THE FUTURE OF INTERNATIONAL DERIVATIVES REGULATION
WHAT'S NEXT AND WHY
Commissioner David D. Spears
US Commodity Futures Trading Commission
for the 20th Burgenstock Meeting of the
Swiss Futures and Options Association--September 9-12, 1999
The views expressed herein are solely those of the author and do not reflect the views of the Commission or any division of the Commission.
I am honored to participate in the 20th anniversary meeting
of this international forum on derivatives markets. The US Commodity
Futures Trading Commission believes that international regulators and
representatives from the financial services industry must take
advantage of forums such as this one in order to meet the challenges
of the 21st century.
In the past two years, there has been more change in the derivatives industry than in the last decade. Some have called these changes a "capital markets revolution." Electronic trading, for example, is rapidly transforming the industry by giving end-users unprecedented access to markets around the world. Just last month, in fact, the CFTC permitted US customers electronic access, through authorized futures brokers in the US, to derivatives markets in the UK, Germany, Australia, and France. US exchanges currently have terminals for trading US products in each of these locations, as well as in Japan, Singapore and Hong Kong--over 100 terminals in all. More such arrangements are anticipated.
In addition to providing greater access to global markets, electronic technology also is spurring the creation of new types of markets and new opportunities for retail and institutional market participants. The Internet, for example, brings to the average customer the power to evaluate financial instruments and products in every corner of the globe. As some of you may know, the CFTC is currently examining a proposal for the first US Internet-based futures exchange. The proposed trading system, known as FutureCom, would offer cash-settled live cattle futures over the Internet.
Similarly, the Internet also is prompting brokers to change. Some are developing their own private networks to serve their customers. Others are refocusing their efforts on providing credit as opposed to execution services.
It is natural that the structure of markets and firms should change as the industry searches for cost-efficiencies and competitive advantages. Customers are using prime brokers to trade globally as well as to consolidate accounting for and managing their exposures in a single location. Money managers are providing sophisticated financial planning tools to their customers electronically. Futures industry associations are debating the future of intermediaries.
In addition, over-the-counter trading continues to expand. Data from the Bank for International Settlements suggests that OTC markets are playing an ever larger role--relative to organized exchanges--in financial derivatives. The BIS's most recent estimate puts the notional amount of outstanding global OTC derivatives at $80 trillion as of December 1998. The explosive growth in OTC markets has challenged organized exchanges to develop equally competitive products.
But it is not only the industry participants who must meet the challenges presented by all this change. Regulators must also meet market innovation with creative approaches, continually reevaluating regulatory systems in light of market changes. To do otherwise would be to neglect our responsibility to permit the markets to evolve without undue interference while at the same time protecting the public interest.
For example, the growth of electronic markets has prompted many regulators to explore more cooperative models for allocating regulatory responsibility in order to reduce unnecessary duplication. In addition to heightened cooperation, some of these models call for regulators to divide responsibility among themselves to ensure that regulation appropriate to the market and the transaction is in place. Cross-access agreements between exchanges from different jurisdictions, for example, have forced regulators from those jurisdictions to examine how best to allocate oversight responsibilities.
Like many of the regulators represented here today, the CFTC has struggled to strike the proper balance between market innovation and the regulator's mission to ensure fair and efficient markets. In the coming months, however, the CFTC will be especially immersed in these issues as a part of its periodic, statutory reauthorization process. Through this process, the US Congress evaluates the work of the Commission and examines the Commodity Exchange Act with an eye towards modernizing it, where necessary.
Certainly, the question will be asked whether we have been innovative enough. Even more fundamentally, our Congressional oversight committees intend to examine whether the Commission should operate as a "front-line" regulator or become more of an "oversight" agency. Interestingly, this idea seems to run contrary to the trends we have seen in other jurisdictions where regulators have had to consider the implications of exchanges converting to for-profit entities and potentially weakening their self-regulatory incentives.
I believe that during these reauthorization proceedings we will have a good story to tell our Congress about how international cooperative efforts are meeting the challenges of changing markets. To cite a very recent example, in considering petitions to place foreign market electronic terminals in the US, the CFTC received comprehensive information on regulatory systems used by other markets. This information clearly demonstrated a commitment to the same basic regulatory goals as those of the Commission.
Similarly, a recent CFTC survey of futures exchange and contract authorization standards and procedures in various jurisdictions found significant commonality among various regulatory approaches. Nevertheless, "regulatory parity" will definitely be on the Congressional agenda, and the Commission's efforts on this issue will continue to be discussed throughout the reauthorization process.
In this regard, despite a divergence of techniques, I am struck by how similar the regulatory goals of various international regulators are. This is not surprising to me because the CFTC has worked with many of its regulatory colleagues to promote common goals. In addition to the work done through this forum, the CFTC has participated in groups such as the International Organization of Securities Commissions (IOSCO) that are committed to developing common standards, benchmarks, and best practices.
By moving to harmonize international regulatory requirements and by
cooperating with one another across markets and borders, regulators
can more efficiently and effectively deal with expanding global
markets and advances in technology. Of course, this requires that each
of us understands the other's regulatory systems and assumes a
degree of trust by each of us in the other's ability to implement
them. Such understanding and trust is built on case-by-case experience
in information-sharing and by managing cross-border market
In the months to come, the CFTC and its Congressional overseers will face some difficult issues. But none of the issues that will be debated in the US is exclusive to the US markets. We must all struggle to keep pace with changes so as to support robust, competitive markets without abandoning needed protections. Much has been accomplished to date, and I am optimistic that today's dialogue will advance our progress toward high standards and better cooperation.