Luncheon Address by Chairman James E. Newsome
at the Winter Meeting of the American Bar Association’s
Committee on Futures and Derivatives Instruments
Coral Gables, Florida

February 8, 2002

Thank you for inviting me here today. It is a pleasure to address this distinguished group. I hope that you are benefiting from the participation of our CFTC staff members in various panel discussions, such as yesterday’s discussion on money laundering legislation, this morning’s review of hedge funds issues, and tomorrow’s discussion of new trading and clearing facilities now permitted by the Commodity Futures Modernization Act. I would like to describe to you today where the CFTC stands on several fronts, including single stock futures, the industry’s response to September 11th, the Patriot Act, and the Enron situation. I would also like to summarize my views on our proper role as a regulator and share with you some of my plans for moving forward.

With respect to single stock futures and other security futures products, solid progress was made last year and we continue to move forward to permit trading. As many of you know, 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 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 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.

But perhaps most importantly, Chairman Pitt and I have agreed generally on how to best address those issues that remain before us. Accordingly, 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.

With respect to disaster preparedness in the futures industry, I want to first commend all those in the industry who braved 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 certain 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.

Because these terrible events presented an unparalleled opportunity to see contingency plans put into action, the Commission has completed and will soon release its initial report on responses to the crisis. Invaluable lessons have been learned and key issues identified in the areas 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 have learned thus far about our own preparedness as a financial regulator and about the preparedness of the exchanges, clearinghouses, and firms we oversee, that we might trigger further discussion among market participants. I believe 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.

With respect to the Patriot Act, our staff discussed in detail its money laundering provisions yesterday afternoon but I would like to take this opportunity to assure you that, while the Treasury Department has the lead role in developing regulations in this area, the CFTC has and will continue to be consulted and to participate actively in the rulemaking process. Our staff is working closely with Treasury, other regulators, and market participants to ensure that the goal of the legislation is achieved and that all concerns are considered so that regulations do not place CFTC registrants at a disadvantage relative to other financial service providers.

With respect to the Enron situation, I recently testified before the Senate Energy Committee. I described the Commission’s aggressive market surveillance program, in which both we and the exchanges closely monitor the aggregated positions of large traders. I told the Committee that, although we have no indication at this time of any attempted manipulation of the regulated markets in energy-based futures, we will continue to monitor them closely and to pursue all appropriate inquiries. I also described how we closely monitor the financial integrity of the clearing system and how Commission staff worked closely with clearinghouses and clearing FCMs to ensure that, at no time last fall, were the funds of other customers, the financial strength of the FCMs, or the smooth functioning of the clearing process threatened by the difficulties of any individual trader, large or small. And I reported to the Committee that the increasingly deep markets for energy-based contracts reacted well, with little or no adverse impact on price volatility or liquidity.

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 currently 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.

The Enron situation has led some to call for further responses from Congress and 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. 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.

Having said that, I supported passage of the CFMA because I sincerely believed that a one-size-fits-all approach to regulation was outdated, particularly in light of technological advances and innovations in the financial services industry. Rules tailored to the participant, the product, and the trading facility seemed to me to be a more appropriate approach than the prescriptive regulations of the past. As most of you know, 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 those debates. I believe that any departure from the path of progress represented by this important piece of legislation should be approached with extreme caution.

That brings me to my own view of our proper role as an oversight regulator. Many of you are familiar with my regulatory philosophy but for those of you who may not be, I should first emphasize that I believe strongly in, and in fact have taken an oath to fulfill, the responsibilities and mandates of the Commission to ensure the economic, financial, and operational integrity of the marketplace and to protect market participants against fraud and abusive practices. However, there are different ways to fulfill that duty. I believe that the CFMA’s principles-based approach together with vigorous enforcement efforts against wrongdoers is a superior combination that can fulfill our mission far more effectively than prescriptive regulations that attempt to prevent all possibility of problems.

I believe that not only will principles-based rules, combined with vigorous enforcement efforts, better accomplish our goals, but they will also provide critically important flexibility that will foster, rather than stifle, innovation in the marketplace, innovation that can provide us with more useful financial tools, that can convert new technologies into more efficient and transparent trading platforms, and that can provide the benefits of risk management capabilities to more and more users. In passing the CFMA, Congress wisely retained prohibitions against fraud and manipulation, but provided the flexibility for market innovations that provide real value to develop as quickly as technology permits and customer needs require.

To implement this new approach, I recently announced a restructuring of the CFTC that, I believe, will make the agency more responsive, more effective, and more efficient. I hope that all of you, not just those of you who work directly with our staff, will notice these benefits in the months to come. The main thrust of the new structure will be that the functions previously performed by the Divisions of Trading and Markets and Economic Analysis will now be performed by two new divisions and one new office which will be called, respectively, the Division of Market Oversight, the Division of Clearing and Intermediary Oversight, and the Office of the Chief Economist.

The new Division of Market Oversight will have regulatory responsibility for recognition and oversight of trade execution facilities, including newly Registered Futures Exchanges and Derivatives Transaction Execution Facilities. Continuing oversight of these facilities will include the Commission’s market surveillances functions, trade practice reviews and investigations, rule enforcement reviews, review of product- or market-related rule amendments, and market studies. Other functions will include rulemakings, interpretations, and no-actions on market operations and reviews of the NFA activities.

Meanwhile, the new Division of Clearing and Intermediary Oversight will oversee the clearing systems and market intermediaries. Its functions will include reviewing Registered Clearing Organization applications, financial integrity issues, customer funds protections, stock-index margins, the registration and fitness of intermediaries, sales practice, NFA oversight of intermediaries and clearing operations, and foreign market access by intermediaries.

The Office of the Chief Economist will be an independent office with responsibility for providing expert economic advice directly to the Commission. Its functions will include policy analysis, economic research, expert testimony, education and training.

In addition, the Offices of Public Affairs and of Legislative and Intergovernmental Affairs will be combined to form the new Office of External Affairs. This team, as part of my office, will perform, among other things, the coordination of all agency dealings with the media, the Congress, the White House, other government entities, and interested industry organizations. There are currently no plans to restructure the Office of the General Counsel. We are interviewing candidates to lead the new Divisions and hope to make announcements very soon.

In conclusion, let me say that I do recognize that there are many other issues I have not mentioned today but which the Commission needs to address. For example, we are looking forward to completing the intermediary study called for by the CFMA and considering modernization proposals for that sector of the industry. As I have said before, modernization of the intermediary rules is a high priority for me. In this, as in every other effort we undertake, your invaluable insights and participation will be key to its success.

Thank you again.