It is an honor to address you this morning, both those attending the derivatives expo and those of you with the hedge fund conference. There are several issues I’d like to discuss this morning that I believe will be of interest to you. On the managed futures side, we are in the midst of some significant rule modernizations that will affect commodity pool operators and commodity trading advisors, as well as other pooled investment vehicles and institutional investors with an interest in the futures markets. With regards to derivatives markets, there are a number of things going on at the CFTC that I want to mention. First, however, I’d like to take just a moment to describe for you my regulatory philosophy.

Upon my arrival at the Commission five years ago, I quickly saw that technology promised to facilitate major changes in the marketplace. I recognized that these changes held the potential to bring greater participation, deeper liquidity, and increased efficiency to the derivatives markets. It was obvious that technological advances could help to enhance customer service, lower barriers to cross-border business, and generally improve the availability and usefulness of risk management tools. Yet it was also readily apparent that the regulatory structure did not always facilitate such progress. In fact, the regulatory structure in some cases was stifling innovation and market efficiency.

For this reason, I aggressively supported the effort to enact the Commodity Futures Modernization Act, signed into law in December 2000. This much-needed legislation embodied three key objectives: modernizing rules affecting trading platforms and market intermediaries, providing legal certainty for over-the-counter derivatives, and permitting futures based on single stocks or narrow stock indices. As we have pursued implementation of those objectives and made changes in how we fulfill our mission at the CFTC, I have followed a straightforward oversight philosophy: for the legitimate business activities of those who through innovation and competition bring to the marketplace greater liquidity, more useful risk management tools, more efficient pricing, and enhanced customer service, I want to provide the most flexible and responsive oversight structure possible.

But there is a second aspect of my oversight philosophy. And that is that, for those who would attempt fraud or manipulation in these important markets, I believe in promptly and aggressively exercising our enforcement authority under the Commodity Exchange Act. My fundamental belief is that the proper deterrent to wrongdoing is not to issue more prescriptive or burdensome regulations that adversely affect legitimate activities but, rather, to bring tough enforcement actions against those who would try to operate outside the established rules. Those rules should establish a necessary legal framework without being overly prescriptive or unnecessarily burdensome. But they must be enforced vigorously.

The CFTC has been quite active on the enforcement front. I am confident in the ability of our Enforcement Division to effectively police against wrongdoing in the marketplace and I know that legitimate market participants want and need a marketplace free from fraud and manipulation. For example, when Congress provided helpful legal certainty in the area of retail foreign exchange fraud, our Enforcement Division rose to the challenge and in barely two years have conducted numerous investigations and initiated almost three dozen formal actions, making a huge dent against this type of abuse.

The Enforcement Division has also been active in the energy trading area. At the end of last year, the Commission imposed a $5 million civil monetary penalty against two firms in connection with false reporting and attempted manipulation. Already this year, a large energy trading firm has entered into a consent order with the CFTC penalizing it $20 million for the reporting of false information to energy price reporting services. And in March, we filed a complaint in federal court in Houston against another major energy trading company, alleging manipulation of natural gas prices and the online operation an illegal futures exchange. The Division is actively engaged in other energy sector investigations, which may result in further charges being filed or other actions being taken, as will be announced by the Commission later today.

Let me take a moment here to make two very important points with regard to these cases. First, and although these cases are quite complex and require substantial resources to develop, we are striving to conduct our investigations and to bring the necessary cases just as quickly as possible so that, in addition to identifying the wrongdoers in the energy trading sector, we can help to exonerate those who were not involved and allow the energy and energy derivatives markets to continue with their work toward restoring the confidence of market participants and the public.

Second, I do not want there to be any confusion over CFTC intentions when it brings charges against an entity with regard to illegal futures contracts. We approach the issues of whether the Commodity Exchange Act applies to, and whether we have jurisdiction over, any particular transaction solely on the basis of the economic substance of the transaction. Thus, where we have brought charges alleging operation of an unregistered futures exchange that involved the trading of contracts that may have been labeled or referred to as, quote, “swaps,” it is because the economic substance of those transactions was that of a futures contract.

