Remarks of Commissioner Thomas J. Erickson before the FIA Law and Compliance Section, FIA Monthly Meeting in New York, New York
July 28, 1999
Thank you for that kind introduction. I was delighted when Barbara Wierzynski invited me to speak before the FIA's Law and Compliance section. It is important for representatives of the CFTC, whether they are Commissioners or staff, to work closely with those practitioners who counsel both individuals and institutions on the requirements of the Commodity Exchange Act and Commission regulations. As a Commissioner, I am pleased--even relieved--to know that dialogue takes place. The Commission and the markets we regulate benefit from that communication.
I see a number of familiar faces but, for those of you who I have not yet had the pleasure of meeting, let me introduce myself. I am a native of Sioux Falls, South Dakota; I received my undergraduate degree in Government and International Affairs from Augustana College and my Juris Doctor from the University of South Dakota School of Law. After graduating from law school, I worked for Senator Tom Daschle for three years. Thereafter, I joined the National Grain Trade Council, a national trade association that represents futures exchanges and futures market participants. As assistant to the president and legal counsel, I quickly learned the critical importance of futures, options and other derivatives in the U.S. and global economies. Over the last two years, I served as the director of the CFTC's Office of Legislative and Intergovernmental Affairs, where I was involved in a wide array of legislative and regulatory issues. I was confirmed by the U.S. Senate and sworn in as Commissioner late last month.
As many former Commissioners have said, the CFTC is a small agency with a very important mission. The Commission plays an important role in federal oversight of the financial markets and, as such, I do not take the public's trust lightly. The Commission's statutory mission is to protect market users and the public from fraud, manipulation and abusive trade practices and to foster open, competitive and financially sound futures and option markets. I have pledged to work closely with the other CFTC Commissioners, with members of our industry and with other interested members of the public in fashioning regulatory responses that are timely, responsive to the market and mindful of the public interest.
Over the past decade, derivatives markets have been invigorated by innovation. These changes have pushed new competitive issues and public policy concerns to the forefront of the regulatory landscape. Much of my professional career has been spent at the intersection of these market changes and policy considerations. In addition to gaining an understanding of issues related to the CFTC’s regulatory oversight, I also analyzed tax considerations, accounting standards, and bankruptcy concerns for derivatives transactions and firms that participate in those markets. Perhaps the issue that was most influential in shaping my perspective on derivatives markets was the tax issue commonly known as Arkansas Best. During my tenure at the National Grain Trade Council, I had the privilege of coordinating the efforts of a broad-based coalition that included approximately 100 organizations, corporations and firms representing agricultural, energy, transportation, manufacturing and financial interests. This coalition was instrumental in restoring the tradition of ordinary tax treatment for the gains and losses stemming from most hedging transactions. I understand that the tax bills pending in the House and Senate include provisions that would address most of the remaining issues, and the House Bill would allow the more favorable "ordinary" tax treatment to apply to transactions that manage risk, not only to those that reduce risk.
Over the years--both before and after Arkansas Best--I have worked within the reality that markets are the place where different economic interests intersect and compete. In fact, each person here today probably represents an economic interest that differs--however imperceptibly--from the economic interest of each other person in this room. Federal regulators must not only balance discrete private interests but must advance a public interest in open, competitive and sound markets. Regulators also cannot outpace the market and instead must have the opportunity for direct communication with market participants and the multiplicity of economic interests that comprise the markets in order to respond to changing markets.
Perhaps the most uttered phrase in the futures industry over the past year--perhaps the last decade--has been "legal certainty." Of course, I never could quite figure out how the bar could in good conscience lobby for legal certainty without first disclosing to the client the obvious conflict of interest. After all, legal certainty would most certainly kill the careers of a lot of up-and-coming lawyers, but I leave that assessment to you. Nonetheless, the phrase legal certainty has been repeated in a mantra-like manner when discussing many issues affecting the derivatives market, including swaps and Treasury Amendment instruments. Various fixes have been proposed: more regulation, less regulation, statutory fixes, new regulators, fewer regulators, consolidated regulators and many more with which I am sure you are familiar. I look forward to continuing the dialogue on these issues and am confident that we can achieve a resolution that will retain the integrity of what I believe to be one derivatives market. I hope that our dialogue will include consideration of the potential for regulatory arbitrage and increased risk of fraud, especially at the retail level, if the derivatives market is bifurcated. Flexibility in approach will be key to providing the industry with the certainty it deserves.
The over-the-counter derivatives market is the focus of a study currently being drafted by the President's Working Group on Financial Markets, of which the Commission's Chairman is a member. The recommendations of the Working Group will be forwarded to Congress and will be a basis for discussion of the proper regulation of OTC derivatives. The study is a work in progress. Commission staff continues to analyze and draft portions of the study with the other members of the Working Group, including the Federal Reserve, the Treasury Department and the Securities and Exchange Commission. I am hopeful that with the genuine goodwill of all members of the Working Group productive recommendations on these issues will emerge.
Any resolution of the OTC derivatives debate must achieve legal certainty. For me, this means clearly defining the OTC derivatives market, stating the degree of regulation--if any--to be imposed on the various parts of that market, delineating the jurisdiction of the CFTC and other regulators over the market, and clarifying the role of the various federal financial regulators in promulgating and/or enforcing any regulatory regime in the OTC market. To do otherwise would be counterproductive and unfair to both the industry and end-users.
Before closing, I would like to spend a few moments on another issue of great interest to me: electronic trading. Such trading is one of the most significant issues that will face the Commission, other federal financial regulators and the Congress. Financial and legal scholars continue to expand our discourse on electronic financial markets and their effect on regulation. Technology will only continue to test our regulations and push regulators to address the challenges of overseeing electronic financial markets. To the credit of Congress, the Commodity Exchange Act is flexible enough to allow the Commission to respond to changes like these and to provide a regulatory framework that recognizes the different regulatory interests presented by these new financial markets. I am very interested in grappling with the novel issues presented by electronic trading and hope the Commission will continue to craft a useful, common-sense regulatory framework that responds to today’s technological innovations.
These are very exciting and challenging times at the Commission and in the industry. With your help, I will be better positioned to work with my colleagues at the Commission to respond to issues important to the industry today. Without your input, I fear the Commission could end up doing its level best in addressing yesterday's problems--not much help to an ever-changing industry. I know that I have not touched on the entire range of issues that may be of interest to you, such as the placement of foreign terminals in the United States and regulatory reform for the domestic exchange markets, but I would be happy to respond to questions on these or any other issues. Thank you once again for inviting me to be with you today.