Remarks of Commissioner David D. Spears
Commodity Futures Trading Commission
National Grain Trade Council
February 6, 1998
I am honored to be here for the annual meeting of the National Grain
Trade Council. I see a number of old friends in the audience. Others I
have had the pleasure of meeting before and during this conference.
For those of you who I have not met, I hope that this sets the ground
work for future discussions between us.
Just a bit about myself. I grew up on a farm in Kansas. After earning
my degree in economics, I spent about 10 years with the Bank for
Cooperatives. Afterwards, I spent about 7 years in the legislative
arena working with Senator Dole.
Being nominated to the position of Commissioner has proven to be an
interesting and rewarding experience. Among other things, I have tried
to bring to the job a little bit of the common sense you find in the
coffee shops in rural America.
As you all probably know, the Commodity Futures Trading Commission regulates futures and options contracts traded within the United States. The principal purposes of the CFTC are:
to protect the public interest in the proper functioning of the markets;
to encourage competitiveness and efficiency; and
to protect market participants from abusive trade practices and
The futures markets are critical to hedging and price discovery. As a
regulatory agency, it is important that we oversee the futures markets
to ensure that they operate in an open and competitive manner. It is
equally important, in my view, to balance regulatory oversight against
the needs of businesses so that they can effectively compete and grow,
particularly in a global marketplace.
In the last year, the volume of trading at the United States exchanges
climbed to record heights. For the 1997 year, volumes at the 11
biggest US exchanges all had gains. According to numbers released this
week by the Futures Industry Association, the New York Mercantile
Exchange, for example, saw an 11% gain; trading at the CBT showed a 9%
gain, and trading at the CME showed a gain of 13%. In addition, total
US futures and options volume increased about 14%. Foreign exchanges
also showed an overall gain of about 5% for 1997.
On the surface, these gains tell me that business is good. But it is
my responsibility as a regulator to ask myself -- Could the gains have
been better? I think that is one of my roles because, as we all know,
too much regulation of the market place hurts economic growth. I
believe that there is a need for regulation to protect the public, but
at the same time, there needs to be a balance. It is precisely that
balance that I work towards - a balance which permits participants to
compete and to succeed on a level field without undue regulation, and
which also permits the public to remain protected from fraud and
abuse. As I said in my first interview as a Commissioner, I am hopeful
that the exchanges will continue to grow and that regulations will be
balanced against the needs of the industry.
In my remarks today, I would like to focus principally on two things:
First, I would like to talk about some of the CFTC's initiatives
in the international arena. Recently, we have undertaken some measures
aimed at developing common standards to promote a level playing field
We have all witnessed the explosive growth of foreign stock and
futures exchanges and the emergence of many new markets around the
globe. These developments have increased the interdependency among the
US financial markets and the financial markets of the world. In this
type of global environment, international initiatives become more
important to the continued success of the financial marketplace. There
is no question that the events within the borders of a single nation
influence the events in other nations.
Second, I will talk about some the CFTC's recent proposals for
regulatory reform. I will spend a bit of time talking about the pilot
program that we currently have proposed to allow the use of
agricultural trade options.
First, on the international front, as many of you know, the CFTC
always has been a leader actively involved in addressing the
challenges posed by the globalization of the financial markets. During
the last decade, almost every major jurisdiction has developed a
derivatives market. As these markets have moved toward permitting
trading around the clock and in every corner of the globe, the CFTC
has actively worked towards achieving more transparency. Transparency
permits all participants to know the international rules of the game.
We have also worked to achieve more consensus on what is necessary to
assure customer and market protections without hampering business
To emphasize our commitment to international initiatives, Chairperson
Born established the Office of International Affairs in July of 1997.
The goals of the OIA include: eliminating unnecessary impediments to
global business, and ensuring that the United States remains an
effective force in a global marketplace. OIA also is focused on
improving upon international information sharing arrangements so that
all nations can respond quickly to market situations with global
Prior to July of 1997, OIA's functions were carried out by the
former International Section of the Division of Trading and Markets.