Let me assure you that we are not seeking to expand the scope of our jurisdiction over transactions, such as true swaps and forwards, that the Congress has determined -- appropriately so, in my opinion -- to exclude under the Commodity Exchange Act. In the case of over-the-counter swaps, for example, such an exclusion was expressly provided by the Commodity Futures Modernization Act following recommendations from the President’s Working Group on Financial Markets, and this brought much-needed legal certainty for counterparties in this important sector of the risk management marketplace.

Indeed, I believe that such legal certainty is critically important for the efficient and reliable operation of markets generally, but perhaps particularly important for many derivatives markets. If the enforceability of contracts is in doubt among counterparties or if laws, regulations, or even an agency’s enforcement policies are unclear, then rational market participants must factor that uncertainty into their decisions and this, in turn, can result in unnecessary added costs, missed opportunities, inefficient results, and misallocated resources. I believe that is why Congress took care to provide additional legal certainty in various areas through the Commodity Futures Modernization Act and I am committed to adhering to that path as we move forward. Oversight agencies, such as the CFTC, can meaningfully reduce doubt and uncertainty in a variety of ways, and sometimes even beyond their own regulations and policies by suggesting or supporting statutory changes to the Congress.

For example, certain amendments to the bankruptcy code have been proposed that could help to alleviate counterparty credit risk concerns in certain derivatives markets. These concerns appear to be a serious constraint on trading activity, and thus on liquidity and risk management opportunities, in various markets, but particularly energy derivatives. The proposed amendments would help to ensure the enforceability of acceleration and termination provisions, netting clauses, and other contractual safeguards in the event of one counterparty’s insolvency. In previous years, my fellow members of the President’s Working Group on Financial Markets and I have written to the Congress to voice our strong support for legislative proposals that would effect such amendments. Most recently, following a joint conference on potential solutions to credit risk problems in the energy markets, Chairman Pat Wood of the Federal Energy Regulatory Commission and I wrote to the Congress to express our support for such changes and to highlight the benefits that might quickly accrue from providing potential market participants with a greater degree of certainty that the key protections which they carefully negotiate into their transaction agreements will be honored and enforceable should a problem ever arise. It is my understanding that recently on Capital Hill a stand-alone measure to address these concerns has been introduced, an initiative I would support.

Of course, it is possible for the goal of legal certainty for markets and market participants to be harmed as well as helped by governmental efforts, particularly if proposed solutions to perceived problems in the marketplace are pursued without adequate discussion, consideration, and debate. For example, I believe that the Commodity Futures Modernization Act reflected careful consideration and that its passage was preceded by informative discussions with and among the relevant financial regulators, in particular the members of the President’s Working Group on Financial Markets. I would therefore hope that any legislative amendments to the CFMA, particularly those that might impact legal certainty, would be pursued only in close consultation with the PWG. As Chairman Greenspan recently noted, the derivatives markets can be credited with strengthening the financial system and making it more resilient to economic shocks, which ultimately benefits the economy as a whole. The importance of these markets should not be overlooked nor should the fact that effective control mechanisms within the markets themselves have made defaults and other problems very rare.

I’d like to mention a few of the CFTC’s current efforts that may be of interest to many of you here today. The public comment period recently closed on a variety of proposed rule changes that would modernize our oversight in the managed futures area. My fellow commissioners and I are always grateful for the time and attention that market participants devote to providing us with invaluable feedback and suggestions when we solicit public comment on pending matters. This time was no different, as we received a large number of thoughtful and insightful comments.

