Remarks of Commissioner James E. Newsome before the National Introducing Brokers Association Eight Annual Conference, Embassy Row Hilton, Washington, DC
June 26, 1999
Current Issues Affecting Introducing Brokers
Presented to the National Introducing Brokers Assn. Annual Conference
I am delighted to be with you here this morning, and I thank you for the opportunity to talk with you about issues we are currently facing at the CFTC and issues that are of significant interest and import to you and to the Introducing Brokers (IB) community.
Many of you already know who I am and where I come from, but let me give a little background about myself for those of you I have not yet had the opportunity to meet. I, along with my three brothers, grew up on our family's farming and cattle operation in Florida.
Before joining the Commission, I was an instructor at Mississippi State University and most recently served ten years as the Executive Vice President of the Mississippi Cattlemen's Association and Beef Council.
Consequently, I tend to look at issues from the producer's point of view. I certainly feel that the views of industry are of utmost importance to both Congress and regulatory agencies.
I find the theme of this conference, "Building Business by Building Relationships," very fitting because I believe the CFTC, as a regulatory agency, should have the goal to build a closer relationship with industry to promote business and encourage, not impede, innovation and technological advancement.
To accomplish this, both regulatory agencies and industry must dismiss the notion that these two groups are advisaries. Instead, we must realize that we are interdependent. By working together, we can accomplish much more than we can if we work against one another.
Consequently, I am interested in your business knowledge and wisdom and I not only appreciate but solicit your input as the Commission moves forward on a variety of issues.
Now, I realize that this attitude might come as a shock to those of you who deal with regulatory agencies on a regular basis, but this is a philosophy in which I firmly believe. I have learned that as industry comes together to support issues of common interest, the likelihood of achieving the agreed-upon goal increases substantially.
I am proud of my agricultural background, and of the values and work ethic it has provided. I think that it's important for you to know that I did not grow up wanting to be a CFTC Commissioner; in fact, I tried to turn it down, but Mississippi Senators Trent Lott and Thad Cochran would not take "no" for an answer.
I ascribe to the belief that our government should be run by and for the people. Although some in Washington seem to think this is an antiquated idea, I call it time-honored and time-tested.
I hold to the conviction that in "governing best by governing least," we foster those ideals which allow our businesses, our farms, and our financial services to retain their primacy in the global marketplace.
Because of the beliefs I've just described, I commend and encourage those in the private sector for thinking "outside the box" and for being innovative and creative in their business activity, I can pledge to you that in my tenure as a Commissioner at the CFTC, I will think "outside the Beltway" in making decisions regarding appropriate regulation of those activities.
As you know, the Commission is facing yet another reauthorization. Although this often elicits groans from those involved in the process, I am looking at it as an opportunity: indeed, I believe that Congress has the occasion now to address and resolve several key concerns of both regulators and regulatees.
Let me take a few minutes to address some of those topics, as well as some other current regulatory issues and then I will be open to any questions you might have.
I believe reauthorization provides a unique opportunity for Congress to make changes to the Act that will benefit the industry and market participants, as well as provide clearer guidelines for appropriate regulation by the Commission.
There are several topics that I will offer today, but I would like to begin by stressing two overarching principles that I believe are critical in this analysis: providing legal certainty and decreasing regulatory burdens should be the key elements in any review and amendment of the Act.
In order to accomplish this, we need to listen to industry participants regarding the effects of regulation on the day-to-day matters of financial and agricultural risk management and price discovery, and respond accordingly.
We as public servants are charged with protecting the interests of the public. We cannot do justice to that obligation unless and until we listen carefully to those most directly affected by our actions.
I also feel that, as responsible regulators, the Commission must be responsive to not only industry, but also to the Congress as we work through reauthorization. We must cooperate to develop a regulatory scheme that discourages fraud and manipulation, but encourages innovation, technology, fair competition, and sound business practices.
In addition, I believe there is a significant corollary issue to the goal of decreasing regulatory burdens that should be considered. With the growing OTC market, domestic exchanges have encountered new levels of competition. Decisions are being made and will have to be made in the near future on how they plan to do business long term.
I firmly believe this determination should be their job, without undue interference from CFTC. With the regulatory burdens currently imposed on our exchanges, the task of competing globally is almost impossible.
It goes without saying that businesses will seek to operate in the most efficient fashion; accordingly, if the opportunity presents itself to avoid regulatory costs by operating outside the borders of the United States, many businesses will make the logical decision to take advantage of that opportunity.
Therefore, I believe it is critically important to engage in sensible cost/benefit analyses in making regulatory decisions. Not only that, overly burdensome regulation has the effect of moving those entities outside the sphere of our policy-making authority.
In other words, with the exodus of business beyond our borders goes the ability of the United States to continue to make policy determinations that affect the global economy.
I do not want to overstate the matter, however, given current technological advancements, I firmly believe that we as law makers and enforcers must be acutely sensitive to this issue in order to maintain the primacy of our markets as world-wide leaders and innovators.
The Commission must work with the Congress in determining how much flexibility the Commission needs to address the changing technological environment. I believe the CFTC should have the flexibility to be innovative from a regulatory standpoint to those within industry who are creative and visionary.
I believe we should work together to identify Commission regulations that result in regulatory overreaching, confusion, or misunderstanding; and, indeed, I have already begun the process of taking steps to initiate changes that can be made under our current regulatory authority to decrease regulatory burdens and promote legal certainty.
In that vein, I recently convened a meeting with representatives from the three largest futures exchanges in the United States. I asked them to come to this meeting ready to discuss concrete, practical initiatives that we can undertake promptly to address their regulatory concerns.
