| CFTC

Remarks of Commissioner Thomas J. Erickson before the Chicago Bar Association's Committee on Futures and Derivatives, Chicago, Illinois

October 19, 1999

Good afternoon. I appreciate your kind introduction and warm welcome. I was delighted when Ken called me last spring during my period of nomination purgatory to invite me to speak before the Chicago Bar Association’s Committee on Futures and Derivatives. I am pleased to be here.

In the interest of full disclosure, I thought that either Ken or I should inform you of our pre-existing relationship. I guess by default Ken has left me with the privilege. Many years ago, I had the good fortune of working with a then-talented young lawyer – Ken – on a project of great import. The goal was to define and distinguish futures from cash forward transactions. Before you reach for your copy of the "White Book," let me reassure you that there is no such definition in the Commodity Exchange Act (Act); the effort was in vain.

The Commodity Futures Trading Commission (CFTC or Commission) is a small agency with a very important mission. 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. In practical terms, the Commission’s job is to make sure people don’t lie, cheat or steal – simple rules for complex markets.

As practitioners in this specialized area of the law, you have witnessed how derivatives markets have been invigorated by innovation over the past decade. These changes have pushed new competitive issues and public policy concerns to the forefront of the regulatory landscape. Federal regulators must not only balance these discrete private interests but must advance a public interest in open, competitive and sound markets. Regulators also cannot outpace the financial marketplace 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. 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.

I have been a consistent proponent of change and believe change can only come to be embraced if the Commission and others are willing to ask and answer the hard questions. This afternoon, I would like to discuss several of these issues and continue the process of asking some of the difficult questions.

Regulatory Relief for Domestic Futures Exchanges

On June 25, 1999, the Commission received a joint petition from the Chicago Board of Trade, the Chicago Mercantile Exchange and the New York Mercantile Exchange (the Exchanges) requesting broad regulatory relief from certain statutory requirements for all boards of trade previously designated by the Commission as contract markets. For the moment, the Exchanges’ Section 4(c) petition is the central focus of relief under consideration by the Commission. The comment period on the petition closed last week, and the CFTC is considering the comments and plans to address the issues highlighted in the petition very soon.

The Exchanges are requesting an exemption in three areas. First, the petition requests relief from the contract market designation process for new contract submissions. The Commission already has taken steps to try to provide some meaningful regulatory relief to the exchanges regarding the contract designation process. Most recently, on July 27, 1999, the Commission published a proposed rule that would establish a two-year pilot program allowing exchanges to begin trading new contracts immediately upon notice to the Commission. The proposal still would require approval of applications for contract market designation after trading commenced. The Exchanges’ comments have expressed concern that the proposed pilot program would expose transactions in new contracts to a level of legal uncertainty that would discourage trading. The Commission currently is considering how best to address the designation process for new contracts in light of comments received on the proposal.

Second, the petition requests relief from the contract market rule review process. The Exchanges propose that domestic contract markets be required to provide only notice of new rules or rule amendments to the Commission ten days in advance of their effective date. Pursuant to the petition, proposed new rules or rule amendments would not be stayed unless the Commission determined that they were likely to cause fraud, render trading readily susceptible to manipulation, or threaten the financial integrity of the market. On July 15, 1999, the Commission published proposed amendments to Rule 1.41, which would expand the number of exchange rule amendments eligible for automatic approval upon adoption and would require only a later single summary filing with the Commission. I understand this proposal does not address all rule change submissions. However, the Commission is reviewing the public comments on this proposal and the Exchanges’ petition and is considering ways to address many of the Exchanges’ concerns.

Third, the petition requests relief from the relevant provisions of the Act that would otherwise prevent the immediate adoption and implementation of trading rules and procedures comparable to those of a competing foreign exchange with electronic trading terminals in the United States. In essence, the petition requests that a domestic designated contract market be permitted to immediately implement trading rules and procedures comparable to those of a foreign exchange, provided that the implemented rules and procedures apply only to contracts listed by the domestic contract market subject to direct competition with the foreign exchange.

As you can see, the issues raised by the Exchanges’ petition are more than a little interesting and, if adopted, would have a significant impact on the oversight of U.S. futures and option markets.

Changing Markets: Electronic Trading and Demutualization

Today’s markets are facing change at an exponential rate – a rate some suggest may cause a regulatory crisis of worrisome proportions. I beg to differ from that assessment. I prefer to look at change and any potential for crisis from the perspective of the Chinese language character for the word "crisis". The character "weiji" is comprised of the characters for danger and opportunity and teaches us to learn from our difficulties. Such an age-old philosophy would serve us well as we move into the next century.

It is true that the introduction of electronic trading platforms and systems is well under way and is one of the most significant issues that will confront 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. The CFTC and the futures industry together must continue to address the impact of electronic trading on our financial markets. The Commission must ensure that its regulatory framework encourages innovation, but not at the expense of market participants or market integrity. This will require of the industry a readiness to share information with the Commission about developments and potential regulatory implications.

