Remarks of James E. Newsome
Commodity Futures Trading Commission
29th Annual International Futures Industry Conference
Boca Raton, Florida
March 18, 2004
Initially, I want to mention how our friends in Madrid have been in everyone’s thoughts over the past several days and we wish them all comfort in the aftermath of last week’s bombings.
On behalf of my colleagues at the Commodity Futures Trading Commission (CFTC), I want to thank you for inviting us again this year. As always, we enjoy participating in this conference and hearing your thoughts and ideas expressed on the many timely panels and in informal discussions throughout the week. I congratulate John Damgard, his staff and other organizers of this year’s event for putting together what looks to be an informative agenda.
I want to formally recognize Commissioners Walt Lukken and Sharon Brown-Hruska and tell you what great assets they both are to this industry through their dedication to public service. I can assure everyone that both Walt and Sharon believe in what they are doing at the CFTC and share in a genuine desire to craft good policy for the futures industry.
I also want to recognize someone who is not with us today, but who served this industry faithfully as a CFTC Commissioner, Barbara Holum. As most of you know, Barbara recently retired after more than ten years at the CFTC. Barbara and her husband John are happy and plan to spend a lot of time sailing, which won’t surprise those of you who know Barbara well.
This marks the fourth year in a row I have had the privilege of standing before you in my current capacity. Reviewing my comments over those years as Chairman and the two-plus years as a Commissioner prior to that, helped me gain a sense of perspective about where we have been. In light of the many experiences we have had over that period, I decided to spend most of my time this morning looking toward issues that could be discussed during the Commission’s upcoming reauthorization by the Congress.
A Look Back
As some here might recall, my CFTC tenure began in 1998 in the middle of the over-the-counter concept release debate, then agricultural trade options, foreign terminals, the Commodity Futures Modernization Act, which led to single-stock futures, exempt markets, and applications for new exchanges and clearinghouses. Of course, there was 9/11 and the Patriot Act, energy scandals, and most recently corporate governance issues and foreign ownership of a U.S. market. Since most of you have been around longer than I and know the regulatory history quite well, I won’t elaborate on these issues.
A look at the U.S. numbers over that period shows that market volume and the number of exchanges have both nearly doubled, while global volume has grown even faster. The number of clearing organizations has also doubled. Alliances between exchanges and clearing houses have shifted, and even OTC business is now being cleared. Electronic trading has soared from less than 10% of the total volume in 1998, to almost 50% of the total last year, with expectations that the upward trend will continue.
New contract filings have increased more than 500% during this time period, and the regulatory delay in listing the products after filing has dropped from an average of almost 70 days in 1998, to one day for 99% of the new contracts last year due to the certification procedures introduced in 2000. Commission review periods are not the only thing trending downward. Trading fees are lower too.
Why and What Does It Mean?
For an industry that has been around for over 150 years, these are amazing numbers. I believe that many things contributed to this trend, including the fact that entities are more certain than before—legally—about the kind of regulatory treatment they will receive if they operate in the U.S. futures markets. Also the significantly shorter time the Commission takes to review applications, contracts, and rules has led to lower costs associated with getting a license to operate and making changes to an existing business. New and traditional exchanges alike have embraced technology, have created strategic alliances, and have utilized the new regulatory framework to create efficiencies and products desirable for customers.
This regulatory environment, coupled with market demand, has yielded more platforms, more choices and more competition. What it has not produced is the overriding success of the newcomers or the demise of the traditional industry leaders. Allowing entities to enter the market and compete in the market has never been and should never be a guarantee of success.
I believe that as the regulator, we are merely one of the facilitators of competition through our commitment to a sound, reasonable regulatory structure. People in this room and elsewhere will decide how and where to do their business.
Although it seems like yesterday when we were debating reauthorization, the time is fast approaching for those discussions to start again. CFTC authorization runs out next year, and most of you remember the lengthy, but necessary debate that preceded the passage of the 2000 Act. I am not suggesting that the same level of change is necessary or even advisable this time around, but I do think several things should be discussed as we move forward.
One legislative goal of the reform effort in 2000 was to take the agency out of the business decisions of market participants. Conceptually that sounds good to most of us, but depending on the issue and depending on which side you are on, it can be difficult. This has been a challenge for the agency, especially during debate on issues like market structure and approval of new market entrants. Congress may choose to refocus the Commission’s role on these issues given the passion used to express opinions to the Commission by many.
Congress may also want to consider how wide the scope of self-certification should be, or if exchanges should be able to certify rules and contracts at all. This issue was highlighted during the Commission’s detailed and public consideration of the Eurex U.S. application.
Congress should review the shared regulatory environment for single-stock futures and consider changes. Critics of the shared regime argue that it is too burdensome and that margin levels are too high and should be lowered to levels consistent with traditional futures contracts. I would suggest that dual regulation in a new competitive market is too cumbersome and unnecessary.
The Commission’s existing oversight role relies heavily on two aspects, self-regulation and Commission enforcement action: (1) self-regulation for daily market monitoring and compliance; and: (2) enforcement authority for punishing those who act illegally.
Self-regulation has recently been scrutinized in other segments of the financial sector. I announced a review of the self-regulatory system for the futures industry last May. Most recently, we announced our progress in this area, including interim initiatives we plan to pursue with the Joint Audit Committee and a review of corporate governance as a continuation of the review.
As I have said before, the fact that we are conducting this review is not based on specific allegations of abuse or wrongdoing, but rather is a prudent course of action given the level of reliance placed upon self-regulation in our industry. If we believe changes are warranted, we will say so. If we do not, the review will be an endorsement of the existing system. It is my hope that our work in this area will aid in any Congressional deliberation on self-regulation.
We have spent a significant amount of Commission resources on enforcement, especially in the off-exchange foreign currency and energy areas. Obviously, this is a vital part of our job and one that should be important to those operating legitimate businesses. When the energy problems began to surface over two years ago, there were many calls for increased regulation and allegations of a lack of enforcement authority.
I believed then and continue to firmly believe now that both views were incorrect. We have collected almost $200 million dollars in settlements on energy cases over the past year, which clearly indicates Commission authority. I am pleased to announce today that of the energy investigations, the Commission has opened, 97% have been completed and I look forward to a brighter future for this important segment of the marketplace.
As important as the enforcement component of our modernized oversight remains, I expect that Congress might review the use of our authority since passage of the 2000 Act to ensure we are using it as intended, and that it continues to effectively serve as a deterrent to wrongdoing. I remain convinced that the case has not been made for more regulation in the OTC energy area—especially when additional regulation could drive business to other jurisdictions, which leads me to the hedge fund area.
I am troubled by those who are quick to suggest that hedge funds should be more heavily regulated. Several federal authorities have jurisdiction over various segments of the hedge fund industry, including the CFTC. What I am suggesting is that any regulatory changes in this area should have the benefit of a full debate by both the Congress and the President’s Working Group, and just like in the energy area, should be based on facts, not politics. I am optimistic this will happen.
Of course, given the inherent complexity of futures laws, the degree of changes considered during reauthorization will most likely be driven by you—the industry. New members of Congress will be involved since several members, including some past leaders on these issues, are not, or will no longer be, in the Congress. So obviously, education will be a key factor in the ultimate success of next year’s reauthorization. The Commission stands ready to offer our thoughts and assistance throughout the process and we look forward to working with both you and the Congress on this effort. I believe that with the tremendous growth in the industry, we need to be extremely careful in reviewing our regulatory structure so that we do not suggest changes that could in any way stifle this trend. I thank you for the opportunity to be here today and I look forward to visiting with many of you individually over the next couple of days.