Address by Chairman Reuben Jeffery III
U.S. Commodity Futures Trading Commission
National Grain Trade Council
Los Cabos, Mexico
February 2, 2006
Thank you, I’m very glad to be here with you today. I want to first thank Randal Linville and Jula Kinnaird for the warm reception. Also, I would like to thank the National Grain Trade Council for their continuing support for the CFTC and their vital contribution to maintaining an open and competitive commercial environment in agriculture and in the futures markets.
While it is an honor and privilege to serve as Chairman of the CFTC during this time of great challenge and opportunity, I don’t lead the agency single-handedly. Let me say at the outset that the CFTC relies on the leadership and judgment of all its Commissioners, and I want to publicly acknowledge the contributions of my outstanding fellow Commissioners Walt Lukken, Sharon Brown-Hruska, Fred Hatfield, and Mike Dunn. And, of course, I would be remiss if I did not also acknowledge the CFTC’s absolutely outstanding professional staff.
Let me also mention the recent appointment of Commissioner Dunn as Chairman and Designated Federal Official of the Agricultural Advisory Committee (ACC). I have met with Mike to discuss ways to rejuvenate the ACC, and to ensure that we adhere to the Federal Advisory Committee Act (FACA). Our goal is to make the ACC an active and effective Committee that provides meaningful input to the CFTC on agricultural matters. You will soon be contacted by Commissioner Dunn’s office requesting your nomination of a representative to serve on the ACC and will also be asked to provide potential issues for the ACC to address.
Having spent most of my career to date involved with financial markets, I came to appreciate just how important the risk management opportunities provided by the derivatives markets are to business and to the smooth functioning of the national economy. Significantly, the risk management tools and techniques involving derivatives, and, more specifically, futures products, were not developed on Wall Street or even within the financial sector at all. Rather, it was from the agricultural sector where these instruments first emerged.
The Chicago Board of Trade introduced its first futures contract more than 140 years ago. In the spring of 1865, in fact, in the very month following the end of the Civil War, CBOT developed standardized “futures” contracts that made trading even easier and more effective for grain market participants. The Kansas City Board of Trade and the Minneapolis Grain Exchange, as well as the Chicago Mercantile Exchange and the predecessors of the New York Merc and Board of Trade, were also founded in the nineteenth century on the basis of agricultural contracts.
Today, agricultural – or agricultural product related - futures trade as vigorously as ever, with some of the most remarkable growth occurring in the electronic trading of ag contracts. As many of you here today know so well, 2005 saw new records set by both Kansas City and Minneapolis in wheat volumes and overall trading levels, while CBOT broke its previous volume records in a variety of contracts, including corn and soybeans, as well as in its interest rate and other financial contracts.
The never-ending proliferation of futures products on new commodities, instruments, and indexes has given businesses and investors throughout the broader economy the same ability to manage their risk exposures that the agricultural sector has enjoyed for so long. Today, for example, more than 90% of Fortune 500 companies use derivatives to manage exposure to volatility in interest rates, exchange rates, energy costs, and the price of other physical inputs.
The ever-expanding array of risk management tools has, of course, have proved invaluable to many of you here today as you work to manage volatility in everything from your capital costs to exchange rates.
In addition to hedging, these markets play a critically important role in price discovery. Price discovery represents the combined effect of the individual actions of countless market participants, hedgers and speculators, each serving their own needs, buying or selling at prices and terms reflective of their individual perceptions of future economic reality. Without this price discovery function a great deal of commercial activity outside the futures markets themselves would be less efficient, more costly, perhaps even impossible. This is particularly true in the agricultural and energy sectors that are so closely watched by every American and so integral to the smooth functioning of our entire economy.
I am not telling you anything that you do not already know. But I’m emphasizing the issues of risk management and price discovery because they underscore the importance of the futures markets in the broader economy. Accordingly, we at the CFTC are committed to doing everything we can to foster and maintain open, competitive and financially sound markets.
Today I’d like to discuss briefly some of the more important areas that the CFTC will continue to focus on in the coming months -- reauthorization, strengthening the futures industry’s self-regulatory system and vigorous enforcement -- three areas that have, and will continue to, occupy our time throughout the coming year. In addition, I will touch on an issue that we, at the request of many of you here, will be looking at, namely a thorough reassessment of the way we report position data – the so-called “Commitment of Traders Report.”
First, let me update you on Reauthorization. In a joint letter of November 3, 2005, the President’s Working Group on Financial Markets sent Congress agreed legislative language supported by each member of the PWG to address the retail foreign currency issues raised by the recent Zelener decision. We also provided legislative language setting a deadline of June 30 for the PWG to address making futures on certain debt security and foreign equity indexes available to U.S. customers, and September 30 to address implementing portfolio margining for security futures products.
It is not every day that Secretary Snow, former Chairman Greenspan and Chairman Cox opine favorably on proposed legislation. I was therefore quite pleased that the PWG was able to achieve consensus on these provisions. I was even more pleased when the House of Representatives subsequently passed its Reauthorization bill in mid-December.
Although the last CFTC reauthorization expired on September 30, 2005, I can assure you that we have not turned out the lights at the CFTC! Congress has appropriated funds for this fiscal year, so we keep coming into the office and working to ensure the integrity of the markets we regulate and the protection of those who trade in them.
Nevertheless, the current Reauthorization effort encompasses some important legislative provisions that everybody in this room should be able to support. These provisions are important not just to the CFTC, but to the industry and the public at large. They offer the prospect of expanded trading opportunities in new index products and more efficient use of capital through portfolio margining, while at the same time ensuring that the CFTC can effectively prosecute those who break the rules and thereby tarnish the reputation of the industry as a whole.