Moreover, technological innovation already has begun to test our regulatory structure. Increasing numbers of potential commercial and retail customers have easier access to a wider range of financial products, challenging all of us to balance innovation with concerns about customer protection and systemic risk. Several questions come to mind. For example:

Technology increasingly will enable customers to bypass traditional market intermediaries in trading financial products. Should this trigger modifications in our current regulatory safeguards?
How should the Commission address concerns regarding system capacity and security as increased access continues to test the boundaries of our markets?
As trading hours expand and raise the possibility of 24-hour online trading, how should the Commission approach issues involving market liquidity?
Are current guidelines adequate to address cross-border access to foreign markets by U.S. customers?

While change always poses some risk, we would do well to view any so-called "crisis" as an opportunity to strengthen our markets and to refine our regulatory structure . To the credit of Congress, the Act is flexible enough to allow the Commission to respond to these challenges and to provide a framework that recognizes the different regulatory interests presented by our changing financial markets. I look forward to grappling with the novel issues presented by technology and hope the Commission will continue to craft a useful, common-sense regulatory framework that responds to today’s – and tomorrow’s – innovations.

The demands of today’s marketplace also are challenging exchanges to face fundamental questions about their own governance structures. Both securities and futures exchanges are considering whether they should move from a membership structure to a for-profit structure in an effort to enable themselves to respond more quickly to changes in the markets and pressure from competitors. This, in turn, is raising important concerns, including:

How should an exchange convert membership into an ownership stake in the exchange?
Can a for-profit exchange adequately fulfill its self-regulatory responsibilities?
Should self-regulation be centralized in a single national overseer, as Securities and Exchange Commission Chairman Arthur Levitt has suggested?

These questions will be debated in the coming months, as exchanges – both large and small – strive to remain competitive in a changing financial marketplace. I am confident that the CFTC will continue to encourage the dialogue and to support exchange efforts to adapt to today’s challenges. We all must work together to find opportunity within these challenges.

CFTC Reauthorization

Perhaps the single biggest Y2K glitch ahead of the Commission and the industry will be reauthorization legislation next year. Congress already has begun the reauthorization process: Hearings have been held (with many more undoubtedly to come), questions have been submitted to the industry for consideration, and suggestions have been solicited from the industry on how to improve the Act.

The issues involved in reauthorization are numerous and complex. 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. Some reauthorization issues are the subject of a study by the President’s Working Group on Financial Markets, which is reviewing the over-the-counter (OTC) derivatives market. I am hopeful that, with the genuine goodwill of all members of the Working Group, productive recommendations on these issues will emerge.

Perhaps the most uttered phrase in the futures industry over the past year – perhaps the last decade – has been "legal certainty." It has been repeated in a mantra-like manner when discussing many issues affecting the derivatives market. In order to be successful, any resolution of the Commission’s reauthorization must achieve legal certainty, particularly in the area of OTC derivatives.

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.

We find ourselves in an era where everyone is looking to increase efficiencies in market performance and in the regulation of the markets. Given that increased efficiency is a common goal, I think it is fair to ask whether it makes sense to carve-up the regulation of derivatives markets – on- or off-exchange. More fundamentally, have we reached the time when it is appropriate to choose one form of regulation over another: market regulation versus entity regulation?

The Commission’s reauthorization likely will resolve many of the issues I just mentioned. I believe that groups like this Committee on Futures and Derivatives have a significant interest in helping the Commission and the Congress arrive at solutions for shaping the future of derivatives regulation. I believe that the Commission and the industry can work together to craft an appropriate, workable proposal for resolving many of these most important issues. I believe that a consensus proposal is not a luxury, but a necessity to ensuring that the Commission and the industry move together into the new millennium as partners in maintaining the integrity and innovative spirit of our derivatives market. I look forward to your full participation in this most important process.

Thank you once again for inviting me to be with you today. I welcome any comments or questions you may have.

Remarks of Commissioner Thomas J. Erickson before the Brooklyn Law School and New York Stock Exchange, New York, New York

April 18, 2000

Electronic trading and other technological advances are eliminating economic barriers to becoming an exchange marketplace. Globalization of markets is expanding the reach of market competitors. Futures and securities exchanges are responding to the heightened competition by reexamining traditional business models and contemplating more effective approaches. Demutualization has surfaced – both here and abroad – as one way to address competitive pressures. This morning I will discuss several issues relating to the demutualization of exchanges from a derivatives market regulator's perspective, and what I believe to be at the heart of change – technology.

To date, the three largest domestic futures exchanges – the Chicago Board of Trade ("CBOT"), the Chicago Mercantile Exchange ("CME"), and the New York Mercantile Exchange ("NYMEX") – have announced plans to demutualize by converting from nonprofit member-owned organizations to for-profit corporations. Each exchange has designed a different restructuring plan, and each is moving quickly toward a membership vote that will decide its future.

We at the CFTC are undertaking an independent effort to analyze demutualization issues within our regulatory framework. At the request of the Commission's Chairman, Bill Rainer, my office is coordinating the work of an interdisciplinary Staff Demutualization Committee to advise the Commission on issues that might implicate regulatory responsibilities under the Commodity Exchange Act ("Act") and to provide futures exchanges with expedited, coordinated responses to questions raised by the demutualization process.

Why Demutualization?

Why the drive to demutualize? Certainly competition is the most frequently cited reason. For example, there is the notion that membership structures are cumbersome and do not allow for nimble decisionmaking. We also have heard from exchanges about their brand-names. Certainly, once they have streamlined decisionmaking, they will be able to extract maximum value out of their brand-names in any number of ways – many of which I am sure you are contemplating within the securities context.

