Commissioner James E. Newsome
National Grain and Feed Association
1999 Annual Convention
San Francisco, California
3:00 p.m., Sunday, March 21, 1999
Today, I would like to talk to you about the Commodity Futures Trading
Commission (CFTC) and issues surrounding the agency. Given the format
of this meeting, I planned to talk to you briefly about a couple of
topics I thought might interest you: Agricultural Trade Options (ATOs)
and CFTC reauthorization.
At the appropriate time, I will be happy to take you questions on these or any other topics of interest to you.
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 within the industry 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, my philosophy and to hear their concerns.
For those of you whom I haven't met, 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.
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.
As most of you know, and probably much better than I, 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 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 commission 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 study)
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.
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.
I believe that if the ATO program is successful, the exchanges would 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. In fact, Commissioner Spears and I are in the process of meeting with industry participants, and I think Kendall will tell you that I am committed to making necessary changes.
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. On the other hand, if the ATO program is not the answer, then we need to work together to determine what is.
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.
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 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.