During the last year, OIA and its predecessor office, worked on
significant international initiatives that for the first time resulted
in guidance and two best practices for designing contracts and
conducting market surveillance. These initiatives also set forth a
blue print for exchanging sensitive information to address various
types of market emergencies with international implications.
Most recently, in October of 1997, the United States co-hosted with
the United Kingdom's Financial Services Authority and Japan's
Ministry of Trade and Industry and its Ministry of Agriculture,
Forestry and Fisheries, a meeting of the world's commodities
regulators. At this meeting, which was held in Tokyo, world commodity
regulators from 16 nations signed an accord known as the Tokyo
Communiqué. This accord commits to steps aimed at removing legal
or other barriers in order to achieve collective objectives.
All parties to the accord endorsed two guidance papers aimed at achieving more consistent regulations, both in contract design and review and in market surveillance and information sharing. For example, as part of the Communiqué, the signing parties agreed that important elements of contract design include provisions intended to reduce the possibilities for market manipulation. The partied agreed that contract provisions should be designed to:
facilitate economic utility for risk management and price discovery;
parallel cash market practices to promote convergence and settlement provisions that reflect the cash market; and
promote market transparency to enable all users to be aware of the
specifics of the contract terms.
In terms of market surveillance and information sharing, the Tokyo
Communiqué calls for several cooperative measures. For one thing,
it marks the first time that regulators agreed to extend their
information sharing into related cash and over-the-counter markets.
This type of information sharing should allow regulators to know which
traders and firms are holding large cash and over-the-counter
positions and will allow regulators to better identify potential
dangerous concentrations in the futures markets. It is precisely the
type of information that should assist in addressing, for example, the
events surrounding the Sumitomo incident.
I think that the Tokyo Communiqué and our discussion today are
particularly well timed. The current market volatility in Asia
highlights the need for appropriate surveillance and information
sharing arrangements. The CFTC's surveillance of the situation has
been vastly improved by the cooperative efforts of foreign market
The cooperation of the regulators in Hong Kong, Japan, and Malaysia,
for example, have proven instrumental in recent days in keeping us
apprised of potential problems arising from the volatility in the
Asian financial markets. The CFTC received relevant information from
the Securities and Futures Commission in Hong Kong during the recent
failure of the Hong Kong investment bank, Peregrine Investment
Holdings. Through information sharing, and our own surveillance
systems, the CFTC was able to quickly assess the potential position of
this bank and any potential impact on US firms and markets.
We are also keeping a close eye on the effects that the Asian
situation is having on the demand for all types of commodities,
including agricultural commodities, such as corn, soybeans, and other
grains, as well as on the livestock industry. As we all know, many of
the Asian countries are large importers of US grains. So it is likely
that the Asian situation will have an effect on grain exporters and
other United States agribusinesses, although it is too soon to tell
the extend to which export demand will be affected. Information
sharing arrangements also allow us to remain well informed about the
financial conditions of United States investment banks with Asian
Over the past year, the CFTC also has signed several Memorandums of
Understanding with foreign regulators and market authorities. One of
these MOUs, signed in October of 1997, stands out in my mind because
it was the first formal understanding among US and UK securities,
futures and banking regulators. The agreement was signed by the CFTC,
the Securities and Exchange Commission and the Bank of England. This
MOU will enhance the ability of regulators to obtain information about
the activities of US and UK firms active in the international markets,
including information about their internal controls and risk
management systems. The MOU also sets forth procedures for cooperating
to address potentially significant market events experienced by US or
UK securities or banking firms.
Each year, the CFTC also presents a one week training seminar on the
regulation of derivative products, markets and financial
intermediaries for international regulators. Last year, the seminar
was held in October at the Federal Reserve Bank of Chicago. It was
attended by about 80 individuals from 45 organizations representing
approximately 29 countries. Participants attended workshops given by
CFTC staff and industry professionals that addressed such issues as
the conduct of business, financial requirements, compliance, audits,
market surveillance and trade practice techniques.