But there is much more. It is not going to be enough to demutualize and be "just another futures exchange." If they do this right, one day soon, exchanges may compete with Goldman Sachs, J.P. Morgan, and even Internet communications corporations. It would not surprise me if an exchange were to become registered as a financial services holding company under the recently enacted Financial Services Modernization Act.

Moreover, exchanges will attempt to use their brand-names as a lever that, when joined with technology, can provide multiple platforms for cash, futures, options, over-the-counter derivatives, as well as debt and equity securities. In other words, all exchanges – those that exist today and those yet to be born, whether they trade cash, derivatives or securities – will seek to provide integrated platforms enabling firms to enter and exit any market at any time.

Futures Exchange Demutualization Plans

Nothing in the Act dictates what business plans are appropriate or inappropriate. In fact, the CFTC has some experience with for-profit structures:

The Kansas City Board of Trade has been incorporated since 1973;

Cantor Financial Futures Exchange, Inc. ("CFFE"), a for-profit enterprise, was approved for contract market designation in September 1998;

FutureCom, Ltd. ("FutureCom"), an Internet exchange, was recently conditionally designated by the Commission as a contract market; and

The Commission is currently considering an application for contract market designation filed by the Merchants’ Exchange of St. Louis, L.L.C. ("Merchants’ Exchange"), a Missouri for-profit limited liability company.

With that as background, I will turn briefly to a discussion of the plans for demutualization by the CME, the NYMEX, and the CBOT.

Chicago Mercantile Exchange (CME)

Last November, the CME announced a two-step plan that would transform it from an Illinois not-for-profit membership corporation to a Delaware for-profit stock corporation. Members of the CME, International Monetary Market division, and Index and Option Market division would receive Class A common stock representing pure equity in the exchange, and all members (including members of the Growth and Emerging Markets division) would receive Class B common stock representing existing trading rights and privileges plus equity rights. The existing 39-member board of directors would be reduced to 19 members over a two-year period, the exchange would be run by a chief executive officer hired by the board, and the 200-plus member committees would be replaced with a more streamlined committee structure. Members likely will vote on the plan this Spring.

The New York Mercantile Exchange (NYMEX)

This past January, the NYMEX announced a two-step plan that would reorganize it from a New York not-for-profit membership corporation to a Delaware for-profit membership corporation ("NYMEX, Inc.") and would create a new Delaware stock-holding company ("NYMEX Holdings, Inc.") to own all of the economic interests and most of the voting control in NYMEX, Inc. NYMEX members would receive common stock in NYMEX Holdings representing equity in the overall organization and Class A membership in NYMEX, Inc. representing trading rights and privileges. NYMEX Holdings would have the sole outstanding Class B membership in NYMEX, Inc. Identical 22-member boards of directors would govern NYMEX Holdings and its NYMEX, Inc. subsidiary unless a majority of stockholders voted to permit separate trading of the common stock and trading rights. A membership vote is expected in this Summer.

Chicago Board of Trade (CBOT)

The CBOT also announced a two-step demutualization plan in January. The exchange, an Illinois not-for-profit membership corporation, would be restructured into a closely held Delaware for-profit stock corporation focusing on open outcry trading and a Delaware for-profit stock corporation focusing on electronic trading. The electronic trading company initially would be a for-profit wholly owned subsidiary of the CBOT and, subject to a second vote, subsequently would become an independent operating company. CBOT members initially would receive shares in the CBOT and eventually would receive shares in both the CBOT and the electronic trading company, but details regarding the distribution of stock are yet to be determined. Restructuring would change the existing management and organizational structure. The first vote is anticipated this Summer.

Implementation of these plans is contingent upon approval by the exchange membership, registration with the Securities and Exchange Commission, and receipt of a favorable ruling from the Internal Revenue Service regarding the tax consequences of the proposed transactions. In addition, many changes attendant to exchange demutualization would require submission of exchange rules to the CFTC.

Regulatory Issues Raised by Futures Exchange Demutualization

Demutualization is a significant change in our markets, which of course attracts the attention of the industry participants and the regulators. To date, much of the regulatory discussion has been influenced by the demutualization of global securities markets. This debate is certainly instructive to the Commission’s own evaluation of the regulatory issues raised by the demutualization of domestic derivatives exchanges. However, there are very real differences, I think, in the applicability of some of these concerns in the derivatives market context.

Conflicts of Interest

The demutualization dialog has raised the question of whether for-profit exchanges require greater scrutiny than nonprofit exchanges. The subtext seems to be that for-profit exchanges will be driven by the interests of shareholders rather than market users. The fear seems to be that concern for the bottom-line would affect an exchange’s willingness to vigorously undertake self-regulatory obligations. A similar concern has been raised about the fairness of disciplinary proceedings in a for-profit environment.

Securities exchanges are attracting particular scrutiny because they would list their own shares. There is the suggestion that this relationship would create an immediate conflict in that the exchange, in effect, would be charged with enforcing self-regulatory organization ("SRO") compliance requirements on itself. Moreover, exchange actions could affect the value of shares in the exchange listed on the exchange. That, in turn, could create the perception that exchange actions were based on equity valuations and not on considerations of marketplace integrity. These conflicts of interest are premised on the self-listing of individual securities. Since self-listing of an equity is not possible for derivatives markets, this "self-listing conflict" is not a factor for us. However, were futures exchanges permitted to offer contracts on single equities, the CFTC might have similar concerns.

