Remarks of Acting Chairman James E. Newsome
at the FIA Conference in Boca Raton, Florida
March 15, 2001

    Thank you, for that kind introduction and for inviting me here today. It is both an honor and a pleasure to address this distinguished group. I have had the opportunity to work with some of you during my tenure at the CFTC and look forward to continuing these productive relationships in the future, as well as to building more such relationships.

    As I reviewed the agenda for this conference, the discussion topics seemed to me to lead to one question: "Where do we go from here?" Through competition, innovation, technological advances, and globalization and with businesses being redefined, recreated, or even newly created, many of you are asking that question. We at the CFTC are asking ourselves a similar question: "How do we, as regulators, make allowances for these changes in the marketplace and continue to carry out the core mission of the agency?"

    This is obviously an exciting time for the industry. Congress exhibited great vision and determination in passing the Commodity Futures Modernization Act, a truly landmark piece of legislation that is very responsive to market changes. Its passage represents tremendous progress and demonstrates just how effectively good government can work when everyone cooperates, public and private sector alike. Passage of the Act was an important first step and I commend Congress for taking it. Now, we must continue the momentum as we attempt to define the future of regulation.

    As busy as we were last year, I expect us to be even more so in 2001. Prompt implementation of the new Act is my highest priority. The CFMA, quite appropriately in my view, establishes deadlines for accomplishing numerous tasks, both individual and in cooperation with other Federal regulators. I welcome the challenge and am fully committed to meeting each of those deadlines.

    Implementation efforts at the CFTC are already well under way. The Commission has approved a set of proposed rules governing execution facilities, which were published in the Federal Register last Friday. The Commission also recently approved other proposed rules regarding privacy and opting out of segregated funds.

    As for joint rulemakings with other agencies, we have assembled our team and are actively working with the relevant agencies to develop proposals. As always, I look forward to receiving the valuable insights and suggestions of those in the marketplace as proposed rules are published. There will be a lot of proposals coming at you in the next several months and I want to thank you in advance for your responsiveness and continued interest.

    Many of you are familiar with my views on the proper role of regulation. For those of you who may not be, it is worth emphasizing, first, that I believe strongly in, and in fact have taken an oath to fulfill, the responsibilities and mandates of the Commission to maintain market integrity and to protect market participants against fraud and manipulation.

    However, I do not subscribe to the idea of regulation for regulation's sake. There are different ways for the Commission to fulfill its responsibilities and I believe that reducing unnecessary and burdensome rules in favor of best management practices that allow flexibility and promote innovation is the appropriate path to take. The temptation to resort to prescriptive regulations that take an inherently static view of markets and technology has traditionally been hard to resist for some in the regulatory community. However, I have and will continue to take a hard line against reverting to such restrictions on innovation and progress.

    You are the experts in running your businesses. We, as regulators, are not. Our role is to protect the public good and should be confined to what I like to call outcome-neutral regulatory action where competition among market participants, not governmental prescription, determines the results. Section 3 of the Act clearly defines those legitimate public interests that should be furthered by this Commission. It is the place of Congress, not this Commission, to create new public policy.

    The alternative to prescriptive regulations, of course, is a rational set of principles-based rules and I believe, therefore, that the Commodity Futures Modernization Act and the principles-based approach it takes could not have come at a better time. Advances in technology are facilitating great innovation in the marketplace. New competitors and industry veterans alike are developing new products and new ways to trade existing products. In my view, these innovations promise to improve both the efficiency of markets and their effectiveness as a means of discovering prices and managing risks. But such changes would quickly make any set of inflexible or prescriptive regulations obsolete, burdensome, and, frankly, unnecessary.

    There is an unavoidable relationship between overly burdensome market regulation and market innovation. The nature of the regulatory approach influences whether resources are invested in valuable new innovations (if the regulatory approach is flexible and economically sound) or are consumed in costly adaptation efforts (if regulations are overly burdensome and inflexible). Too often, an inflexible and prescriptive regulatory approach that lacks a rational economic basis has forced market participants to adapt to regulations in ways that avoid the inefficiencies imposed by such regulations but otherwise add no new value to the marketplace.

    The market bears the added cost of such efforts and whatever public policy the regulator might have been attempting to pursue is quite often not achieved. Not frequently enough are rules designed with sufficient flexibility to permit (even encourage) true innovation, innovation driven by the economics of the marketplace and improvements in technology. Yet flexible rules can be very effective in achieving necessary public policy goals without imposing unnecessary inefficiency or triggering costly adaptation.

    The new regulatory approach that is called for by the CFMA empowers the Commission to do just that: accomplish important public policy goals without imposing unnecessary costs on market participants, without stifling innovation driven by new technologies and the evolving needs of customers, and without implementing inflexible regulations that quickly become obsolete or ineffective.

    We have seen a direct benefit to markets when we have, in the past, been able to rationalize rules. What I hope to do is make such improvements the rule rather than the exception and I believe that we will be successful in this effort. Subject to the normal prohibitions against fraud and manipulation, market innovations that provide real value for participants are now free to develop as quickly as technology permits and customer demand requires.

    While passage of the CFMA was a very positive first step, and its prompt implementation is, as I’ve said, my highest priority, I do have other priorities. I plan to move forward with reviewing the need for comprehensive relief for intermediaries. I also plan to propose, in appropriate circumstances, using our exemptive authority under Section 4(c).

    Obviously, the year 2000 was an extremely important year for the futures industry. However, when we look back ten years from now, I predict we will find that 2001 was also a critical year because, today, our challenge is to implement the much-needed relief granted by the new legislation, to anticipate future needs, and to react quickly to market dynamics. Your challenge is to help us address these issues properly.

    The key to success for a regulator facing such great potential change in the marketplace is to pursue the same innovativeness and creativity that successful market participants rely upon in conducting their businesses. Fortunately, the CFMA affords us the opportunity to do so.

    It’s been wisely said that enough regulations will ensure that nothing ever goes wrong in the marketplace…but at the same time, nothing right will be permitted to take place either. Principles-based rules that suit the nature of the participant and the nature of the product, that take into consideration the costs as well as the benefits of compliance, that allow business people to conduct business without unnecessary restrictions, and that reflect a common sense approach to regulation through a genuine partnership with market participants, are most often the rules that are best able to achieve public policy goals. These are my ideas about where we go from here and what the core mission of our agency should be. I look forward to working with you as we move forward.