Introductory Remarks of Chairman James E. Newsome before
the Luncheon Panel Discussion on Single Stock Futures
at the MFA Conference in South Beach, Florida
February 5, 2002
Thank you for inviting me here today. It is a pleasure to address this distinguished group. I look forward to the panel discussion on single stock futures and will keep my remarks brief. Solid progress has been made in moving toward actual trading in single stock futures and other security futures products. The Commission has issued final rules on notice registration, listing standards, self-certification of rules and rule amendments, data reporting, speculative position limits, and cash settlement or physical delivery of SFPs. Together with the SEC, we have also issued final rules on the key issue of how to determine whether an index is a narrow-based security index subject to joint regulation or a broad-based index subject only to our traditional rules. We have published for comment our proposed rules on dual trading of SFPs. And, with the SEC, we have published jointly proposed rules on margin, customer funds protection issues, cash settlements, and trading halts.
Perhaps most importantly, SEC Chairman Pitt and I have agreed generally on how to best address the issues that remain before these products can trade. We believe the CFMA does not require that implementation of portfolio margining for security futures be deferred until it has been approved for exchange-traded options, as long as we avoid regulatory arbitrage between SFPs and exchange-traded options. And we have committed our respective agencies to promulgating final rules on margin and customer funds protection at the earliest possible date, with a goal of permitting actual trading by early in the second quarter. Chairman Pitt and I issued a joint statement to that effect on December 21st, the first anniversary of the CFMA's enactment, and I fully intend to meet that commitment. However, we realize that it is most important to finish them appropriately versus just quickly.
With your indulgence, I'd like to bring you up to speed on efforts in several other areas before the panelists begin their discussion. First, I want to commend all those here today who faced the unprecedented challenges, and personal tragedies, of September 11th to get the futures markets back up and running within mere days. The steady hand of industry leaders and management teams, the foresight and flexibility of many contingency plans prepared in the aftermath of the 1993 attacks or in anticipation of Y2K, the prudent investments of some institutions in redundant facilities and backup systems, and -- most of all -- the courage and tenacity of every person at every firm in this industry should give us all great confidence in the strength and resilience of our financial system.
The Commission has undertaken a study of the industry's response to this crisis and will soon be releasing its initial report. Invaluable lessons were learned and issues identified in the area of disaster recovery and business continuity plans, for regulators as well as market participants. It is my hope that, by sharing through this initial report what we've learned thus far about our own preparedness as a federal financial regulator and about the preparedness efforts of the exchanges, clearinghouses, and firms we oversee, we might trigger further discussion among market participants. I believe that the same creativity and ingenuity that has produced so many innovative new financial products and trading platforms will also generate the best solutions to the challenge of preparing ourselves for disasters we hope to never face.
I would also like to mention our efforts with respect to the Patriot Act and its provisions on money laundering. As many of you are aware, Title III of the Act imposes a number of new anti-money laundering requirements on all financial institutions, including CPOs. �The Treasury Department has authority under the Act to develop a number of regulations that may impact your compliance efforts. The Commission has and will continue to be consulted and to participate actively in this process. Our staff is working closely with Treasury, other regulators, the MFA, and others to ensure that your concerns are considered and that any regulations in this area do not place CFTC registrants at a disadvantage relative to other financial service providers.
The ongoing Enron situation has also generated challenges for the Commission and I'd like to mention some of our efforts in that area. Among other things, I recently testified before the Senate Energy Committee and will share with you some of the items I discussed there. As many of you know, the Commission has an aggressive market surveillance program in which both we and the exchanges closely monitor the aggregated positions of large traders. As I stated at the hearing, we have no indication at this time of any manipulation or attempted manipulation of the regulated markets in energy-based futures or options but we will continue to monitor them closely and pursue all appropriate inquiries. We also closely monitor the financial integrity of the clearing system and Commission staff worked closely with clearinghouses and clearing FCMs to ensure that, at no time last fall, were the funds of other customers or the smooth functioning of the clearing process threatened by the difficulties of any individual trader, large or small.
The markets for energy-based futures showed as much resilience as the clearing system last fall. These markets were not roiled by price spikes nor did liquidity suffer. Obviously, as an oversight regulator, we will continue to look at how and why markets within our jurisdiction respond the way they do, whether well or poorly, to a situation such as the failure of a significant participant and we will continue to evaluate the public good as we seek to appropriately fulfill our statutory responsibility. Separately, as a member of the President's Working Group on Financial Markets, I am participating with Secretary O'Neill, Chairman Greenspan, and Chairman Pitt to review, for the President, possible improvements in accounting, auditing, and disclosure practices with respect to publicly-held companies.
Recent events have led some to call for further responses from the Congress and the regulators, even for re-regulation of markets that were provided legal certainty by the Commodity Futures Modernization Act. While I agree that it is prudent for a regulator to constantly review its policies and procedures to ensure that an appropriate level of oversight is exercised, I also believe that a situation of this magnitude deserves careful consideration before action is taken. One reason for my caution is that I believe we should make sure that we identify the true problem before we pursue remedies to that problem. With all that is going on in the world, I think it is important for the government to respond appropriately, but that does not mean we should act just for the sake of acting.
I was a supporter of the CFMA because I sincerely believed that a one-size-fits-all approach to regulation was outdated, especially with all of the business and technological innovations that we have seen in recent history. Rules tailored to the participant, the product, and the trading facility seemed to me to be a more appropriate regulatory concept relative to the prescriptive regulations of the past. Many aspects of the CFMA were intensely debated during the legislative process and key issues received a full airing. Important changes to the law were agreed upon as a result of that debate. Globally, competitive issues were of utmost importance during this debate to assure that the U.S. remained a focal point for financial markets. I believe that a departure from the path of progress represented by this important piece of legislation should be approached with caution.
Finally, in spite of the challenges presented by events last year, the Commission has not slowed its efforts in other areas. We have just announced a major restructuring of the Commission that is designed to make us a more responsive, more effective agency. We are actively interviewing candidates to lead the divisions in this new structure.
I recognize that there are many issues, which the Commission needs to address. We are looking forward to completion of the intermediary study called for by the CFMA. As I have said before, modernization of rules for intermediaries is a priority for me. Your inputs and participation will be a key part of this effort.
Thank you again.