The exercise of self-regulatory authority over competitors is another potential conflict of interest that has been raised in the securities market context. There are several permutations of this potential conflict. For example, would an exchange such as the New York Stock Exchange ("NYSE") be free of a conflict in enforcing its market rules on competitors who happen to also be listed on the NYSE? To the extent this is a conflict, it has been a conflict in the nonprofit derivatives exchange environment for nearly two years, without apparent concern. Currently, the CBOT has the authority to enforce its SRO rules on a competitor, namely Cantor Fitzgerald, which operates the CFFE.

The CFTC is examining demutualization plans for potential conflict of interest concerns. I must confess that I am somewhat agnostic on the issue of conflicts. Certainly conflicts exist in mutual organizations, and it is virtually certain that conflicts will exist in demutualized exchanges. Our job will be as it always has been: to identify potential conflicts and to determine whether there is a regulatory interest in addressing them.

Even if conflicts are heightened in a for-profit context, I would hope that futures exchanges would continue to have a self-interest in preserving their reputations for providing fair and efficient markets. Exchanges ultimately would pay a heavy price in sacrificing good will and their reputations in the interest of short-term profits. Self-regulation contributes to brand-name and reputation, and existing exchanges already have invested in developing their own compliance programs.

The CFTC oversees exchanges and will continue to monitor their ongoing fulfillment of self-regulatory obligations. Exchange rule enforcement reviews conducted by the Commission’s Division of Trading and Markets will consider the potential conflicts of interest associated with a for-profit exchange in the same manner that the reviews presently consider potential conflicts associated with nonprofit exchanges. The rule enforcement review process will remain an integral part of the Commission’s oversight program.

Outsourcing Self-Regulatory Obligations

Demutualization has raised the possibility of exchanges contracting with third parties to perform SRO obligations. Nothing in the Act or the Commission’s regulations precludes exchanges from contracting-out their self-regulatory obligations. Indeed, Commission regulations contemplate an exchange contracting with third parties to perform some SRO functions. Whatever approach an exchange chooses, the CFTC will continue to ensure that exchanges meet their SRO obligations.

The CME, NYMEX and CBOT have indicated that their self-regulatory programs will be retained in-house but also have acknowledged that their boards will exercise discretion on a continuing basis with regard to the structure of these programs. Other exchanges may believe that outsourcing would be more cost-effective than retaining SRO programs in-house. Several new exchanges apparently have contacted the National Futures Association ("NFA") to discuss outsourcing self-regulatory obligations, and it appears FutureCom and the Merchants’ Exchange both are negotiating to contract at least some self-regulatory functions to the NFA.

If an exchange opts to contract-out its self-regulatory obligations, the Commission should consider what, if any, requirements would be necessary to ensure that these obligations are fully met. For example, should the contracting exchange be required to describe the outside entity’s relevant experience, the number of individuals that would be dedicated to the task, the surveillance system that would be used to identify potential rule violations, and/or the procedures for addressing these violations? As previously mentioned, adequate Commission oversight will require increasing reliance on the rule enforcement review process with respect to these issues.

The current public dialog also has included the concept of one "super self-regulator" performing self-regulatory obligations for all exchanges – the NFA for the futures industry and the National Association of Securities Dealers Regulation, Inc. for the securities industry. Given existing exchanges’ experience in self-regulation and their apparent commitment to continue to self-regulate, a single super self-regulator for the futures industry may not be preferable to having several SROs. And since we all probably agree that choice and competition are generally good things in most other contexts, there is certainly an argument that a super-SRO just is not good policy. Moreover, requiring exchanges to contract with a super self-regulator may appear to be inconsistent with the Commission’s role as an oversight agency, especially if regulatory concerns do not outweigh the benefits of the current SRO structure.

The CFTC currently has the authority to intervene and require a modified SRO structure if, after demutualization, it appears that exchanges are not adequately performing their self-regulatory functions. Should existing or new exchanges decide to contract-out their self-regulatory obligations, the Commission must continue to have clear authority to hold exchanges accountable for compliance failures and disciplinary violations. Professor Roberta Karmel of the Brooklyn Law School has raised an interesting question about the super SRO model: would delegation of these authorities to a quasi-public bureaucracy be preferable to pulling the SRO functions back within the domain of the federal regulator. A former Chairman of the CFTC, Philip McBride Johnson, recently questioned the role of SROs in a demutualized world with the suggestion that there may be no "self" in self-regulation. Given the possibility that exchanges may soon be contracting-out for any number of essential functions, I might add there may be no "organization" in future self-regulatory organizations.

Funding Self-Regulatory Obligations

Demutualization and potential outsourcing of self-regulatory obligations could raise concerns regarding adequate funding of exchange self-regulatory programs. For example, a for-profit exchange eager to reduce costs could decide to trim its budget by reducing self-regulatory programs. An exchange also could base its payments to third-party vendors on transaction volume or a percentage of the dollar value of transactions rather than paying a set dollar amount. Such a payment structure potentially could dedicate insufficient resources to self-regulatory obligations.

