ORAL STATEMENT OF
JOHN E. TULL, JR.
COMMODITY FUTURES TRADING COMMISSION
SENATE COMMITTEE ON APPROPRIATIONS
SUBCOMMITTEE ON AGRICULTURE, RURAL DEVELOPMENT,
AND RELATED AGENCIES
MAY 2, 1996 Good morning Mr. Chairman and
members of the Subcommittee. Thank you for inviting me to present the
President's fiscal 1997 budget request for the Commodity Futures Trading
Commission. With me this afternoon are Madge Bolinger, Director of the Office
of Financial Management, and Andrea Corcoran, Director of the Division of
Trading and Markets.
Mr. Chairman, I would like to have my written testimony included in the
record and I will briefly summarize it.
As you know, the President's request for the CFTC is $56,601,000. This
request represents a modest increase of $3 million, or 5.6 percent, over the
fiscal 1996 level.
Since the Commission last appeared before your Subcommittee, we have
made progress in six important areas. First, with additional funds provided
last year, the Commission is making critical improvements to its market
surveillance computer system. In particular, we are planning to add daily
options data to our large trader reporting system. Currently, we have daily
large trader reports for futures, but only weekly reports for options. As
options volume has grown over the years, our surveillance picture has become
less complete. We must have a modern system that captures the whole picture
for today's dynamic, and sometimes volatile, markets.
Market volatility over the last few months underscores the need to
improve our surveillance system. When markets become extremely volatile, we
need to know immediately the financial exposure of large traders in both
futures and option markets, and the potential impact they may have on other
market participants. Our new surveillance system will allow us to do this.
Second, we have taken a number of steps to strengthen our enforcement
program. Our goal is to send a clear message that fraud and other violations
of the Commodity Exchange Act will be promptly and thoroughly investigated and
vigorously prosecuted. During fiscal 1995, the Commission brought a number of
significant enforcement cases and imposed over $11 million in civil penalties.
We are concentrating our enforcement resources on matters that will have the
greatest deterrent impact against wrongdoing in the marketplace.
Third, we devoted considerable time last year to dealing with the
collapse of Barings Bank. The CFTC was particularly concerned about the
potential impact of the Barings collapse on U.S. markets and U.S. firms, and
we worked to protect their interests. In the wake of the Barings crisis, the
CFTC and British regulators hosted a meeting to address international
regulatory issues. At the conclusion of the meeting, regulators from 16
countries issued a statement, known as the Windsor Declaration, outlining
recommendations that include:
cooperation among market authorities;
protection of customer positions, funds, and assets;
default protections; and
regulatory cooperation in emergencies.
The CFTC has taken many steps domestically and internationally to
implement these recommendations. Most notably, the Commission, along with 13
foreign regulators, signed a Declaration of Cooperation and Supervision of
International Futures Exchanges in March. Fifty-two futures exchanges and
clearing organizations also signed a companion Memorandum of Understanding.
This Declaration and MOU represent an unprecedented commitment to information-sharing and cooperation among world futures exchanges, clearing organizations,
and regulatory authorities that will significantly enhance the international
safety net for financial markets.
Fourth, the Commission has worked to ensure compliance with the enhanced
audit trail standard that became effective in October 1995 for higher volume
exchanges. The exchanges have made significant improvements that will benefit
Fifth, the Commission has demonstrated concern for competitive issues in
its regulatory program. For example, in response to petitions from futures
exchanges, the Commission has established a pilot program that will allow
exchanges to create markets for sophisticated traders that will be exempt from
many of the requirements of the Commodity Exchange Act. These less regulated
markets will allow U.S. exchanges to compete more effectively with over-the-counter derivative markets and foreign exchange-traded instruments without
sacrificing customer protection.
Finally, the Commission has promoted an ongoing dialogue with industry
by holding public roundtables to discuss regulatory reform initiatives.
Recent roundtables have addressed the disclosure framework for managed funds,
risk-based net capital rules, and agricultural trade options. We are planning
a roundtable on internal controls in the near future.
These roundtable discussions have been followed by concrete action.
After the roundtable on managed funds disclosure requirements, for example,
the Commission issued final rules completely revamping the disclosure
framework. Following the roundtable on net capital rules, the CFTC amended
its capital rules to harmonize them with SEC and industry self-regulatory
organizations' requirements and is collecting the information needed to
consider further changes.
In closing, the Commission recognizes that this Subcommittee faces
difficult appropriations decisions this year. Nonetheless, we believe that
the modest increase we have requested for fiscal 1997 is essential for us to
continue enhancing our enforcement and surveillance programs. Additional
funding in fiscal 1997 would enable the Commission to heighten its
surveillance in major market centers and ensure that the upgrade of its
surveillance system stays on schedule. Additional funding also will enable
the Commission's enforcement program to respond more quickly to fraud and
other wrongdoing in the marketplace, provide a greater level of customer
protection, and better promote market integrity.
For these reasons, we believe that the President's request is fully
justified. I would be happy to answer any questions you may have.