ORAL STATEMENT OF
JOHN E. TULL, JR.
COMMODITY FUTURES TRADING COMMISSION
COMMITTEE ON AGRICULTURE, NUTRITION, AND FORESTRY
UNITED STATES SENATE
JUNE 5, 1996
Mr. Chairman and Members of the Committee, I am pleased to appear today on behalf of the CFTC. Accompanying me today are Andrea Corcoran, the Director of Trading and Markets, and David Merrill, my Executive Assistant.
We commend you for laying the groundwork for today's hearing by inviting futures industry representatives and others to present recommendations for reforming our regulatory structure. We have reviewed the responses that Chairman Lugar received last summer and have discussed them with a wide range of interested parties. The Commission has already begun to resolve a number of regulatory issues identified during this process.
In addition, to supplement our May 15 testimony, we want to inform you that we are aggressively investigating several situations involving hedge-to-arrive contracts. Among the issues that we are evaluating are (1) whether some of these contracts may be illegal off-exchange futures or agricultural trade options; (2) whether certain participants are required to be registered as futures commission merchants, commodity trading advisors, or introducing brokers; and (3) whether some participants may have committed fraud in the marketing of hedge- to-arrive contracts. Meanwhile, we continue to encourage participants to resolve their differences with the guidance provided in our May 15th Policy Statement. We are also actively monitoring the expiration of each grain futures contract, particularly the July corn contract.
Since I know from my last appearance here that this Committee is particularly interested in hedge-to-arrive contracts, I would like to share with you the latest estimate from telephone inquiries made by our Surveillance staff: the total short July corn futures positions that we have identified as held by reportable traders against hedge-to-arrive contracts was 11 percent of the total open interest on May 24. This figure, if correct, should pose no threat provided that parties responsibly handle their positions prior to the first notice date.
Turning back to subject of oversight, the Commission will work with you to examine all proposed changes to our regulatory structure and to determine whether such changes are desirable. Our progress over the last year in five areas -- protecting the integrity of market operations; strengthening enforcement; encouraging innovation; streamlining regulation and enhancing interagency cooperation; and improving the international safety net for U.S. firms and customers -- provides a useful starting point for this process.
First, protecting the integrity of market operations is one of our most fundamental missions. There are three significant junctures where the CFTC exercises its oversight: (1) before a contract begins trading, the CFTC reviews it for compliance with the Commodity Exchange Act and designates it for trading; (2) as a contract trades, the CFTC conducts daily surveillance of the contract market; and (3) when necessary, completed trades may be examined through audit trail and surveillance to determine whether trades were executed lawfully.
The primary purpose of the designation process is to ensure that prospective contracts are not readily susceptible to manipulation and that they provide hedging and price basing benefits. In this fiscal year, the CFTC has already approved 79 new contracts, surpassing the previous record of 48 contracts for an entire year. In the last five years, the average processing time for new contract designations has fallen by more than fifty percent from six months to about three months, even though the period permitted by statute is one year. Our streamlined approval process also has reduced paperwork and fees.
The Commission has also devoted additional resources to strengthening its market surveillance system. As noted in our previous testimony, an effective surveillance system is critical to maintaining market integrity and customer confidence. To accommodate the need for additional options data, the CFTC's computer systems are being upgraded. Through these improvements, we hope to lessen the reporting burden on futures firms and enhance the Commission's surveillance capabilities.
Additionally, ensuring compliance with audit trail requirements is an important component of the Commission's oversight program. In June 1995, the Commission completed audit trail tests of the four largest exchanges to assess their progress toward meeting audit trail requirements mandated by Congress in 1992. Based on these results, the Commission issued letters to the four exchanges recommending specific improvements that, if adopted, would place the exchange within a "safe harbor" for demonstrating good faith compliance. These manual improvements address specific problems identified with each exchange's system, thus allowing each exchange, at the least cost, to maximize the benefits of its existing audit trail.
Two of the four exchanges -- the New York Mercantile Exchange and the Coffee, Sugar, and Cocoa Exchange -- adopted or committed to adopt all of the Commission's recommendations, therefore qualifying for the safe harbor. The remaining two exchanges -- the Chicago Board of Trade and the Chicago Mercantile Exchange -- adopted most, but not all, of the Commission's recommendations and therefore have been retested recently to determine whether their systems meet the 1995 standard. We are analyzing the test results and will determine shortly whether they qualify for good faith compliance.
The second area which has been at the top of the Commission's agenda is enforcement. To increase the effectiveness of this program, the Commission restructured its regional offices, reorganized its Enforcement staff in Washington, and appointed a new Director and Deputy Director. We also have devoted resources to implementing a "quick strike" capability to halt ongoing fraud at an early stage and thus better protect and recover customers' funds.
Third, the CFTC is mindful that its regulatory program should facilitate innovation and support technological improvements in the marketplace without decreasing market integrity. The CFTC has acted on petitions submitted by exchanges to establish professional markets under its exemptive authority, while keeping in mind Congress' caution that we not to allow wholesale deregulation of the exchange marketplace. These professional markets should permit U.S. exchanges to compete more effectively with OTC derivatives markets and foreign exchange- traded instruments. The Commission also strives to ensure that its regulatory program keeps pace with technological advances that help to improve the competitiveness of U.S. exchanges and provide better service to customers.
Fourth, the Commission has heeded calls for regulatory streamlining and a better dialogue with the public and regulated entities. The CFTC has held several public roundtables to discuss and seek resolution of significant regulatory issues.
We also continue to work closely with other U.S. financial market regulators. In particular, the Commission and the Treasury Department are working to clarify the treatment of foreign currency transactions under the Treasury Amendment to the Commodity Exchange Act.
Over the past several years, the scope of this Amendment has been the subject of litigation. At issue are the kind of participants who may engage in off-exchange foreign currencies transactions pursuant to the exclusion, and whether the exclusion applies to options. At the direction of Commission and Treasury leadership, our staffs are working to identify potential solutions to these issues that will accommodate our regulatory concerns. Ultimately, we plan to work with private sector interests and the President's Working Group on Financial Markets to come to a resolution that will accommodate the interests of all affected parties.
Finally, the Commission's international work has continued to increase, and we are particularly pleased with our efforts to strengthen the international safety net for U.S. futures firms and customers. This spring the CFTC and 13 other regulatory organizations entered into an agreement establishing a mechanism for information-sharing based on certain triggering events. At the same time, 52 futures exchanges and clearing organizations located in 18 jurisdictions have signed a companion agreement for information-sharing. These agreements are the result of recommendations made at a meeting convened by U.S. and U.K. regulators last year following the collapse of Barings.
In conclusion, the CFTC will continue to strive for a regulatory program that is fair, flexible, and serves the public interest, and we look forward to working with the Committee to promote these goals. I would be happy to answer any questions you may have.