Remarks of Commissioner Thomas J. Erickson

Futures Industry Association
Futures and Options Expo 2001
Chicago, Illinois
November 29, 2001

Good afternoon. I am pleased to be here with you in Chicago and to participate in the Futures Industry Association’s Expo 2001. The FIA Expo has a tradition of linking the futures business with the technology that not just supports it, but is increasingly woven into the fabric of our markets. As chairman of the Commission’s Technology Advisory Committee, I thought it would make sense to take advantage of these synergies by holding a committee meeting in conjunction with this week’s events, which we did two days ago on Tuesday.

I thought what I’d do today is to provide a little background about what your peers in the industry talked about at the Technology Advisory Committee. I’d also like to share some reflections regarding September 11 from a regulatory perspective. And finally, I will conclude with some thoughts about these matters in the context of the Commodity Futures Modernization Act of 2000.

Advisory committees play a vital role for independent agencies such as the Commission. The CFTC maintains three such committees: the Agriculture Advisory Committee, chaired by Commissioner David Spears; the Global Markets Advisory Committee, chaired by Commissioner Barbara Holum; and the Technology Advisory Committee. The Technology Advisory Committee was established nearly two years ago by then Chairman Bill Rainer. Until this year, our current Acting Chairman Jim Newsome chaired it. It has been a privilege for me to work with and learn from the industry leaders serving on this panel.

I consider the advisory committees to be more than a biannual opportunity for an industry reunion. Rather, advisory committees should be a forum for timely and active debate. These committees are one of the most important vehicles for industry input to the Commission. Providing such a vehicle is my goal for the Technology Advisory Committee. This Tuesday’s meeting committee far exceeded my already high expectations for the committee. The depth of the discussion is a tribute to the dedication and commitment of the roughly two-dozen members of the committee.

Last May, the Technology Advisory Committee established two subcommittees – the Standardization Subcommittee and the Market Access Subcommittee. Each of these subcommittees produced written interim reports for the consideration of the full committee.

The Standardization Subcommittee established as its focus the issue of standardization of electronic communications in the futures and options industry. The subcommittee engaged in a comprehensive review of electronic communications within the futures and options industry, as well as those occurring throughout other parts of the financial services industry. The results of that study are contained in the subcommittee’s two areas of recommendations.

First, the subcommittee set out to review communication protocols. Communication protocols generally are the instructions embedded into communication systems that define how we communicate electronically. The subcommittee reviewed various protocols currently employed in various sectors of the financial services industry and recommended a series of best practices for protocol standards.

Second, the subcommittee sought to identify the data content that should be included in every electronic transaction from the point a customer initiates an order to the point the transaction is confirmed back to that customer. The interim report includes a detailed list of the content the subcommittee recommends be included in electronic transactions.

The Market Access Subcommittee set out to review market access privileges in solely electronic market venues. With the emergence of all-electronic markets, the broadest conceivable range of participants – from institutional to retail – have direct access to markets. For the members of the subcommittee, this possibility raised questions about the fairness of access to markets across the spectrum of customers. The Market Access Subcommittee developed a set of recommendations for best practices in the provision of access to this broad and varied group of customers.

As I mentioned, each of the subcommittees prepared comprehensive reports. I commend them to you and encourage you to review them and provide any comment to members of the subcommittees. Final reports to the full committee are expected at the next meeting this spring. The reports are available for your review at the Commission’s web site.

These discussions of standardization leap into relief following the attack of September 11 when it became crucial for all markets and their participants to communicate and cooperate on an unprecedented level. The importance of technology simply cannot be overstated.

In the aftermath of the September 11 attacks, there has been much discussion focused on what the industry needs to do to prepare itself for emergencies. Given the experience of the New York exchanges, we can say with certainty that there is no substitute for business continuity planning and disaster recovery planning – not to mention a hefty dose of hard work and goodwill. The New York exchanges would not have been able to get back on line as quickly as they did without careful planning beforehand and the work of extraordinarily dedicated staff afterwards. They deserve all the accolades they are receiving, and we can learn a great deal from their experience.

In the months before the September 11 attack, this industry – like others – viewed technology primarily as a means of maximizing productivity and profitability and reducing expenses. In the wake of September 11, technology is being viewed through the lens of what happened that day and the financial services industry as a whole is being asked to consider and weigh extraordinary investments in the electronic and physical architecture of financial markets. Where once we were focusing on streamlining, we are now talking about cloning and redundancy. From what I have seen at this year’s FIA Expo, the entrepreneurial spirit is alive and well in this industry, and I expect there will be a number of business solutions available to you to meet many of these new demands.

You all are going to face these issues for years to come and you will no doubt have to make some difficult decisions. This afternoon, I’d like to pose a few questions to you regarding the role of the regulator in market breaks.

Back in May, some months before the September 11 attacks, the Technology Advisory Committee met in Washington. One of the panels at that meeting was titled “Disaster Scenarios in Linked Markets: Who's in Charge?” The focus of the panel in May was the rippling effects a profound market break might have in a world of linked markets, who should respond to such breaks, what they are able to do, and what they should do. I doubt any of us envisioned the kind of physical devastation that occurred in New York in September, but the questions asked by that panel are more relevant than ever.

So I put it to you: what is your expectation of a regulator in such situations? Do those expectations mesh with the authorities vested in that regulator?

We all know that the Commodity Futures Modernization Act granted markets unprecedented flexibility, and it also expected the Commission to step back from hands-on regulation, even during times of market emergencies. The trade-off, of course, is that the industry accepts more responsibility.

The flexibility and freedom gives all markets and their participants enhanced abilities to compete, and to succeed or fail. In this environment, who is looking out for the public interest and market integrity? By and large, it is you.

Things worked as well as they did in New York because of the incredible spirit of cooperation between and among markets, their participants and the Commission. In this new, less rule driven environment, I submit to you that must be the model for how we work together.

Before I close I want to take a moment to thank you, the members of this industry and the staff of the Commission, for the Herculean efforts made to bring U.S. derivatives markets back up following September 11. It was truly inspiring for me to witness the strength of the human spirit. You all worked through your own personal tragedies to ensure the continuity of business in this country. We are indebted to you all.

Thank you.