Remarks of
Commissioner James E. Newsome
Before
The Commodity Club
Hyatt Regency Capitol
Hill
12:00 p.m., Tuesday, March 16,
1999
Opening Remarks
Thank you Chandler for that kind introduction and for the opportunity
to address this prestigious group. Through my past experiences with
the Mississippi Cattlemen's Association, I have learned that as
industry comes together to support issues of common interest, the
likelihood of achieving the agreed-upon goal increases substantially.
It appears to me that The Commodity Club provides a good atmosphere
for discussing the issues important to American agriculture and
related industries.
Today, I would like to talk to you about the Commodity Futures
Trading Commission (CFTC) and issues surrounding the agency. Things
are changing at the CFTC. With the 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.
While I have only been in Washington for a few months, I have had the
opportunity to meet many of you and look forward to meeting and
visiting with more of you in the near future. I have also visited with
futures and options industry participants in Chicago, Kansas City,
Minneapolis, and New York to discuss my background and philosophy and
to hear their concerns. For those of you who don't know me, I
believe in free market principles, and have a pro competition, pro
business attitude. I firmly believe government should be led by the
people for the people.
I 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. I am
interested in your business knowledge and wisdom and have shown that I
am willing to come to you to get it. Now, I realize that this attitude
might come as a shock to those of you who deal with regulatory
agencies on a daily basis, but this is a philosophy in which I firmly
believe.
I am proud of my agricultural background, and of the values and work
ethic it has provided. However, I think it's important for you to
know that I did not grow up wanting to be a CFTC Commissioner. In
fact, after Senators Lott and Cochran contacted me about the
appointment, I tried to turn it down, but they 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.
Agricultural Trade Options (ATOs)
Introduction
An agricultural trade option is an agreement giving an agricultural
producer the right to deliver his or her commodity in the future for a
set price. Agricultural trade options would not be traded on a
commodity futures exchange, but directly between commercial parties.
In other words, a local elevator could be the seller of the trade
option.
History
Some of you know 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.
Personal Views
I was not at the Commission during creation of the 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 almost 1
year ago, but the National Futures Association has yet to receive any
applications for participation.
All producers must have the opportunity to protect themselves against
downside price risk, especially given Freedom to Farm, 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 study).
Given these dynamics, I believe 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. 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 have recently been in the process of
meeting with industry participants to draft needed changes to the ATO
program. I am very optimistic that favorable changes will be
implemented in the near future.
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 industry to make this
program viable. I believe 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 will be attractive in the dynamic
agriculture environment of both today, as well as tomorrow.
Over-The-Counter Derivatives
Many members of Congress have expressed concern regarding actions
taken by the CFTC over the last year, particularly with the
Commission's Concept Release on Over-The Counter (OTC) Derivative
Markets. Most of these members believe these issues should be
addressed in the reauthorization process. Many of you have been
involved or have closely followed this process and know my position on
this issue.
While I was not at the Commission when the Concept Release was
published, I, along with Commissioner Spears, sent a letter to
Congress supporting the moratorium preventing CFTC from taking any
regulatory action in the OTC markets. Furthermore, I have committed to
Chairman Lugar and Chairman Combest that I will not support any action
taken by the Commission until the Congress has had time to address
this issue. I believe the most important point to make is that
we must maintain legal certainty for the OTC derivative
markets.
Additionally, I believe that over-regulation would cause business to
flee offshore, which certainly is not in the best interest of the
United States. If we are not careful and sensible in this regard as we
rethink the Commodity Exchange Act, the markets will evolve without
us, we will erode our leadership position in the global economy, and
we will lose the ability to have significant, if not controlling,
input into policy-making for markets worldwide.
Foreign Board of Trade Terminals
In July of last year, the Commission published a concept release
regarding the use in the United States of automated trading systems
that would provide access to electronic boards of trade in other
countries. I believe the intense interest in this topic is fueled by
two issues: first, the rapidly increasing globalization of the futures
and options markets in particular and financial markets in general;
and secondly, the tremendous advances in electronic trading
technologies and activity. The lower transaction costs and the
inherent benefits regarding oversight of electronic trading systems
make them an attractive alternative or complement to traditional
trading methods.