The Reauthorization process now moves to the Senate, where it remains a priority for Agriculture Committee Chairman Chambliss and for all of us at the CFTC. All of us at the CFTC are very appreciative of the agricultural community’s historical support for the agency in its periodic reauthorizations. I urge each of you here today to join us in working to complete the CFTC Reauthorization process in Congress as early this year as possible.
Another major initiative that we hope to finalize in the coming months is the Commission’s SRO review. Today, self-regulation is under scrutiny, and not just in the futures industry. In the wake of head-line grabbing debacles involving accounting irregularities, research analysts and executive compensation, among others, legislators and the SEC have set in motion a series of dramatic reforms designed to address an apparent breakdown in corporate governance and conflict management.
Fairly or not, these events will influence our discussions about SRO governance -- and more specifically, about how we can ensure that our front-line regulators maintain their vigor and impartiality in the face of changing regulatory incentives and market pressures. At the heart of this issue are perceived potential conflicts of interest between an SRO’s dual role as a market and a regulator of that market.
Let me repeat here what I have said before. The self-regulatory model has been key to the growth and vitality of the U.S. futures industry. But self-regulation is not a static process -- and if the U.S. futures markets are to continue to flourish, we cannot give short shrift to this most fundamental component of our regulatory framework. Ultimately, self-regulation becomes irrelevant unless it fosters public confidence that SROs are fair and impartial, insulated from pressure that may compromise the execution of their regulatory duties.
It is no secret that there are strongly held and differing views as to whether, and how, the existing self-regulatory model can continue to effectively serve the public interest in the current market environment. As reflected in the comment letters that we have received, differences exist on a broad range of SRO issues, including, among other things, the governance structure, market oversight programs, rule certifications, and disciplinary processes of the SROs.
That said, while we do not want to prejudge the outcome of this review, let me briefly outline some of the fundamental concepts that will inform the CFTC’s approach to self-regulation issues.
First, SROs must vigorously fulfill their obligations to enforce their own rules and ensure adequate funding to support an effective surveillance and examination program. This duty, by the way, applies equally to Exchanges and to member-funded SROs such as the NFA. Second, SROs must insulate their regulatory functions from commercial pressures. Third, SROs must not allow the parochial interest of dominant members to override the interest of open and fair competition. Fourth, SROs must ensure a fair and impartial disciplinary process. Fifth, in the case of for-profit exchanges, the objective of maximizing short-term profit must not be allowed to compromise their duty to protect their markets from abuses so as to maintain the public’s confidence in the integrity of their marketplace.
These are fundamental principles that we all share to further the same ultimate goal: A strong system of self-regulation that effectively protects the people who rely on the proper functioning of the futures markets. But as we all know, the devil is in the details.
As we look ahead to the upcoming SRO Hearing, we are hopeful that there will an open, healthy and constructive dialogue with the industry and other stakeholders on these issues.
Effective self-regulation, with appropriately calibrated government oversight, can prevent problems from arising in the first place. It should be no surprise that one of the highest priorities for the CFTC remains maintaining a vigorous enforcement program.
Because market abuse that interferes with the price discovery process adversely affects all Americans, even those who are not trading, the CFTC has a zero-tolerance policy for those who engage in false reporting or other dishonest or manipulative conduct. In this regard, our enforcement program has been very successful.
In the last few years, the CFTC has filed various actions charging some 50 defendants with false reporting, attempted manipulation, and manipulation in violation of the Commodity Exchange Act. These enforcement actions have thus far resulted in civil monetary penalties totaling nearly $300 million.
These enforcement efforts are critically important as one cannot overstate the importance of a strong and visible deterrent to any behavior that would hurt market participants and others who rely on futures prices as accurate signals of market fundamentals. In the year ahead and beyond, we fully intend to keep market manipulation a high priority and vigorously investigate situations where we find evidence this type of misconduct.
Commitment of Traders Report
The last topic I would like to discuss is one is of particular interest to many of you – Commitment of Traders Report (COT report).
The first COT report was published in 1962. Over time, we have changed the format, content, and frequency of this report in an attempt to improve its usefulness to market participants and the general public. A number of you now suggest that the COT report could be further improved by increasing the transparency of distinctions among the market participants that currently comprise the category of “commercials.”
By way of example, the commercial category currently includes swap dealers, who use futures markets to offset price risks resulting from their over-the-counter swaps and other derivative transactions. These OTC transactions may be in individual commodities, but in recent years much of this activity has involved commodity index swaps.
Some have gone further and questioned the treatment of hedge funds in the COT report. Professionally managed funds, including hedge funds, are classified as non-commercial traders. This is true of both actively managed funds and also passively managed funds, such as commodity index funds. While some would agree that this is the proper classification, others would like for the COT report to separately show the positions of hedge funds, as distinct from other non-commercial traders.
With these issues in mind, I have asked our newly-appointed Chairman of the Agricultural Advisory Committee, Commissioner Michael Dunn, and the Division of Market Oversight to carefully consider this suggestion and, in fact, to assess the utility of the COT report as a whole. I know the National Grain Trade Council has already shared some ideas on changes that you think would enhance our report. Thank you for that input, and we look forward to hearing more from you as we more forward on this issue.
In closing, these are some of the more visible matters currently before the Commission: reauthorization, a review of self-regulation, our ongoing enforcement efforts, and a reassessment of the COT report. As the marketplace continues to grow and expand in all directions, we will face new challenges as regulators and as industry members. It is the CFTC’s responsibility, and indeed its appropriate role, to act proactively, always keeping as the highest priority, the protection of market integrity and the public interest.
Thank you for your kind invitation and for this opportunity to speak with you. If you have any questions, I’d be happy to try to answer them.
Last Updated: March 29, 2007