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
events.
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.