Remarks of David D. Spears, Commissioner
Commodity Futures Trading Commission
Financial Services Convergence Institute
Keynote Session: The New Face of Regulation
New York City
October 19, 2001
It is an honor to participate in this distinguished panel. At the outset, I would note that the conference brochure describes this panel as discussing regulatory harmony vs. disharmony. Let me assure all of you that achieving international regulatory harmony remains a top priority of the CFTC.
My fellow panelists have outlined some of the conflicting tensions pushing and pulling on business and regulators alike as the global derivatives business continues to evolve. I will try to give you a brief overview of how the CFTC has responded to the changes we have already seen and what the future might hold from a regulatory perspective.
Derivatives markets, once dominated by the U.S., have become increasingly global in scope. Where once there were a mere handful of offshore exchanges, today 45 markets outside the U.S. report volume figures to the Futures Industry Association. Globalization represents more competition for U.S. markets, but it means new business opportunities as well. For example, our most recent monthly data [September 17 – October 12] shows that, of the large traders required to file reports with the CFTC, 23% of those trading agricultural products, 25% of those trading industrial goods and metals, and 38% of those trading financial instruments were foreign-based.
At the same time, markets are becoming increasingly electronic. Internationally, electronic trading has become the model of choice, with exchanges in London, Paris, Sydney and Hong Kong abandoning pit trading in favor of computerized systems over the last few years. The U.S. is almost the last bastion of open outcry. But even here, the Commission has designated 6 new electronic exchanges in the last few years, with 9 more applications in the works. Electronic trading is also making inroads in our established markets. During January through September of this year, 31.5% of the volume in CBT Treasury Futures was traded electronically, with September volume rising to 38.6%, representing average daily volume of almost 247,000 electronic trades.
Global electronic trading creates new challenges for customers. A transaction theoretically could involve a trader located in one country, using an intermediary located in a second country, with back office services based in a third country, on an exchange housed in a fourth, using a clearing system located in a fifth. Internet-based markets, currently in their infancy, can offer even more opportunities, giving customers direct access to trade matching systems without utilizing the services of an intermediary. But without an identifiable broker to turn to, a customer may not know where to turn with a problem or question about a trade. The customer may have no way to check on the fitness or even the identity of the professionals on the other side of the screen, no way to verify the accuracy or usefulness of the wealth of information available over the Internet. If a customer decides to resort to a regulator, he or she may not know which one to call.
Global electronic trading creates equally profound challenges for the regulator. First and foremost, we want to maintain a regulatory system that is flexible and responsive. We want to give innovative business ventures and trading systems the freedom to develop and grow without strangling in a net of outdated, inconsistent prescriptive rules. At the same time, we must retain the authority to protect customers from cross-border fraud and manipulation and to protect the financial system from abnormal price impacts due to market events. In the wake of September 11th, we also need to be more vigilant against those who would use derivatives markets to launder illicit funds, transfer monies to fund terrorist activities, or even to profit from the results of their own evil acts. Likewise, we must also be on guard against cyber-terrorists who might launch an electronic attack on the world financial system.
Responding to such challenges demands coordination and cooperation among regulators and self-regulatory authorities, including the exchanges themselves. The CFTC has a long history of promoting international cooperation. We have cooperative enforcement arrangements with 19 foreign jurisdictions and numerous special purpose arrangements for financial oversight, warehouse information and technical assistance. We have also been a moving force behind various multilateral agreements, such as the 1995 Windsor Declaration, the 1996 Boca Raton Declaration, and the 1997 Tokyo Communiqué that have enhanced international supervisory cooperation and emergency procedures. With respect to the Windsor Declaration, I would like to acknowledge the efforts of my fellow panelist, former CFTC Chairman, Mary Shapiro, who was one of the driving forces behind that international response to the Barings situation.
The CFTC has also been very active in IOSCO, the International Organization of Securities Commissions. IOSCO’s overall mission is to foster international regulatory cooperation and various IOSCO task forces and working groups are tackling the regulatory challenges that I have mentioned. For example, in 1998 the organization adopted a set of 30 objectives and principles for international securities and derivatives regulation, including principles for regulators and self-regulators, principles for enforcement and regulatory cooperation, as well as principles for collective investment schemes, intermediaries and secondary markets. In October 2000, the Commission encouraged IOSCO to update its “Principles for the Oversight of Screen-Based Trading Systems for Derivative Products,” in order to promote greater transparency of market and regulatory rules and better coordination of regulatory responsibilities in cross-border transactions. In April of this year, the Commission joined with regulators from 35 countries in IOSCO’s second annual Internet Surf Day, targeting futures and securities fraud on the Internet. Participants identified more than 2,400 Internet websites for follow-up review, including 278 sites that involved cross-border activity.
One of the biggest benefits of regulatory cooperation is increased competition. Consistent regulatory schemes and open access to qualifying markets (for example, through “passporting”) encourages competition among markets. Competition, in turn, gives markets a strong incentive to provide services with the lowest cost and the highest degree of financial integrity in order to attract more customers. Thus, competition fosters market discipline that can decrease the need for direct regulation.
The Commodity Futures Modernization Act (CFMA), enacted last December, recognizes and encourages regulatory harmony. It removes many of the prescriptive rules that could make harmonization across borders more difficult and acknowledges that a U.S. regulator can rely on certain parts of a foreign regulatory regime if it meets relevant standards. Congressional action on the CFMA included a provision making clear that the Commission was to continue its participation in international organizations and its cooperation with foreign authorities. It also encouraged facilitating cross-border transactions through removing unnecessary legal and practical obstacles, developing international best practice standards, and enhancing international supervisory cooperation.
On September 11, the international regulatory system faced a test that no one could have anticipated or planned for. More than any agreement or declaration, the international response to the terrorist attacks and their aftermath provides dramatic evidence of the ongoing spirit of international regulatory cooperation. Regulators and exchanges worked together through formal and informal channels. When U.S. securities markets closed after the attack, other markets around the world suspended trading in derivatives based on U.S. securities and devised special pricing and redemption arrangements for mutual funds with dominant exposure to U.S. markets. Regulators that didn’t have sufficient authority went to their legislatures for special orders authorizing the necessary actions, with some imposing ad hoc short selling restrictions.
During the post-attack confusion, IOSCO let the Commission use its website so we could post contact numbers to let people find out the status of U.S. firms. Then, as U.S. markets began reopening, the IOSCO Technical Committee held a multi-jurisdiction conference call to smooth the way by sharing information about market conditions. Just last week, that Committee established a special multi-national project to look at reinforcing our contingency planning, account identification and cooperative procedures. COSRA, the Council of Securities Regulators of the Americas, recently adopted a resolution to implement a similar effort. Perhaps most remarkably, our regulatory contacts around the world reported that traders by and large acted responsibly and did not seek to take financial advantage of the disaster.
In conclusion, looking ahead, I see increasing cooperation and coordination among regulators, exchanges and market users alike to address common concerns in our global marketplace. I believe the formal structure of IOSCO, as well as various bilateral and multilateral agreements, combined with the remarkable spirit of fellowship we saw in the wake of September 11, point the way to a bright future for international regulatory harmony.