Looking forward, in March of this year, the CFTC will host the annual regulators meeting at the International Futures Industry Conference in Boca Raton. This conference will be attended by International delegates representing more than 20 countries, market authorities, regulators and brokerage professionals. The agenda for this meeting is still tentative but it will probably include a discussion of:
any lessons that can be drawn from the recent market volatility;
information on the structural changes in regulation occurring in jurisdictions such as Australia, the UK and Japan; and
areas where international regulation can be made more
As for recent proposals aimed at regulatory reform, there are numerous initiatives that we have undertaken in moving toward streamlining regulations. As the former chairman of the Financial Products Advisory Committee and the current chairman of the Agricultural Advisory Committee, I am proactive in recommending and reviewing proposals aimed at meaningful reform. Just to mention a few of our initiatives in 1997, we:
approved "fast track" procedures for processing contract market designation applications and exchange rule amendments;
streamlined procedures for bunched orders;
streamlined risk disclosure requirements;
issued a concept release on the regulation of noncompetitive transactions executed on or subject to the rules of a contract market; and
issued a proposal that would allow the exchanges to permit futures
style margining of option contracts.
We also proposed a pilot program for the trading of agricultural trade
options. I'd like focus on this proposal a bit and let you know
where it stands. As you may know, this proposal went out for public
comment on November 4, 1997 and the comment period closed on December
4, 1997. In that time period, and for awhile after the close of the
comment period, we received 448 comments. Our staff is still sorting
through the numerous issues that were raised by commentors.
To refresh your memory on what the proposal does, the short story is
that it will permit off-exchange trade options between commercial
users on certain agricultural commodities under a three year pilot
program. That's the short story. The long story is contained in a
16 page federal register release, tiny print, three columns per page.
The way I see it, that makes the long story too long and I am working
to shorten it a bit. As I said, I am committed to regulatory reform
without undue regulatory burdens.
The best part about this proposal is that it marks the first time
since 1936 that off exchange options on agricultural commodities would
be permitted. It is a pilot program, which also gives us some
flexibility to monitor the markets and make appropriate changes.
With a few adjustments, it is my hope that it will be a true risk
management asset to the agricultural community, including the grain
exchanges, grain companies, the producers and related businesses. It
will permit the grain processors and producers alike to improve their
risk management tools because it will provide them with greater
flexibility to individually tailor contracts to meet their personal
For example, because the specific terms of the option contracts would
be privately negotiated between the parties, the producers would have
an input in writing the terms regarding price, delivery date, quantity
and even quality. This would permit more precise matching of hedges to
the actual market needs and price risks of the individual
Although this pilot program will more directly affect the domestic
market users, it is my view that this proposal has global implications
as well. It is a step toward the deregulation of hedging tools for the
agricultural communities, which should have an effect on the
agribusiness participants because they will be better able to manage
their market exposure. Agricultural trade options should provide
greater variety, supply and competition in offering options. Since the
United States is a major exporter of agricultural commodities, and
world consumption and trade of agricultural products continues to
grow, improvements in risk management efficiency domestically should
promote derivative benefits in the international arena.
I also think, although some people may differ with my view on this
point, that permitting agricultural trade options will increase the
use of exchange traded futures and options. Everybody wants to manage
their risk, and the processors are no different. So, it is my view
that the processors will increase their use of exchange traded futures
and options in order to hedge their positions in the cash
As I mentioned, Commission staff is currently analyzing the comments
received on this proposal and I understand that based on those
comments, the staff may be recommending some modifications to the
pilot program. Because this is a currently pending initiative, I am
not at liberty to discuss any of the staff's initial assessments.
But, I can say that I am a strong supporter of this pilot program and
I am committed to working hard towards transforming it into a final,
shorter and workable proposal.
I know I've spoke for about twenty minutes, and I think this an
excellent opportunity to shorten my presentation as well. I would like
to mention, and I think I speak for all of the Commissioners, that it
is important that we maintain open lines of communication between the
private sector and the government agencies that regulate them. In a
world of vast change and technology, where information is transmitted
on a world wide basis in seconds, it is important that we remain
apprised of the needs of private industry. I personally, and the CFTC
as an agency, are open to your thoughts and input about initiatives
that you think are important to the agricultural, futures and
financial markets. Your comments and input make a difference.