Again, these risks exist in the current system. Adequate SRO funding is essential in carrying out compliance and disciplinary regulatory responsibilities and falls within the Commission’s oversight purview. In particular, the Commission will have to scrutinize any effort to base funding on the quantity or dollar value of transactions. As exchanges add new products and new exchanges attempt to build volume, the possibility exists that funding could be inadequate for even minimal self-regulation.

Exchange Governance

Demutualization may cause incongruence between CFTC governance requirements and a for-profit corporation’s governance objectives. For example, Section 5a(a)(14) of the Act and Commission Regulation 1.64 require that exchange governing boards include meaningful representation of a variety of market users in order to promote the public interest in the self-regulatory process, as well as foster integrity and impartiality in the boards’ decision making. In contrast, in a for-profit context, the board of directors need not represent any interests other than those of the corporation and its shareholders, and state corporate governance laws include their own requirements concerning the composition of a board of directors. Exchanges will be required to comply with both Commission and state law requirements. However, the Commission will be reviewing its board composition standards and other governance requirements in light of exchanges’ changing management structures and the underlying goals of the requirements.

Exchange Designation

Finally, the CFTC will be considering the parameters and transferability of exchange designation in the context of each exchange’s demutualization plan. The CME and the NYMEX wish to transfer their current designations as contract markets to the for-profit exchanges created through demutualization. The CBOT plans to treat the subsidiary electronic trading company as a division operating under the CBOT’s current designation and, at some point before taking a vote to spin off the subsidiary, to apply for separate contract market designation for the independent electronic trading company.

The question raised in each case is really one of flexibility. How direct is the linkage between the current exchange and the new for-profit exchange? Is that linkage strong enough to simply transfer designation to new business models?

The Promise of Technology

I would be remiss if I did not say a few words about new technology. For the moment, that means electronic trading. It is easy to do a superficial analysis of electronic trading and come to the conclusion that the U.S. futures exchanges have been slow to adopt new technology and that many of their more nimble foreign counterparts are currently enjoying the competitive and economic advantages of electronic platforms. While there may be a grain of truth to this, I think a more careful analysis indicates the extent to which electronic trading is making inroads in U.S. markets and the promise new technology holds for these markets. There are, today, several electronic trading platforms in use domestically, and I believe a major factor in our exchanges’ push to demutualize is their desire to construct more effective vehicles for exploiting new technology.

Ultimately, I think that the success of a derivatives exchange under any model is dependent on reaping the benefits of technology. In years to come, some may ask: What was the catalyst for ever-expanding markets – the establishment of for-profit exchanges or the accessibility of technology? My response is technology because, irrespective of whether an exchange is mutualized or demutualized, it is the embrace of technology that will yield significant dividends. Demutualized exchanges will only realize their full potential when coupled with technology.

Finally, it is worth noting that almost everything I have talked about this morning concerns the efforts the three largest futures exchanges to come up with new, more competitive business models. But change is sweeping the industry and competition will come from all angles in the electronic economy. Even today, we see examples of smaller futures exchanges looking for partnerships that will enable them to trade electronically. Firms in every sector of the economy are constructing platforms and forming new alliances for business-to-business and business-to-consumer commerce. Once B-to-B and B-to-C platforms are in place, it would require very little for such a venture to compete head-to-head with existing futures exchanges. Clearly, profound changes are in store.

Conclusion

In the end, I view all of the changes we are facing, both on a regulatory level and in the industry in general, as challenges embedded with tremendous potential. We are witnessing the industry’s efforts to harness new technologies, to embrace innovation, and to move forward. As regulators, our job is to ensure that our regulatory framework preserves the public interest in open, fair, and honest markets and to see to it that we do not create obstacles to innovation. Accordingly, whatever new market structures or technologies may be adopted, we can, and are, attempting to formulate an approach that encourages innovation and maintains standards that will continue to instill confidence in our markets.

Remarks of Commissioner Thomas J. Erickson, Derivatives Deregulation and Financial Markets: Right Medicine at the Right Time?, Economic Strategy Institute

July 27, 2000

I should preface my remarks with a couple of disclaimers. First, my comments are mine alone and should not be considered to be those of the Commission. Moreover, I will not be commenting directly on those portions of the bills intended to implement the Commission’s proposed regulatory framework. As you probably are aware, the Commission has issued a proposal and the comment period closes on August 7. I concurred in the release of that proposal and expressed several concerns about the proposed framework. I am hopeful that my expressed reservations will be addressed during the comment period -- perhaps even in today’s public forum.

At the outset, I think you should know that I have a bias -- not for turf -- but for the value of functional or market regulation. Functional regulation is over in the area of derivatives should either of these bills pass. And this is despite the fact that U.S. equity and derivative markets have thrived over the years, at least in part because of the combination of institutional supervision -- which has been successful in ensuring the safety and soundness of financial institutions -- on the one hand, and functional, or market, regulation on the other. Together, the SEC and CFTC have carried out market regulatory mandates for a quarter century. Certainly, the SEC has created an environment of investor confidence in capital formation markets. Closer to home, the CFTC, together with Congress and the industry, has fostered an environment that has enabled innovation and growth in on- and off-exchange traded derivatives over the years.

