Commissioner James E. Newsome
The Commodity Club
Hyatt Regency Capitol Hill
12:00 p.m., Tuesday, March 16, 1999
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)
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.