Commissioner James E. Newsome
National Grain Trade Council
1999 Annual Meeting
Rancho Mirage, California
10:30 am, Thursday, February 11, 1999
Thank you Bob for the opportunity to address this prestigious group. I have been anxiously awaiting this meeting and only regret that I can't be with you for its entirety. I would like to congratulate Dan Dye, your new chairman and Jim Lindau for the leadership he has provided to this organization the last two years.
Things are changing at CFTC. With the recent announcement of Chairperson Born that she will not seek another term as head of our agency, and the recent presidential nomination of Tom Erickson to take the place of outgoing Commissioner John Tull, we are experiencing some significant leadership changes.
I have had the opportunity to meet many of you on recent trips to Chicago, Kansas City, and Minneapolis to discuss my background and philosophy. I believe in free market principles, and have a pro competition, pro business attitude. I believe government should be led by the people for the people.
I also tend to look at issues primarily from a producer/industry viewpoint, and I certainly feel that the views of the industry to both Congress and regulatory agencies are of utmost importance. As I have already shown, I am interested in your knowledge and viewpoint and am willing to come to you to get it.
I am proud of my agricultural background, and of the values and work ethic it has provided. I think that it's important for you to know that I did not grow up wanting to be a CFTC Commissioner. In fact, I tried to turn it down, but Senators Lott and Cochran would not take no for an answer.
I would like to discuss generally several issues that are currently
before the Commission, talk about my ideas as we approach
reauthorization, and finally take any questions you might have.
Dual trading refers to the practice of trading on the floor of an exchange for both one's customers and oneself. As you know, in the Futures Trading Practices Act of 1992 (FTPA), Congress directed the CFTC to implement dual trading prohibitions in certain markets. Several exchanges petitioned the Commission for exemptions from this prohibition, and for the past several years, the Commission and exchanges have been working on these petitions.
We all understand the reason for Congress including this in the FTPA. However, that was ten years ago. Times have changed dramatically since then: electronic trading has become a reality in the marketplace and will become more widespread in the coming years; and exchanges have, across the board, made major improvements to their audit trail systems.
The Commission is in the process of final review of the Chicago exchanges' petitions, and I expect and hope that those will be voted on in the near future. While I won't prejudge the issue, I will certainly review the exchanges' systems as a whole, and will make my decision accordingly.
Agricultural Trade Options (ATOs)
An agricultural trade option is an agreement giving the agricultural producer the right to deliver his or her commodity in the future for a set price. The producer is not obligated to deliver and may simply choose to "walk away" from the option contract. In return for this right, the producer pays a fee, usually called the option premium. Agricultural trade options would not be traded on a commodity futures exchange, but directly between commercial parties. I realize that we are not all in agreement on this issue.
There has been a long history of on-again, off-again options trading, both on- and off-exchange. Since 1974, there has been a gradual lessening of the regulatory prohibitions on trading commodity options, the last of which has been the lifting of the off-exchange agricultural trade options ban. The Commission lifted the ban in April 1998 with the introduction of a 3-year pilot program.
I was not Commission during creation of pilot program, but support the concept of additional risk-management tools for the agricultural industry. I am concerned, however, about the usefulness of the pilot program under current rules. It was launched over 9 months ago, but the National Futures Association has yet to receive any applications for participation.
All producers must protect themselves against downside price risk,
given the Freedom to Farm Act, increased market volatility, and most
recently, exceptionally low commodity prices. However, most producers
do not use the futures market (only about 10 percent according to one
Given these dynamics, I believe that we must find a way to create a product that is attractive to the agricultural sector, both producers and agribusinesses, while ensuring the preservation of market integrity, given the changing structure of agriculture. The program must be attractive, not only to farmers and ranchers, but also to local elevators and other processing facilities. In order to achieve such a goal, the process must be industry-driven. Industry knows best what it needs and what will actually work. To that end, Commissioner Spears and I are meeting with industry participants to draft needed changes to the ATO program.
I believe that if the ATO program is successful, the exchanges will see new business generated through the ATOM's need to hedge their risk-- risk incurred when selling trade options to agricultural producers. I am committed to working with you in order to make this program viable. I believe that the more risk-management tools available to industry and the higher the level of competition, the better the products will ultimately be. If ATOs are not the answer, then we need to work together to determine what is.
On July 24, 1998, the Commission published a concept release regarding the placement of foreign board of trade terminals in the United States. In effect, this would allow foreign boards of trade to have access to US customers, with lessened regulatory requirements.
A major concern about this matter is the issue of fair competition--the argument is that if we allow foreign terminals to be set up here, then a US exchange should be able to set up terminals in foreign jurisdictions, with similar regulatory treatment. I share this concern and feel that equal access should be granted to our exchanges.
Commission staff is currently putting together final rules for
consideration by Commissioners, and I hope that this will move along
Senator Lugar pledged to begin reauthorization hearings early this year. Many members of Congress have expressed concern regarding actions taken by the CFTC over the last year, particularly with the Commission's Concept Release concerning the Over-The Counter (OTC) Derivatives Market, and believe these issues should be addressed in reauthorization process. Many of you have been involved or have closely followed this process and know my position on this issue.
There is talk of more specifically defining the jurisdiction of the CFTC, which could possibly lead to a reduction in CFTC authority or, as in the past, some are even suggesting merging the CFTC with the SEC. The Senate and House Agriculture Committees will hold a symposium later this month to educate Hill staffers on the Commodity Exchange Act and issues of importance for the upcoming reauthorization. I am sure that several proposals will be introduced or re-introduced during this discussion.
I believe that discussion is primarily for you [industry] to take up with Congress. I also believe that whatever action is ultimately taken by the Congress, the agricultural emphasis can and should be maintained in a clearly defined way, given the role commodity markets play in the risk-management arena.
I also feel that, as responsible regulators, the Commission must be responsive to not only industry, but also to the Congress as we work through reauthorization. We must work withmembers of the Agriculture Committees to develop a regulatory scheme that discourages fraud and manipulation, but encourages innovation, technology, fair competition, and sound business practices.
The Commission must work with the Congress in determining how much
flexibility the Commission needs to address the changing technological
environment. Who would have thought 10 years ago that we would be
considering trading over the Internet? Who knows what technological
advancements in futures and options trading will be presented to us in
10 more years? These are issues in which both Chairman Lugar and
Chairman Combest have expressed an interest, and most likely will be
taken up during the reauthorization process.
We must decrease the regulatory burden on our domestic exchanges in order for them to not only continue to compete and prosper, but continue to be global leaders. This means we must encourage, not impede those who think outside of the traditional box. The CFTC must have the flexibility to be innovative from a regulatory standpoint to those within industry who are creative and visionary. Finally, industry must unite to assist Congress in addressing reauthorization. Experience and logic tell me that if industry can agree upon several basic issues, then Congress will respond.
These issues may be as simple as:
1. Less burdensome regulation so our exchanges
and industry may prosper
2. CFTC flexibility to address creative and innovative ideas
3. Jurisdictional boundaries- who do you want your regulators to be?
Now, I know that these issues are not as simple as I just stated; however, if industry cannot agree on some basic issues, the outcome will be disappointing to all. I thank you for the opportunity to be here in California for your annual convention. I appreciate your attentiveness and look forward to working closely with you throughout the year.