Opening Remarks of Walter Lukken
Commissioner, Commodity Futures Trading Commission
Hearing on Self-Regulation in the U.S. Futures Industry
February 15, 2006
I want to thank our Chairman for holding this important hearing and I join him in welcoming our distinguished witnesses testifying here today. Self–regulation is an integral part of our regulatory fabric and serves as a healthy compliment to the CFTC’s oversight mandate. Today we will discuss whether the system is in need of modification given recent industry trends, including the transformation of exchanges from mutually-owned to publicly-traded companies.
As we study this question, it is important to remember that self-regulation long predates the CFTC’s involvement in these markets. It was 1859 when the Chicago Board of Trade first formalized its self-regulatory powers in its founding charter and it wasn’t until the early 1920s, some 60 years later, that the Federal government began directly regulating the futures industry. Understanding why self-regulation came to be—and would exist independent of any statutory mandate—is fundamental to our discussion today. Self-regulation brings value to the exchange model because it is in the best interest of an exchange to protect its reputation, brand and product. Market discipline—swift and unrelenting—makes this even more true for publicly-listed exchanges.
Many today will cite the reasons behind the success of the U.S. futures self-regulatory model, including the fact that SRO decision-making is enhanced by its proximity and access to the exchanges, its participants and market information. Self-regulators frequently enjoy a better understanding of the business and its relationships than those of us in Washington as well.
That said, still others will cite these same reasons as the basis of potential weakness in the SRO model. If not properly overseen, exchanges can use this control of information and access to disadvantage competitors. Although the Commodity Futures Modernization Act of 2000 reaffirmed in statute our “system of effective self-regulation,” it also recognized the tension inherent in this regime with the inclusion of core principle 15, which requires exchanges to “minimize conflicts of interest in decision making and establish a process for resolving such conflicts of interest.”
This is the challenge we face today—determining the best manner in which to identify, minimize and resolve potential conflicts of interest that may arise between the quasi-governmental functions of an exchange and its core business. This will undoubtedly involve striking a careful balance between the need to insulate regulatory decision-making with the desire to preserve the advantages of the SRO model that result from its intimacy with the marketplace. Where and how we place this fulcrum will determine whether the system is perceived in the public as fair and balanced or one-sided and unworkable. Today’s testimony will greatly aid the Commission as we strive to reach this equilibrium, and I look forward to hearing our panelists. Thank you Mr. Chairman.
Last Updated: July 22, 2007