Remarks of Chairman James E. Newsome
United States Commodity Futures Trading Commission
As Submitted to the 9th Asia-Pacific Derivatives Exhibition
Singapore, September 17, 2002
Thank you so much for the opportunity to be with you today. I would like to especially recognize my good friend Tom Kloet, whom I met shortly after arriving at the Commission just over five years ago. I have a great deal of respect for Tom, as he is someone that I know and trust. Today, I would like to share with you a few observations on the remarkable events of the past year and to update you on our current efforts at the CFTC.
As did each of you, I’m sure, I found myself thinking quite a bit last week about the friends and colleagues we lost in New York and Washington last year as a result of the horrific events of September 11, 2001. It also occurred to me again just how impressive the derivatives industry’s response to that unprecedented situation really was. As I’ve noted before, the remarkable resilience, ingenuity, and courage of leadership and staff at the New York futures exchanges enabled those markets to resume operations even before the stock markets reopened. That was a critically important accomplishment because, like many other derivatives markets, key New York futures markets are relied upon by businesses throughout the economy and across the globe for price discovery and risk management. I believe that having the key benchmark crude oil contracts already up and running, for example, contributed to the relative stability of the stock markets when they reopened.
This is really just one example of how the risk management tools and price discovery functions uniquely provided by derivatives markets can contribute to more stable financial markets. Innovation in risk management tools and strategies has continued at a rapid pace since passage of the Commodity Futures Modernization Act less than two years ago. That much-needed law permitted the development of a whole new class of derivatives, single stock futures that may benefit the risk management efforts of mutual fund managers, pension funds, and other stock investors. As Chairman Greenspan and other key commentators have noted, the increasingly widespread use of derivatives has made U.S. financial markets more resilient, mitigated the effect of exogenous shocks, and perhaps even enhanced economic growth and productivity.
I am very pleased to see these same benefits accruing for markets around the world, as advances in technology, the easing of exclusionary regulations and other artificial barriers are allowing access to risk management strategies by more and more markets. Today, almost fifty markets outside the U.S. report trading volume to the Futures Industry Association. Close to half of the traders in both agricultural products and financial futures are foreign based. During the first quarter of this year, the largest U.S. Futures Commission Merchants held almost $8 billion in secured funds in respect of foreign trades, an increasingly significant amount when compared to the approximately $50 billion held in respect of U.S. contracts. And that does not include OTC transactions, in which the gross market value of global activity reached almost $4 trillion by the end of last year, representing an annual growth rate of almost 25% from the year before.
As derivatives markets continue to grow in global importance, two tasks become ever more important for financial regulators in every jurisdiction: to provide flexible oversight that encourages innovation and efficiency among legitimate market participants and, at the same time, to vigorously prosecute those who threaten market integrity with attempts at fraud or manipulation.
Because I believe so strongly in the benefits provided by the derivatives markets, I was particularly alarmed by some of the allegations that emerged in the wake of Enron’s failure. Let me first say that I support each of President Bush’s initiatives on improving corporate disclosure and accountability, beginning with the important recommendations he made in March on enhancing disclosures and strengthening auditor independence to better protect investors, creditors, and counterparties. I was proud to have been selected to serve on the President’s Corporate Fraud Task Force. Let me also say that I commend Chairman Pitt for all that the SEC has done this year to address the problem of accounting fraud so that investors are not again harmed as they were by the long-hidden problems recently uncovered at Enron, WorldCom, and other companies.
To the extent that any of Enron’s derivatives activities, as opposed to its accounting practices, were alleged to have been improper, let me assure you that the Commission, in close cooperation with the Department of Justice and the Federal Energy Regulatory Commission, is continuing to investigate every such allegation. The CFTC has a long and proud record of effectively prosecuting various attempts at fraud and market manipulation. We have at our disposal both considerable statutory authority and extensive staff experience to fulfill our mission to protect market integrity and market participants.
These capabilities have been further enhanced by the Commission’s long tradition of working earnestly with regulators in other jurisdictions to develop cooperative oversight arrangements. These cooperative efforts require regulators to consider such things as the degree of harmonization among relevant laws, the amenability of different activities to meaningful enforcement, the dispute resolution capabilities of different jurisdictions, the accessibility of records, and the appropriate levels of information sharing among regulators. Such cooperation can allow regulators to successfully provide appropriate oversight to protect market integrity while also encouraging growth, innovation, and efficiency in cross-border ventures.
Cooperation is a very high priority for me. The Commission’s concern for the business necessities of market participants that hope to implement effective cross-border trading strategies or are trying to assist their clients with global portfolio needs is as strong today as ever. The United States Congress included in the Commodity Futures Modernization Act a provision making clear its intent that the Commission is to continue its tradition of working with foreign authorities and international organizations in order to encourage cross-border transactions, remove unnecessary legal obstacles, develop internationally accepted standards of best practice, enhance supervisory cooperation, and encourage continued improvement in information-sharing arrangements. As an example of our efforts in this regard, the Commission in January, having determined to rely upon the appropriateness of the relevant foreign regulatory regime, issued its first order permitting a foreign clearinghouse to clear and settle trades by U.S. persons on a foreign platform. This follows the spirit of an existing CFTC program, under which foreign persons may solicit U.S. persons for foreign futures and options without having to register with the Commission, so long as they are subject to a comparable regulatory regime. As with every aspect of the CFMA, I expect to continue to closely follow the intent of Congress.
Indeed, the Commission has strived mightily over the past twenty months to follow Congress’ intent that the CFMA be implemented promptly so that market participants would enjoy rapid access to innovative new products like single-stock futures. I could not be more pleased with our efforts, which most recently have culminated with final joint CFTC and SEC rules for domestic trading of security futures becoming effective just last Friday. I am excited to see how and by whom these new risk management tools will be utilized and look forward to working with the SEC and others on greater foreign access to these products.
I am also excited about another effort currently underway at the Commission to look into providing to clearinghouses and intermediary firms the type of beneficial rule modernizations that the Commission was able to provide to exchanges last year. We kicked off this effort over the summer by delivering a comprehensive report to Congress on intermediaries, conducting an open meeting of the Commission on this topic, and by hosting an industry roundtable. However, we have plenty of work ahead of us in this important endeavor, including more roundtables this fall to discuss such things as fungibility and common clearing. As always, your thoughts and input during this process will be invaluable and greatly appreciated.
These are some of the Commission’s current interests. I would like to express my sincere appreciation for the invitation to address you today and want to extend an offer to all of you to come visit us in the United States. Thank you for your time and attention.