced staff members who are working full time to review the CEA in light of the PWG recommendations. This task force is charged with laying the groundwork for development of a modern regulatory model for the futures industry. Consequently, on December 2, the Commission will hold a major roundtable discussion on the future of futures. This roundtable will be the first of many opportunities for the Commission to engage industry participants and other interested parties to begin constructing the appropriate regulatory model for the future. Additionally, the CFTC will also hold a public meeting next Wednesday, November 17, to vote on a final rule regarding contract market designation, as well as proposed amendments to Regulation 1.41, contract market rule review procedures. This should signal the beginning of the Commission’s sincere effort to provide an appropriate regulatory framework for all market entities. It is my hope that the Commission can move quickly on this agenda, relying on input from a variety of sources and working closely with Congress throughout the reauthorization period.
In that vein, I would urge all of us to "think outside the box" in coming up with proposals for regulatory reform. I have listened to discussions of some rather radical ideas for reform, and I’m heartened by the creativity they embody. We’re all realistic enough to know that the end result will most likely not be perfect. But we have a singular opportunity at this point in time to create a new structure, a new paradigm of regulation, that will foster innovation, strengthen the safety and soundness of the markets, and lead us to new challenges we’ve not yet envisioned. I look forward to working with Congress, with the industry, and with other regulators to arrive at a workable, reasonable, and most of all beneficial resolution of our regulatory issues. I am most hopeful that, at the end of the day, market activity flows to and from various industry sectors because of true economic competitive forces, and not because of regulatory obstacles. Thank you.