Remarks of Commissioner James E. Newsome
Before the
National Introducing Brokers Association
Eighth Annual Conference
"Building Business by Building
Relationships"
10:30 am, Saturday, June 26, 1999
Embassy Row Hilton, Washington DC
Current Issues Affecting Introducing Brokers
Presented to the National Introducing Brokers Assn. Annual
Conference
Introduction
I am delighted to be with you here this morning, and I thank you for
the opportunity to talk with you about issues we are currently facing
at the CFTC and issues that are of significant interest and import to
you and to the Introducing Brokers (IB) community.
Many of you already know who I am and where I come from, but let me
give a little background about myself for those of you I have not yet
had the opportunity to meet. I, along with my three brothers, grew up
on our family's farming and cattle operation in Florida.
Before joining the Commission, I was an instructor at Mississippi
State University and most recently served ten years as the Executive
Vice President of the Mississippi Cattlemen's Association and Beef
Council.
Consequently, I tend to look at issues from the producer's point
of view. I certainly feel that the views of industry are of
utmost importance to both Congress and regulatory agencies.
I find the theme of this conference, "Building Business by
Building Relationships," very fitting because I believe the CFTC,
as a regulatory agency, should have the goal to build a closer
relationship with industry to promote business and encourage, not
impede, innovation and technological advancement.
To accomplish this, both regulatory agencies and industry must
dismiss the notion that these two groups are advisaries. Instead, we
must realize that we are interdependent. By working together, we can
accomplish much more than we can if we work against one another.
Consequently, I am interested in your business knowledge and wisdom
and I not only appreciate but solicit your input as the Commission
moves forward on a variety of issues.
Now, I realize that this attitude might come as a shock to those of
you who deal with regulatory agencies on a regular basis, but this is
a philosophy in which I firmly believe. I have learned that as
industry comes together to support issues of common interest, the
likelihood of achieving the agreed-upon goal increases
substantially.
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 Mississippi Senators Trent Lott and Thad
Cochran would not take "no" for an answer.
I ascribe to the belief that our government should be run by and for
the people. Although some in Washington seem to think this is an
antiquated idea, I call it time-honored and time-tested.
I hold to the conviction that in "governing best by governing
least," we foster those ideals which allow our businesses, our
farms, and our financial services to retain their primacy in the
global marketplace.
Because of the beliefs I've just described, I commend and
encourage those in the private sector for thinking "outside the
box" and for being innovative and creative in their business
activity, I can pledge to you that in my tenure as a Commissioner at
the CFTC, I will think "outside the Beltway" in making
decisions regarding appropriate regulation of those activities.
As you know, the Commission is facing yet another reauthorization.
Although this often elicits groans from those involved in the process,
I am looking at it as an opportunity: indeed, I believe that Congress
has the occasion now to address and resolve several key concerns of
both regulators and regulatees.
Let me take a few minutes to address some of those topics, as well as
some other current regulatory issues and then I will be open to any
questions you might have.
CFTC Reauthorization
I believe reauthorization provides a unique opportunity for Congress
to make changes to the Act that will benefit the industry and market
participants, as well as provide clearer guidelines for appropriate
regulation by the Commission.
There are several topics that I will offer today, but I would like to
begin by stressing two overarching principles that I believe are
critical in this analysis: providing legal certainty and
decreasing regulatory burdens should be the key elements in any review
and amendment of the Act.
In order to accomplish this, we need to listen to industry
participants regarding the effects of regulation on the day-to-day
matters of financial and agricultural risk management and price
discovery, and respond accordingly.
We as public servants are charged with protecting the interests of
the public. We cannot do justice to that obligation unless and until
we listen carefully to those most directly affected by our actions.
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 to develop a regulatory
scheme that discourages fraud and manipulation, but encourages
innovation, technology, fair competition, and sound business
practices.
In addition, I believe there is a significant corollary issue to the
goal of decreasing regulatory burdens that should be considered. With
the growing OTC market, domestic exchanges have encountered new levels
of competition. Decisions are being made and 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.
It goes without saying that businesses will seek to operate in the
most efficient fashion; accordingly, if the opportunity presents
itself to avoid regulatory costs by operating outside the borders of
the United States, many businesses will make the logical decision to
take advantage of that opportunity.
Therefore, I believe it is critically important to engage in sensible
cost/benefit analyses in making regulatory decisions. Not only that,
overly burdensome regulation has the effect of moving those entities
outside the sphere of our policy-making authority.
In other words, with the exodus of business beyond our
borders goes the ability of the United States to continue to make
policy determinations that affect the global economy.
I do not want to overstate the matter, however, given current
technological advancements, I firmly believe that we as law makers and
enforcers must be acutely sensitive to this issue in order to maintain
the primacy of our markets as world-wide leaders and innovators.
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.