Thus, exchanges that were once almost exclusively used as vehicles for hedging risk in agricultural products now provide sophisticated risk management tools for those dealing in all manner of commodities from agricultural to financial products. And the CFTC has grown along with the markets. Admittedly, the Commission has struggled over the years to achieve the proper balance between providing the industry with the latitude it has needed to innovate and grow while at the same time fulfilling our mandate to ensure the safety and integrity of the markets. For the most part, I think we’ve been successful. For example, I think the Commission has been especially effective in detecting and deterring abuses such as manipulations. Most recently, the Commission reached a $150 million settlement with Sumitomo for the manipulation of global copper markets. Similarly, in 1996 the Commission settled a case against Fenchurch for the manipulation of the U.S. treasury bond futures market.

With that as background, I believe that the bills pending before the Congress would end the quarter century of what I consider largely successful market regulation of derivatives. It seems to me that, if enacted, the bills would have the following ramifications:

Most of the U.S. portion of the $190 trillion derivatives market will be outside the reach of any of the U.S. federal or state financial regulators.
For those parts of the derivatives markets that arguably remain under some regulatory authority, either of the bills would create anomalous results that I think would increase legal uncertainty.

Let’s take a closer look.

Legal Certainty Not So Certain

The CFTC currently has jurisdiction over transactions -- transactions for future delivery and options. The bills exclude commodities, participants, and trading facilities, but then attempt to define narrow bands of regulatory interests for the CFTC for certain portions of these excluded "things." This is not an easy exercise because, as recognized by the PWG, there are fewer and fewer real distinctions between transactions in the OTC market and the exchange markets. This "regulation by exclusion" raises a number of questions about what lands where in the regulatory scheme. For example:

What is a retail swap in an excluded commodity?

The bills carve out OTC transactions so long as they’re among and between sophisticated parties. I suppose this means retail swaps are illegal, but who has jurisdiction to address problems. The CFTC? Only if the swap can be called a future. The SEC? Only if the swap can be called a security. The Fed? Stay tuned, we’ll see.

Do we really mean exclusion of all electronic trading facilities?

Under either bill, an electronic trading facility is defined as little more than an electronic platform that provides real-time audit trail capabilities. Under either bill, electronic trading facilities are excluded from federal oversight. In our zeal to embrace innovation, do we necessarily have to abandon the field? Is there no federal interest in overseeing, for example, electronic trading facilities that provide a platform to retail customers who want to trade swaps?

Make no mistake, there are today in existence electronic trading facilities that meet these definitions and that are affirmatively regulated by the CFTC. Do these bills mean that that the Cantor Financial Futures Exchange, CME’s Globex system, CBOT’s Project A (soon to be Eurex), and NYMEX’s Access would all be excluded from CFTC jurisdiction? If so, how could the CFTC continue its regulation of futures on these otherwise excluded systems? Moreover, what about all the systems to come, such as FutureCom, the Merchants’ Exchange of St. Louis, BrokerTec, and Intercontinental, to name a few.

Can the CFTC really enforce its fraud and manipulation authority over things that are, by definition, excluded from the Commission’s jurisdiction?

Both bills hang on a complex lattice of exemptions and exclusions, but both attempt to preserve the Commission’s authority to address fraud and manipulation in certain excluded markets. I’m interested in seeing some legal analysis supporting the idea that the Commission can exercise its authority in markets that are specifically excluded from its jurisdiction.

Foreign Exchange Transactions

Pursuant to the recommendations of the PWG, the bills allow "otherwise federally regulated entities" and state regulated insurance companies to sell foreign currency derivatives to retail customers without any requirement for basic customer protections.

Do other state and federal regulators have the experience and resources to address forex fraud? Do they even have the interest? Most importantly, do they have the necessary legal authority to address these concerns?

More broadly, if a commodity is excluded from the CFTC’s jurisdiction, and no other federal regulator is affirmatively vested with the authority to investigate fraud and/or manipulation with regard to these commodities, who will investigate incidents of suspected fraud or manipulation? And what tools are available to other authorities to undertake such investigations?

Don’t misunderstand me, I don’t have a quarrel with the policy decisions reflected in the various bills. As one charged with carrying out the public policy enacted by Congress, my job is to fulfill the Commission’s statutory mandate. I am concerned, however, that the policy debate has not focused attention on the potential ramifications of these decisions. To a certain extent, this is embedded within the recommendations of the President’s Working Group report on OTC derivatives to the Congress. Certainly, the federal government may find that these markets are immune from the types of disruptions we’ve seen historically, and therefore that no regulation or oversight should be applied. But that debate has not taken place this year.

As things stand at the moment, and given the muted debate that’s taken place to date, my primary concerns focus on the CFTC’s ability to do what it’s mandated to do if either of these bills becomes law. To varying degrees, both bills rely on voluntary compliance or mandatory compliance but with fairly vague standards.

I’m reminded of a short-lived experiment that recently took place in Montana. Now, I’m from South Dakota, and in that part of the country, we value our personal freedoms. But in Montana, when freed from 55, and in a heightened moment of federalist fervor, the state decided to do away with the prescriptive speed limit and mandated, instead, that motorists drive at a rate of speed that was reasonable given the prevailing conditions.

