Oral Testimony of
David D. Spears
Commodity Futures Trading Commission
Subcommittee on Risk Management, Research and Specialty Crops
Committee on Agriculture
U.S. House of Representatives
August 5, 1999
Mr. Chairman and members of the subcommittee, I am pleased to appear before you today to testify regarding the competitive concerns of U.S. futures exchanges. I ask that the written testimony of the Commission, including an attached survey of Futures Exchange and Contract Authorization Standards and Procedures in Selected Countries, prepared by the Commission’s Office of International Affairs, be entered into the hearing record. Pursuant to your request, the other Commissioners and I will also each present individual testimony.
Exchange competitive concerns were expressed most recently in a June 25, 1999, joint petition by the Chicago Board of Trade, the Chicago Mercantile Exchange, and the New York Mercantile Exchange ("The Exchanges") requesting an exemption from certain statutory and regulatory requirements for all U.S. futures exchanges.
At the outset, let me assure you that the Commission is firmly committed to addressing the competitive concerns of U.S. futures exchanges. Ensuring the global competitiveness of the U.S. futures industry in general, and U.S. futures exchanges in particular, is a paramount concern of the Commission. I have attached as Appendix A to my individual testimony a list of some 27 major regulatory reform measures taken by the Commission over the last several years. With respect to the petition itself, Commission staff intends to circulate within a few days a proposal to publish the petition for comment in the Federal Register. I should add that the Exchanges’ petition is in part similar to a number of resolutions debated and passed at a July 8, 1999, meeting of our Global Markets Advisory Committee ("GMAC"), Ad Hoc Committee on Regulatory Parity. On July 21, 1999, the GMAC discussed the Ad Hoc Committee’s resolutions.
Even before the Exchanges’ petition was filed, the Commission began to address a central concern raised by that petition, i.e., the ability to list contracts for trading on a more expedited basis. On July 27, l999, the Commission proposed a two-year pilot program to permit the immediate listing of new contracts for trading for a specified period of time prior to Commission approval. This procedure would establish a method for the Commission’s review of new contracts while preserving the public’s opportunity to comment on them, and providing U.S. contract markets flexibility in responding expeditiously to the competitive challenges of the global marketplace. Indeed, only last week, the Exchanges issued a joint statement commending the Commission for this initial action.
Besides responding to the contract approval issue, Commission staff believes a substantial portion of the additional kinds of relief requested by the Exchanges in their petition is already provided for by the Commodity Exchange Act and the existing regulatory scheme. I have attached as Appendix B to my individual testimony a document prepared by T&M staff addressing actions by the Commission under its existing authority that are responsive to many of the specific regulatory parity concerns raised in the petition.
In addition to the regulatory issues raised by the Exchanges' petition, I also believe that it is important to address some of the assumptions underlying their requests.
First, the petition assumes that foreign exchanges will be permitted unlimited access to the U.S. without having to be designated as contract markets under the Act. In fact, the no-action relief granted to foreign exchanges is based upon the presumption that the foreign exchanges are seeking only limited access to the U.S. markets and includes volume reporting requirements and other conditions. To the extent that any foreign exchange substantially increases the quantity or modifies the nature of its contacts within the U.S., the Commission has the discretion to re-examine the relief granted and even require it to become designated as a contract market under Section 5 of the Act.
Second, a careful analysis of the major foreign regulatory regimes suggests that the international playing field may not be as uneven as is sometimes thought. The OIA survey attached to the Commission’s testimony indicates, for example, that while new futures contracts in the United Kingdom are not required to be presubmitted to the regulator, in fact, U.K. authorities tell us that most contracts are submitted in advance and are closely examined by the U.K. Financial Services Authority prior to listing.
Third, the Commission is required by statute to recognize the general public interest in futures markets as well as the needs of market users, including futures commission merchants, other Commission registrants, and customers, ranging from pension funds to small country grain elevators and individual investors. Before the Commission can act on the relief requested by the Exchanges in their petition, it must hear from all members of the interested public through the comments on the petition. Indeed, some have expressed a keen desire to have free and open U.S. customer access to foreign boards of trade. That need evidences the globalization of all futures exchanges, both foreign and domestic. Consistent with this trend, U.S. futures exchanges currently have over 125 trading terminals operating in seven foreign jurisdictions.
Finally, but certainly not least, the Commission recognizes the role of Congress in regulatory relief issues. Some of the Exchanges’ suggestions for regulatory change may well relate to fundamental customer protection and market integrity measures that have formed the cornerstone of U.S. futures regulation for decades. The Commission believes those protections should not be weakened or withdrawn absent a determination by Congress to change the Commission's statutory mandate.
Another very significant issue raised by the petition is a proposal that would reduce U.S. regulatory protection to the lowest level of regulation offered by any jurisdiction gaining access to U.S. markets when trading contracts that clone domestically-traded products. In effect, a U.S. contract market could select the least restrictive elements from various regulatory systems around the world and create a regulatory patchwork that would embody the least restrictive regulatory standards of all of the major foreign financial regulators.
The Commission looks forward to receiving comment on these and all the other issues raised in the Exchanges' petition and believes it is important to reserve judgement on these issues until it has heard from the entire regulatory community through the public comment process.
In closing, I want to stress that the Commission stands ready to cooperate with Congress throughout the reauthorization process, and to work closely with the industry to resolve this and all issues that may arise during that process. On a personal note, Mr. Chairman, as I enter my third month as Acting Chairman of the Commission, I would like to take this opportunity to publicly acknowledge the cooperation of my fellow Commissioners and the hard work and dedication of the Commission’s professional staff.