Remarks of Chairman James E. Newsome
to the National Corn Growers Association
July 15, 2003
Thank you for that kind introduction. It is an honor and a pleasure to be with you this morning. As Chairman of a Federal Financial Regulatory agency with a production agricultural background, it is a treat for me to have the opportunity to address the National Corn Growers Association.
I want to take a few moments this morning to discuss the origin and role of the Commodity Futures Trading Commission – To share some insights regarding the current activities and issues confronting the futures industry and some facts surrounding the Chicago Board of Trade corn futures contract and then finally, what I see as some of the issues on the near horizon for agricultural futures contracts.
The Commodity Exchange Act is over 75 years old and initially was overseen by the Commodity Exchange Authority of the USDA. However, with the growth of non-agricultural futures contracts the Congress decided in 1975 to create an independent agency with exclusive jurisdiction over the trading of futures and options on those futures and thus the CFTC. Today as the agriculture industry has for over 100 years – producers, processors and users of products ranging from metals to energy to financial items such as equity indexes, interest rates and foreign currencies can use futures to discover prices and manage risks. The purpose and goal of the Commission is to maintain market integrity by preventing manipulation and to protect market users from fraud and abusive trade practice.
The Commission consists of 5 Commissioners – all appointed by the President and confirmed by the Senate. There are typically 2 Republicans / 2 Democrats and the Chairman represents the party of the President. However, as an independent agency should, the Commission operates relatively free of partisanship. The Commission has 2 regulatory divisions – The Division of Market Oversight which oversees new exchange contracts and amendments to existing contracts and designations of new exchanges. Additionally the DMO oversees the daily surveillance of markets. The Division of Clearing and Intermediary Oversight oversees the trading firms and clearing houses to maintain financial integrity so that the failure of a single entity does not become systemic or spread to other market participants. As primarily an Enforcement Agency – our largest division – employing almost ½ of our staff is our Enforcement Division. Typically we have over 100 investigations ongoing at any one time – however because of increased energy activity we have been well above that level. Our staff is considered the U.S. governments best at manipulation cases (Hunt Brother’s silver/ Sumitomo copper). It is also an honor for me to represent agricultural and futures industry interest as a member of Presidents Financial Working Group and Corporate Fraud Task Force.
The futures industry is experiencing a period of tremendous growth across most product areas. Volume has increased almost 50 % over the last 2 years and topped 1 billion contracts traded for the first time in history last year. 85% of this volume is traded on the Chicago Mercantile Exchange and the Chicago Board of Trade. Roughly 80% of this volume is traded in the financial arena with approximately 10% in energy and metals and 10% in agricultural products. The S & P 500 Index and the Euro Dollar are the largest contracts traded while the CBOT corn contract is the largest agricultural contract with a volume of 18 million contracts traded in physical year 2002. Corn futures began trading on CBOT in 1859 and is one of the oldest futures contracts, along with CBOT oats and wheat. As you well know, the 2002/03 crop year production was the lowest in 5 years (9 billion bushels). Also, the 2003/04 crop year production is expected to be a record (over 10 billion bushels). Major contract changes were approved by the CFTC in 1998 and implemented in 2000. The changes deleted Toledo point delivery, added Illinois River delivery points and replaced warehouse receipts with shipping certificates as the delivery instrument. The market appears to be performing well since the changes were implemented. There have been no problem liquidations in the corn futures market in recent years. During 2000-01 period, cash –futures price relationships were wider than normal at expiration than in previous years due to large surpluses of corn. From 2002 to present, these cash-futures price relationships have returned to normal due to declining surpluses and an increased daily premium fee payable by shipping certificate holders approved by the CFTC and implemented by the CBOT in November 2001.
Finally, there are numerous issues faces the futures industry and the Commission. Global competition, electronic trading and rule modernizations are issues that face all market participants.
Issues related to agricultural contracts include:
As always, as we address issues affecting your business – we appreciate and solicit your comment. Your comments are heard through your membership on our Agriculture Advisory Committee, the public comment process and through discussions with the NCGA staff.
Thank you for the opportunity to address you this morning.