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Remarks of
Commissioner James E. Newsome
Before the
National Grain and Feed Association
1999 Annual Convention
San Francisco, California
3:00 p.m., Sunday, March 21, 1999
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Opening Remarks
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)
Definition
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.
History
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.
Personal Comments
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)
Conclusion
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.
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.
Agency Mission
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 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.
Summary
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.