Imagine if you will being a Montana state trooper who pulls over a Ferrari for travelling 120 mph on a straight stretch of traffic-less interstate highway on a clear day and having to make the case that 120 mph was inappropriate for the conditions. Until recently, that was the state trooper’s charge. Next year, presuming passage of the pending legislation, that will be mine. And you know what, I don’t know if our vehicle will even go 120 mph if one of these bills is passed.

In all seriousness, I think the most important thing to recognize about the proposed legislation is that it defines a good portion of derivatives transactions as outside anyone’s jurisdiction, and the remaining transactions are subject to legal uncertainty from an industry perspective and regulatory uncertainty from mine.

Remarks of Commissioner Thomas J. Erickson before the Chicago Bar Association, Chicago, Illinois

February 20, 2001

Background on the New Legislation

Thank you for the invitation to join you this afternoon; it's always a pleasure to speak with members of the industry bar and to get a feel for the concerns currently confronting derivatives markets and their participants. At least for today, I think we would all agree that the biggest issue confronting the industry is the implementation of the Commodity Futures Modernization Act of 2000. As many of you know, the CFMA traveled a tortuous route to become law. The House bill that would eventually provide the basis for the CFMA was initially proposed in the spring of 2000 and, just before the election recess, passed the full House without significant debate. But ultimate passage still looked like a real long shot. In fact, in October of last year, just before the 106^th Congress was set to end its session, I gave a speech to the Silver Users Association in which I said that the best thing about the bill was that it appeared to be dead. As it turned out, it was a good thing I hedged. The 106^th Congress returned for an unusual, post-election, lame-duck session, managing at least one act of bipartisanship – passage of the CFMA of 2000.

On the positive side of the ledger, the CFMA addresses several of the more nettlesome problems that have bedeviled the industry for years. For example, it attempts to resolve questions regarding the legal status of certain over-the-counter derivatives; lifts the ban on the sale of single stock and narrow-based stock index futures; and provides the Commission with clear jurisdiction over foreign currency bucket shops soliciting retail customers. Of course, the CFMA also reorganizes the way our markets are structured.

The New Market Structure

In the wake of the bill's passage, most of the media attention focused on legal certainty for swaps and single stock futures. Much less has been said about the regulatory reform part of the bill. Perhaps this is due to the fact that the reform package is similar to rules the Commission approved in November of last year and subsequently withdrew upon passage of the legislation. I think, though, that the reform package's muted reception is also a reflection of the complexity of the new system. And this very complexity seems to create a kaleidoscopic effect: everyone who looks at the legislation seems to see something different. Some see it as an effort to preserve regulation over retail markets. Some look at it primarily as a way to ensure that certain sophisticated parties, notably banks, are not at all subject to regulation. Still others look at it as essentially an effort to provide legal certainty for particular OTC transactions. These aren't necessarily mutually exclusive goals, but trying to accommodate them all creates a tension that runs throughout the bill. Today, I will briefly discuss this new market structure and make a few observations about what it might mean for the Commission and for you.

As far as markets go, the legislation generally establishes a multi-tiered approach to regulation based on the notion that certain instruments, certain commodities, certain types of trading platforms, and certain market participants require less regulatory oversight than others. Under the new law, at the top of the regulatory pyramid, and subject to the highest level of regulatory scrutiny, are designated contract markets. These markets are closely analogous to traditional exchanges both in terms of the permitted participants and the level of regulatory oversight applied. In fact, all existing exchange markets overseen by the CFTC automatically became designated contract markets on December 21^st of last year. These markets must comply with a set of 17 "core principles" which are designed to provide exchanges with more flexibility in their approaches to compliance through self-regulation.

One step down from designated contract markets are derivatives transaction execution facilities, or DTEFs, which cater to primarily non-retail participants. DTEFs must comply with eight core principles. In return, they are allowed to represent that they are regulated by the CFTC; this is an important factor for trading facilities seeking to do business abroad. Finally, the CFMA creates two categories of exempt markets that generally are free from Commission oversight, subject only to the Commission's anti-fraud and anti-manipulation authorities.

So who, and what, can trade on these various markets? That depends. Overlaying the market structure is a series of exemptions and exclusions that define on which tier commodities, contracts, or participants may or must trade. For example, most derivative products in financial instruments – if traded among sophisticated parties – are excluded from the CFTC's jurisdiction. Thus, they can trade over-the-counter or on proprietary trading platforms with no regulation by the CFTC; on exempt markets; on DTEFs; or on designated contract markets, depending upon the level of regulatory oversight desired. All other commodities, with the exception of agricultural products, are exempted from the Commission's jurisdiction. These products may trade on designated contract markets, DTEFs, or even on exempt markets. A handful of agricultural products, commonly referred to as the "enumerated agricultural commodities," must trade on designated contract markets, unless, by rule, the Commission decides to permit trading by DTEFs.

As if that's not complicated enough, electronic platforms enabling sophisticated customers to enter bilateral transactions – presumably trading any product except agricultural products – are excluded from Commission jurisdiction. In fact, those excluded systems are arguably outside the "trading facility" definition in the Act and could never seek to be regulated.

