Remarks of Acting Chairman James E. Newsome
at the FIA Conference in London
June 18, 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.
Which brings me to the subject of today's remarks: the CFTC's long tradition of responsiveness to innovation and growth in cross-border business. Global markets are not new to the Commission.
As many of you may be aware, Congress established the CFTC as an independent regulator for futures markets and related intermediaries at least partly in response to global developments beginning to be seen even then: the markets for grain futures and gold options and the emergence of futures markets in other global commodities such as cocoa, coffee, and foreign currency. From the outset, therefore, the CFTC's powers have reflected the reality that futures trading is a global business.
There were not many futures markets outside the United States in 1974. But this quickly changed in the 1980s as futures markets began to develop in many other nations, some of which entered into linked trading and clearing with CFTC-regulated domestic markets.
In 1982, the U.S. Congress, recognizing the growing participation by U.S. residents in foreign markets and the increased participation by residents of other countries on U.S. markets, expanded the CFTC's authority over the offer and sale of foreign futures in the U.S. and made it easier for the CFTC to work cooperatively with financial regulators overseas.
It must be noted, however, that, in granting the CFTC broader authority to protect U.S. customers trading in non-U.S. markets, Congress made clear that this authority was not to be used to impose the CFTC's own design on those overseas markets.
Congress expressly cautioned the CFTC that it should exercise its authority only while “taking into account the customs and practices of foreign boards of trade ... and recognizing that differences may exist between the practices of foreign boards of trade and their U.S. counterparts.”
Congress also made it clear that it did not intend for the CFTC either to use its authority to impose an approval process on the contracts or rules of foreign boards of trade or to issue any rule that would place the solicitation or acceptance of orders in the United States for bona fide foreign futures contracts at a comparative disadvantage with similar solicitation and acceptance of orders for domestic futures contracts.
Thus, long before the Internet challenged us to think about where exactly a particular market is located, the commercial nature and the global scope of the commodity futures markets challenged regulators to adapt themselves to markets with one or more key components either located outside the U.S. or dependant upon conditions in foreign markets.
Accordingly, the CFTC has worked earnestly toward developing cooperative oversight arrangements to permit, among other things, cross-border industry ventures (such as clearing through mutual offset and cross-access to linked markets) and reliance on foreign authorization processes (for such things as admitting brokers that sell certain offshore products to U.S. customers and permitting foreign terminals to be accessed from within the U.S.)
Each of these solutions to important industry developments required the CFTC to undertake effective cooperative partnerships with one or more foreign regulators. Much effort went into analyzing the harmonization of relevant laws, the amenability of certain activities to meaningful enforcement and dispute resolution capabilities in different jurisdictions, the accessibility of records, and the appropriate levels of information-sharing among regulators.
Not surprisingly, these arrangements were sometimes concluded only after difficult negotiations. The continuing success of future arrangements will depend on the willingness of the relevant regulators to continue to cooperate with one another. But the bridges that were built in the process have proved to be quite durable and have also produced unforeseen benefits, such as greater cooperative responsiveness to market problems that span jurisdictions, such as Barings and Sumitomo.
Today, almost 50 markets outside the U.S. report trading volume to the FIA. Large trader reports filed with the CFTC for March of this year revealed that 42% of the traders in agricultural commodities that were required to report and 38% of those in financial instruments were foreign based.
During the first three months of this year, approximately 200 of the largest U.S. FCMs held more than $7 billion in secured amounts in respect of foreign trades versus approximately $55 billion that they had segregated in respect of U.S. contracts.
Neither of the foregoing examples includes OTC transactions, in which global open interest currently exceeds $80 trillion. I expect these trends to continue, driven by the business needs of those who utilize the futures and options markets. For instance, the CFTC recognizes that as collective investment vehicles such as pension funds are permitted to invest in a broader range of asset classes, fund managers will have greater need of hedging tools that address their global, as well as domestic, risk exposures.
The CFTC's attentiveness to the needs of the market participant wanting to implement an effective cross-border trading strategy, or to assist its clients with all of their global portfolio needs, continues as strongly as ever today. In May, no-action relief was granted for three different broad-based index contracts traded on foreign exchanges to be offered and sold in the U.S. Just last week, no-action relief was granted for two more foreign contracts.
The U.S. Congress has also been attentive to the needs of those who rely on cross-border transactions to accomplish their business objectives. As it undertook a massive, and in my opinion much needed, overhaul of U.S. futures law, the Congress did not overlook the increasing globalization of this industry.
The landmark legislation that was signed into law in December, entitled the Commodity Futures Modernization Act or CFMA, provides legal certainty for over-the-counter derivative markets, deregulates the futures markets, and lifts the ban on single-stock futures. The Act also removes many of the prescriptive requirements that would have made harmonization across borders challenging to say the least.
Prompt implementation of the new Act is my highest priority. The CFMA, quite appropriately in my view, establishes deadlines for accomplishing numerous tasks, both individually and in cooperation with other federal financial regulators.
I welcome the challenge of working both individually and collectively with other regulators to carry out the intent of Congress. In fact, implementation efforts at the CFTC are well under way. Various rules intended to implement the Act have already been published for public comment.
For example, joint rules were recently proposed by the CFTC and the SEC, clarifying that futures on foreign broad-based indices, like those on domestic broad-based indices, will be under the sole jurisdiction of the CFTC.
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 out in the near future and I want to thank you in advance for your responsiveness and continued interest.
As for the CFTC's long tradition of cooperating productively with overseas authorities, Congress included in the CFMA a provision making clear that the CFTC is to continue this tradition of working with foreign authorities and international organizations to facilitate cross-border transactions through the removal or loosening of unnecessary legal or practical obstacles, to develop internationally accepted standards of best practice, and to enhance international supervisory cooperation.
I do not take this charge lightly, and will continue to pursue regulatory solutions that not only ensure that market integrity is maintained, but that also make sense for the business environment of the future by taking into account global partnerships, technological advancements, and international business innovations.