I was extremely gratified with the outcome of that meeting, and have accumulated a list of projects that I believe the CFTC can and should act on in an expeditious manner. Furthermore, I plan to continue to exhort staff and industry to work together to review these issues to determine in what areas we can make significant inroads in decreasing unnecessary regulatory burdens.
Along those lines, let me say I believe that regulatory reform should be industry-driven. It is clear to me that market discipline and adherence to best-practice standards can achieve better enforcement of fundamental market integrity concerns than can any amount of overlaid regulation.
Accordingly, I advocate stripping away unnecessary, costly regulation, and at the same time maintaining the ability to ensure forceful, swift prosecution and significant punishment for those outliers who commit core violations of the Act. I believe that more reliance on private sector discipline and better use of public regulation fosters these interests.
I believe industry must unite to assist Congress in addressing reauthorization. Experience and logic tell me that if industry can agree upon several basic issues, then Congress will respond. These issues may be as simple as:
1. Less burdensome, common sense regulation so our exchanges and industry participants have the opportunity to compete and prosper
2. CFTC flexibility to address creative and innovative ideas
3. Jurisdictional boundaries- who do you want your regulators to be?
With regard to modernization of the CEA, there are several areas of regulatory reform that under current authority cannot be addressed at the agency level--issues that require Congressional review, analysis and disposition.
Let me reiterate that, in my opinion, the end result of such review should be regulation that fosters efficient and liquid markets, enhances the ability of market participants to innovate and compete effectively, and does not create artificial and costly barriers to trade and competition.
Ultimately, I believe the CFTC should concentrate on what Congress intended us to do when it created the Commission in 1974, that is, protect participants against fraud and manipulation and ensure safe, sound, and competitive markets.
Agricultural Trade Options
Another issue currently under consideration by the Commission is revisions to the ATO pilot program. While I was not at the Commission during the creation of the pilot program, I do support the general concept of additional risk management tools for agricultural producers.
I am fully aware that many in this organization have concerns about these potential revisions. I listened intently to comments recently from Scott Stewart at the Commission's Agricultural Advisory meeting and the Senate Agriculture Committee's Risk Management hearing.
Commission staff is evaluating comments and concerns proposed by all interested parties and will soon prepare a draft for Commission consideration. While I am sensitive to and will take into account the concerns of all industry participants before developing a final opinion, I will not apologize for my desire to assist the ailing sector of production agriculture with every logical risk management tool possible.
If we determine that ATOs are not a viable solution, then I will continue to work with you and other industry participants to develop new and innovative risk management tools.
Foreign Board of Trade Terminals
Earlier this year, the Commission released proposed rules on foreign boards of trade seeking terminal access in the United States. I was dismayed to find that the proposed rules were, in my mind, highly regulatory and overly burdensome in approach and content.
Given the widespread interest in the matter, and the unfortunate delay in its release, I concurred in the issuance of the proposal and wrote a separate statement outlining my concerns with the proposal. Even though I found the proposal to be in an unacceptable form, I took this route to ensure that there were no further delays in this process.
In my concurrence, I urged that interested parties make their views known, particularly on the issues I mention, as well as alternative methods of proceeding, for example, the use of no-action procedures.
In reviewing the proposal, I had the interests of our domestic exchanges and the futures commission merchant community foremost in my mind, and I have been very interested in hearing their relative positions on this topic, as well as comments from other affected industry participants.
In effect, this would allow foreign boards of trade to have access to US customers, with lessened regulatory requirements. A major concern about this matter is the issue of fair competition--the argument is that if we allow foreign terminals to be set up over here, then a US exchange should be able to set up terminals in foreign jurisdictions, with similar regulatory treatment.
I share this concern and feel that equal access should be granted to our exchanges. I believe the intense interest in this topic is fueled by two issues: first, the rapidly increasing globalization of the futures and options markets in particular and financial markets in general; and secondly, the tremendous advances in electronic trading technologies and activity.
The lower transaction costs and the inherent benefits regarding oversight of electronic trading systems make them an attractive alternative or complement to traditional trading methods.
I would note the issue of technological advances in electronic trading is also receiving attention on the Hill, and that the House Banking Committee has held a couple of hearings to review the impact of these changes on the financial services industry. The Agriculture Committees in both the House and the Senate have identified technology as a key issue to be reviewed during the reauthorization process.
Also, as an aside, I have discussed with Acting Chairman Spears reconstituting the existing Financial Products Advisory Committee (FPAC) as a Technology and Financial Products Advisory Committee, inasmuch as technology issues will provide us with some of our greatest regulatory challenges in the future.
On June 3 of this year, the CFTC lifted the ban on foreign futures exchanges installing electronic trading systems in the United States. My fellow commissioners and I have instructed the staff to begin processing "no action" requests from foreign exchanges seeking to place trading terminals in the US. The staff is instructed to review applications from foreign exchanges on a case-by-case basis.
This new approach also commits the CFTC to simultaneously address regulatory parity, a crucial issue for US exchanges that fear their overseas competitors will be able to offer electronic trading with fewer regulatory restrictions.
The only foreign futures exchange that now has its terminals in the US is the German/Swiss exchange Eurex. That exchange received "no action" approvals in 1996 to have a limited number of members in the US with electronic trading privileges. Eurex has requested to increase the number of member firms and expand the range of contracts it makes available to US customers.
Other exchanges interested in placing their terminals in the US include LIFFE, IPE, SYCOM, and the New Zealand Futures and Options Exchange.
In conclusion, I thank you for allowing me to speak with you today. I hope that I have provided some insight that will prove informative and useful to you as an introducing broker. I look forward to working with you in the future to promote our combined interests. At this time, I will open the floor for any questions that you might have.