I would note the issue of technological advances in electronic
trading is also receiving attention on the Hill, and that Congressman
Baker will be holding a hearing on March 25 to review the impact of
these changes on the financial services industry. Given this
widespread interest, I know that the industry is eager to see what the
CFTC's proposed rules on foreign boards of trade terminals would
look like.
Indeed, I have shared that eagerness over the past several months,
and I am gratified to be able to say that I finally received a copy of
the proposed rules this past Friday. However, upon reviewing the
draft, I was dismayed to find that it was, in my mind, highly
regulatory and overly burdensome in approach and content. Moreover,
while I am not prejudging these issues, I believe that there are
significant jurisdictional issues raised by the proposal.
Therefore, given the widespread interest in the matter, and the
unfortunate delay in its release, I concurred in the issuance of the
proposal and wrote a separate statement outlining my concerns with the
proposal. Even though I find the proposal to be in an unacceptable
form, I took this route to ensure that there are no further delays in
this process.
In my concurrence, I urge that interested parties make their views
known, particularly on the issues I mention, as well as alternative
methods of proceeding, for example, the use of no-action procedures or
the CEA's Part 30 Regulations. In reviewing the proposal, I have
the interests of our domestic exchanges and the futures commission
merchant community foremost in my mind, and I will be very interested
in hearing their relative positions on this topic, as well as comments
from other affected industry participants.
CFTC Reauthorization
Symposium
Senator Lugar pledged to begin reauthorization hearings early this
year. The Senate and House Agriculture Committees held a symposium
last month to educate Hill staffers on the Commodity Exchange Act and
issues of importance for the upcoming reauthorization. Given the fact
that I am relatively new to the commission, I benefited from the
discussion and welcomed the comments from industry participants. I
believe this is the correct way to approach the reauthorization
process- with input from the various industry sectors and market
users.
Proposals
There is talk of more specifically defining the jurisdiction of the
CFTC, which could possibly lead to a reduction in CFTC authority. Some
are even suggesting, as in the past, a merger between the CFTC and the
SEC. I believe the discussion regarding the direction of futures and
options regulation 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 cooperate with members of the
Agriculture Committees to develop a regulatory scheme that discourages
fraud and manipulation, but encourages innovation, technology, fair
competition, and sound business practices.
Technology
The Commission must work with the Congress in determining how much
flexibility the Commission needs to address the changing technological
environment. I believe the CFTC should have the flexibility to be
innovative from a regulatory standpoint to those within industry who
are creative and visionary.
Given the flexibility, the Commission must encourage, not impede
those who think outside of the traditional box. For example, 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.
Exchange Regulation
Another important comment I would like to make is that CFTC must
decrease the regulatory burden on our domestic exchanges in order for
them to not only compete and prosper, but also continue as global
leaders. With the growing OTC market, domestic exchanges have
encountered new levels of competition.
Decisions will have to be made in the near future on how they plan to
do business long term. I firmly believe this determination should be
their job, without undue interference from CFTC. With the regulatory
burdens currently imposed on our exchanges, the task of competing
globally is almost impossible.
I believe the CFTC should do what Congress intended us to do
when they created the Commission in 1974- protect market participants
against fraud and manipulation.period. This mission should
not require heavy-handed regulation, nor ultimately determine the fate
of private sector business and industry. Instead, the market should
make this determination.
Industry Charge
Finally, I believe 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, common sense regulation
so our exchanges and industry participants have the opportunity to
compete and 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, I do feel that if industry can agree on some basic issues,
Congress will possibly make some substantive changes to the Commodity
Exchange Act, changes that could prove beneficial to industry
participants.
Closing
I thank you for the opportunity to address this distinguished group.
I appreciate your attentiveness and look forward to working closely
with you in the future. I will be happy to answer any questions at
this time.