Some of the rule changes would provide operational flexibility for commodity pool operators, such as proposals to reduce duplicative reporting requirements among master/feeder funds, to permit electronic distribution of account statements, and to provide alternative means of reporting past performance. For pool operators and commodity trading advisors that limit participation to sophisticated persons, the CFTC has for some time provided a more flexible set of requirements but we recently proposed a new exemption from registration for those that limit participation to highly sophisticated persons or that restrict futures activity to a de minimus level. I am hopeful that, in addition to modernizing regulations for entities that currently use the futures markets, the final rules in this area may increase interest in the futures market by entities that have not used them before, which can ultimately benefit all market participants with greater market liquidity.

In a similar vein, we proposed to modernize the exemption for certain otherwise-regulated entities -- such as banks, mutual funds, and insurance companies -- that wish to use the futures markets. Currently, these entities are only permitted to engage in a very limited amount of activity before they are required to register, which could subject them to unnecessary duplicative oversight. Accordingly, we proposed to completely lift that restriction on trading activity by appropriately otherwise-regulated institutions. The numerous comments we received were overwhelmingly in favor of both proposals and also contained some helpful technical suggestions that our staff are reviewing. It is my hope that we will be able to finalize our rule modernizations in this area very soon.

We are also in the midst of various other modernization efforts, including moving to risk-based audits of market intermediaries, developing an appropriate oversight framework for futures clearinghouses, and providing clarity and greater operational flexibility for futures commission merchants in areas such as bunched orders. Comments on the proposals in these areas have been enormously helpful and we are actively evaluating how to move forward on these issues. My desire to pursue continuous improvement in our oversight is based on my firm belief that prescriptive regulations and inflexible prohibitions which ignore the unique risk management needs of different types of market users can impose substantial costs on market participants without achieving any increase in protections or reduction in risks. Instead, oversight that provides the flexibility needed for legitimate innovations in risk management, combined with workable safeguards, can better protect against systemic and individualized problems.

Our attention at the CFTC these days is not focused strictly on our own rulemakings. We are watching with great interest the various developments in the business structure of the futures markets, particularly new relationships and arrangements that have been announced or proposed. It is my view that such developments directly reflect a healthy competitive environment. The continuing and strong growth in derivatives trading activity across the board certainly seems to confirm that. That growth reflects increasingly widespread recognition of the benefits of derivatives-based risk management by businesses and investors that today represent virtually every sector of the economy.

I believe that true economic competition is a dynamic process that results in an ever-changing landscape as new entrants bring new products and ways of doing business to the market and existing competitors promptly respond with vigorous innovations of their own. I must add, however, that market access does not necessarily mean market success. It is our goal as a regulator to provide a level regulatory playing field so that new competitors and existing competitors alike have an opportunity to compete. Ultimately, it is the market users who benefit most by this process. Some have expressed concern about recent reports of new competitors entering the marketplace, both domestically and from abroad. Let me say in this regard that it is my intention, as in the past, to deal with every existing and potential market participant -- whether exchange, clearinghouse, or FCM and whether domestic or foreign -- on a consistent basis in every respect. Let me also state my intention to approach each new circumstance or proposal with an open mind and a willingness to consider ways in which the CFTC can remove any artificial barriers to competition which may exist -- particularly outdated regulations that might constrain such things as product innovation, capital efficiency, or cross-border business. But I should also say that I may exercise a bit of caution about attempting to impose a premature regulatory solution that might later prove to be inefficient or ineffective.

Ten years from now, I believe that we will all look back on this period in the development of the derivatives markets, on- and off-exchange, as an incredibly exciting period in which monumental changes took place to make derivatives-based risk management more efficient, more accessible, and a more vital part of U.S. business than ever before. And, as I’ve said before, that outcome is most likely to come about through the efforts of market participants themselves. The current debate over the optimal structure of the marketplace and its key institutions, particularly with respect to clearing and margin issues which will be discussed quite a bit over the next two day, is a good example of a situation that, I believe, can best be resolved primarily through business decisions rather than regulatory mandates. Certainly, key business decisions are currently being made in this marketplace. That’s why I’m pleased to see the dialogue on these issues continue in forums such as these conferences and I look forward to the discussions.

Thank you for inviting me to address you today.