Remarks of John E. Tull, Jr., Acting Chairman
Commodity Futures Trading Commission
Symposium on Internal Controls and Risk Management Practices
June 24, 1996
On behalf of the Commissioners and the entire Commission staff, I am very pleased to welcome each of you to this roundtable today on what has turned out to be a very timely subject. We had no idea months ago when this was scheduled that such would be the case. Therefore, we're delighted by the great turnout, and I'll be brief so that we can get to our important business, that is, hearing from all of you.
Today's symposium is designed to elicit a wide spectrum of viewpoints concerning the risk management practices and internal controls programs of end-users, brokers and dealers of financial instruments. The attendance of participants from all around the world is an indication of its international importance. On that note, I would like to extend a special welcome to Mr. Nicky Tan and Mr. Sundaresh Menon who I believe have travelled the greatest distance, from Singapore, to be with us today. To you and all of our other distinguished guests who have taken time out of busy schedules to participate, we welcome you.
Unfortunately, it appears that recent events make this symposium especially timely. Despite the failure of Barings and the lessons learned there, it seems that the high costs of the lack of internal controls are still being paid, this time by Sumitomo.
The recent announcement by Sumitomo of $1.8 billion in losses due to unauthorized trading by its head copper trader reminds us that there is still a lot of work to be done by the industry in the area of internal controls. Based on news reports, it appears that Sumitomo's management may have lacked knowledge and control over Mr. Hamanaka, although we do not yet know for sure.
This situation raises an obvious question which must be answered, namely, how could losses of this magnitude be accumulated over a period of ten years without anyone else knowing about them?
One main reason regulators are concerned about internal controls is simple: in our increasingly global economy, losses suffered by multinational financial conglomerates have the potential to affect markets and firms the world over. Indeed, our primary concern in the Sumitomo debacle has been any effect that it may have had on U.S. firms and the U.S. copper market. While the trading at issue was not done on our exchanges, we will focus on whether there has been any resulting manipulation of the U.S. copper market.
I am proud that the joint investigation by the CFTC and the United Kingdom's Securities and Investments Board in the uncovering of these losses. This joint effort began last year in response to unusual market conditions and volatility in the copper market. And since our investigation is not yet complete, I cannot comment on our findings. What I can say, however, is that working through this situation has yet again reminded us of the vital need for close cooperation and information-sharing among international regulators and market participants. We are very pleased by the cooperative effort that has taken place between U.S. and U.K. regulators and exchanges.
Concerning the industry's efforts to improve internal controls, the Commission applauds the organizations that have taken the initiative to develop standards. The Futures Industry Association's Global Task Force on Financial Integrity has provided over 60 recommendations designed to improve the financial integrity of the futures industry for all participants. The International Organization of Securities Commissions (IOSCO) has published its recommendations regarding risk management control mechanisms for over-the-counter derivatives activities of regulated firms.
In an unprecedented undertaking, at the invitation of Arthur Levitt and with the participation of the CFTC, the six largest unregulated affiliates of CFTC-registered futures commission merchants and SEC-registered broker-dealers joined together as the Derivatives Policy Group to formulate a voluntary self-regulatory framework. Their Framework for Voluntary Oversight is an effort to address necessary internal management controls for monitoring and measuring the various risks to firms due to over-the-counter derivative products. We applaud these and other efforts which serve to establish higher standards both internationally as well as domestically.
Proper internal controls and risk management practices protect the dealer, its customers and the markets themselves. As such, none of us in this room can afford to ignore their importance. Users and dealers both must understand the need for and how to implement relevant existing guidance on internal controls and risk management procedures. But we cannot stop there. As risks grow and vary with changes in the markets, risk management practices must adapt.
In closing, let me say that the Commission is vitally interested in what each of you have to say, and we expect the comments delivered here to assist us in our role of oversight of internal controls and risk management practices. We also hope that this meeting will provide valuable information to members of the industry. Lastly, we hope that this symposium will identify areas in which private sector initiatives can move the industry to an even higher level of best practices.