Introduction

I am glad to be with you again for your annual meeting. A lot can happen in just a year. When I spoke to you last year, I spent most of my time giving you a feel for our agency, the Commodity Futures Trading Commission (“CFTC” or “Commission”), and how we go about doing our job. I also spoke about some of our then current efforts in the energy enforcement area. This year, I would like to concentrate on some of the lessons we’ve learned from the recent challenges in this industry, how we have thus far successfully met those challenges, and what this means going forward.

General Futures Industry Perspective

First, before we get started, I would like to give you some statistics I recently compiled while preparing for a speech I gave a couple of weeks ago at the Futures Industry Association’s annual conference. A look at the U.S. numbers over the last few years 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 over-the-counter (“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.

You may wonder why I’m giving you these statistics and if so, I can understand why. However, I think it is important to look behind those numbers. For an industry that has been around for over 150 years, the growth over the past few years has been amazing.

I believe that many things have 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 make 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 modernized 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 new participants to enter the marketplace and compete has never been and should never be a guarantee of success.

I believe that as the regulator, the Commission is 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.

Impact on Energy Business

If you look at the energy piece of the derivatives business, you see similar patterns of growth, innovation, and competition. Over the past several years, the number of on-exchange energy-related products offered by the New York Mercantile Exchange (“NYMEX”), and the volume of trading in those products have both significantly increased. The clearing of OTC energy transactions by the NYMEX Clearing House has also rapidly grown since it first introduced this service in 2002. This arrangement brings an important tool for mitigating counter-party credit risk and a new element of stability to this crucial sector of the economy.

The new category of exempt commercial markets, on which energy products may be traded electronically by eligible commercial entities, is also up and running. The Commission has been notified by nine entities so far of their intent to operate exempt commercial markets, including the InterContinental Exchange, for which the London Clearing House offers clearing services, and the Natural Gas Exchange.

I believe that our less prescriptive, flexible, oversight program has played a major role in each one of these initiatives. I even question whether any of them would be in place without the existing regulatory structure.

Enforcement Initiatives

The elimination of prescriptive rules does not mean that the CFTC has reduced its regulatory role. Rather, it means we’ve refocused our efforts. I firmly believe that most market participants are well intentioned and want to operate fairly in the marketplace, which is why I supported the more flexible approach. However, that policy shift created an even greater need for strong, aggressive enforcement action when people step out of line. Otherwise, the system fails.

When I spoke to you last year, the Commission was in the middle of its energy cases and had collected about $25 million in settlements from a couple of companies, and had filed charges against another. Since then, the amount collected in settlements has grown to almost $200 million. I recently announced that of the energy investigations the Commission has opened, 97% have been completed. I believe this is good news and I look forward to a brighter future for this important segment of the marketplace.

While I am not proud of the fact that we had to take these actions, I am proud of the way we have done our job, especially when there was much debate over whether the Commission even had authority in this area. Almost $200 million later, those who said we did not no longer have an argument, which confirms how important it is to gather the facts before reacting, either through administrative rulemakings or legislative action. I believed then and remain convinced now that the case has not been made for more regulation in the OTC energy markets.

Going Forward

Going forward, we stand ready to work with this industry, Congress, and other interested stakeholders as we continue to seek the right regulatory role in this marketplace. Something I spent a good bit of time talking about a couple of weeks ago is the upcoming reauthorization process for the CFTC, which is sure to begin soon. For those of you who are unfamiliar with this process, our agency is authorized by the U.S. Congress every five years. This means that Congress has an opportunity to grade the CFTC periodically and consider changes to our regulatory model. The modernized structure I have spoken about today came from the last reauthorization in the year 2000.

Given the tremendous growth this industry has experienced since enactment of that law, along with the successes achieved by the CFTC for that time period, I believe that any proposed changes to the law should be carefully considered. No changes should be made without a full and fair debate. This is your opportunity to weigh in with Congress, if you like, on what we’ve been doing, or to let Congress know if you think some things need to be changed.

While the past couple of years have been challenging in this industry, I believe that we have at least learned how important it is for the facts to be in before we change the law, and I believe that perspective will add monumental value to the upcoming reauthorization. Thank you again for the invitation to speak. I have enjoyed being with you today.