I believe we should work together to identify Commission regulations
that result in regulatory overreaching, confusion, or
misunderstanding; and, indeed, I have already begun the process of
taking steps to initiate changes that can be made under our current
regulatory authority to decrease regulatory burdens and promote legal
certainty.
In that vein, I recently convened a meeting with representatives from
the three largest futures exchanges in the United States. I asked them
to come to this meeting ready to discuss concrete, practical
initiatives that we can undertake promptly to address their regulatory
concerns.
I was extremely gratified with the outcome of that meeting, and have
accumulated a list of projects that I believe the CFTC can and should
act on in an expeditious manner. Furthermore, I plan to continue to
exhort staff and industry to work together to review these issues to
determine in what areas we can make significant inroads in decreasing
unnecessary regulatory burdens.
Along those lines, let me say I believe that regulatory reform should
be industry-driven. It is clear to me that market discipline and
adherence to best-practice standards can achieve better enforcement of
fundamental market integrity concerns than can any amount of overlaid
regulation.
Accordingly, I advocate stripping away unnecessary, costly
regulation, and at the same time maintaining the ability to ensure
forceful, swift prosecution and significant punishment for those
outliers who commit core violations of the Act. I believe that more
reliance on private sector discipline and better use of public
regulation fosters these interests.
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?
With regard to modernization of the CEA, there are several areas of
regulatory reform that under current authority cannot be addressed at
the agency level--issues that require Congressional review, analysis
and disposition.
Let me reiterate that, in my opinion, the end result of such review
should be regulation that fosters efficient and liquid markets,
enhances the ability of market participants to innovate and compete
effectively, and does not create artificial and costly barriers to
trade and competition.
Ultimately, I believe the CFTC should concentrate on what Congress
intended us to do when it created the Commission in 1974, that is,
protect participants against fraud and manipulation and ensure safe,
sound, and competitive markets.
Agricultural Trade Options
Another issue currently under consideration by the Commission is
revisions to the ATO pilot program. While I was not at the Commission
during the creation of the pilot program, I do support the general
concept of additional risk management tools for agricultural
producers.
I am fully aware that many in this organization have concerns about
these potential revisions. I listened intently to comments recently
from Scott Stewart at the Commission's Agricultural Advisory
meeting and the Senate Agriculture Committee's Risk Management
hearing.
Commission staff is evaluating comments and concerns proposed by all
interested parties and will soon prepare a draft for Commission
consideration. While I am sensitive to and will take into account the
concerns of all industry participants before developing a final
opinion, I will not apologize for my desire to assist the ailing
sector of production agriculture with every logical risk management
tool possible.
If we determine that ATOs are not a viable solution, then I will
continue to work with you and other industry participants to develop
new and innovative risk management tools.
Foreign Board of Trade Terminals
Earlier this year, the Commission released proposed rules on foreign
boards of trade seeking terminal access in the United States. I was
dismayed to find that the proposed rules were, in my mind, highly
regulatory and overly burdensome in approach and content.
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 found the proposal to be in an unacceptable form, I took
this route to ensure that there were no further delays in this
process.
In my concurrence, I urged 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.
In reviewing the proposal, I had the interests of our domestic
exchanges and the futures commission merchant community foremost in my
mind, and I have been very interested in hearing their relative
positions on this topic, as well as comments from other affected
industry participants.
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 over 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. 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 the House
Banking Committee has held a couple of hearings to review the impact
of these changes on the financial services industry. The Agriculture
Committees in both the House and the Senate have identified technology
as a key issue to be reviewed during the reauthorization
process.
Also, as an aside, I have discussed with Acting Chairman Spears
reconstituting the existing Financial Products Advisory Committee
(FPAC) as a Technology and Financial Products Advisory Committee,
inasmuch as technology issues will provide us with some of our
greatest regulatory challenges in the future.
On June 3 of this year, the CFTC lifted the ban on foreign futures
exchanges installing electronic trading systems in the United States.
My fellow commissioners and I have instructed the staff to begin
processing "no action" requests from foreign exchanges
seeking to place trading terminals in the US. The staff is instructed
to review applications from foreign exchanges on a case-by-case
basis.
This new approach also commits the CFTC to simultaneously address
regulatory parity, a crucial issue for US exchanges that fear their
overseas competitors will be able to offer electronic trading with
fewer regulatory restrictions.
The only foreign futures exchange that now has its terminals in the
US is the German/Swiss exchange Eurex. That exchange received "no
action" approvals in 1996 to have a limited number of members in
the US with electronic trading privileges. Eurex has requested to
increase the number of member firms and expand the range of contracts
it makes available to US customers.
Other exchanges interested in placing their terminals in the US
include LIFFE, IPE, SYCOM, and the New Zealand Futures and Options
Exchange.
Summary
In conclusion, I thank you for allowing me to speak with you today. I
hope that I have provided some insight that will prove informative and
useful to you as an introducing broker. I look forward to working with
you in the future to promote our combined interests. At this time, I
will open the floor for any questions that you might have.