The Commission's Jurisdiction

Let's turn now to a brief discussion of what I see as the new list of nettlesome problems and legal uncertainties spawned by the legislation. And let's start with jurisdiction. One of the few things that has not changed under the new law is the basic statutory grant of jurisdiction to the CFTC. The CFTC has "exclusive jurisdiction" over agreements and transactions "involving contracts of sale of a commodity for future delivery…." The term "commodities" has broad meaning under the Act, covering transactions for future delivery in financial, agricultural and other commodities. The CFMA, however, excludes financial commodities and exempts virtually all others from the Act, leaving agricultural commodities the only ones absolutely subject to the Act – just think of the Act prior to 1975. Despite this retrenchment, the CFMA would permit the trading of contracts in any commodity on Commission regulated markets – even those that may not be "futures." This begs some pretty fundamental questions.

Take, for example, a market in excluded commodities that chooses to trade in a regulated environment. The Commission's jurisdiction over such a market would be based entirely upon the market's consent to be regulated. Is consent by the market alone enough for the Commission to assert jurisdiction over the transactions? If E-Bay – an electronic trading platform of a sort – voluntarily sought to place itself within the Commission's jurisdiction, could the Commission reasonably assert its oversight authority? One wouldn't think so. So how are markets in "excluded" commodities somehow different from E-Bay?

Further, nothing in the legislation prevents a swaps market in excluded commodities from gaining recognition as a DTEF or designated contract market. By consenting to the CFTC's jurisdiction, such a market would be able to represent to its participants and to foreign regulators that it was, in fact, regulated by the CFTC. But swaps were excluded from the CFTC's underlying jurisdiction. I cannot claim to be an expert on jurisdiction, but I've yet to read any analysis that convinces me that a market could effectively submit itself to Commission jurisdiction by waiving objections to what is essentially the Commission's subject matter jurisdiction.

So what are we left with? Pre-CFMA, the Act told us that our jurisdiction extended to instruments that behaved like futures contracts and that these instruments, subject to limited exceptions, must be traded on exchanges. This approach to jurisdiction was relatively simple in that it defined jurisdiction in terms of types of transactions. This enabled the CFTC to carve out exemptions for swaps, for example, while maintaining the integrity of a comprehensive regulatory regime over markets. The tension existed around the edges, where we argued about exactly which instruments behaved like futures contracts. Post-CFMA, in the name of legal certainty, things have gotten much more complex. In order to determine whether something falls within our jurisdiction, we now must look to the type of transaction, the type of participant, the type of underlying commodity, and even the type of platform. All of that must be wedged into the preexisting grant of transactional jurisdiction. And we can disregard all of that if someone simply asks us to be their regulator.

Tools Lost and New Responsibilities for Markets

But let's put aside the question of jurisdiction for a moment and look at some less metaphysical, more immediate concerns. As I've mentioned, DTEFs will operate under the Commission's oversight, but without having to comply with some elements of traditional market regulation. So what's lost? Large trader reporting, for one.

The CFMA does not require DTEFs to maintain or provide the Commission with reports of positions held by their customers that exceed certain thresholds. As I've said in the past, large trader reports are an essential tool in the Commission's effort to detect and deter market manipulation. I have heard it said that, given the fact that DTEFs are intended to serve primarily sophisticated or commercial users, we needn't be as concerned with manipulations. I couldn't disagree more strongly.

First of all, I don't know that it's possible to neatly cordon off retail participation from these markets. As qualified participants, pension funds will be a nice proxy for retail. Second, market manipulations reach far beyond the market's participants. Consumers ultimately pay for manipulations in commodity markets: home buyers pay higher interest rates; commuters pay higher prices for gasoline; and we all pay higher prices for heating oil and food. I can't help but see the loss of large trader reports as a potential blow to confidence in our regulatory regime.

Many people – perhaps even most – think this new structure makes a great deal of sense because sophisticated and commercial participants simply do not require the protection that retail participants do. But that alone is really no change from the status quo. The real change is that for commercial markets, regulation is now optional. As a result, much of the information that the CFTC relied on in the past in its effort to ensure market integrity will fall into a gap – not unlike the gap that permitted the Long Term Capital Management incident to occur. Of course, when LTCM happened, lack of transparency and accountability were issues for the regulators to mull; from now on, they will be issues the industry will have to confront.

In the end, my observations with respect to the implementation of the CFMA flow from a broader public interest perspective. If the Commission is to accept responsibility for certain types of transactions, in order for it to serve the public's interest in fair and equitable markets, it needs an unambiguous statement of where its jurisdiction starts and where it stops. By the same token, the industry deserves a clear sense of where its interests and the Commission's meet. That will be our task in the coming years.

Conclusion

It's been widely noted that there are numerous technical problems with the CFMA that will need to be addressed. The Commission is unanimous in its commitment to an expeditious implementation of the CFMA. In fact, CFTC staff is currently working on implementing regulations that will provide some guidance. Where the law is clear on its face, it will be implemented. Where it is less clear, the Commission will have to make some decisions about how to implement particular provisions. As for the legislation itself, I would encourage Congress to quickly address some issues and technical problems. As for other, more conceptual problems, a wait-and-see approach seems more likely and more prudent. Let me conclude today by stating what is crystal clear: the CFMA is the law of the land, and we at the CFTC will do our best both to implement and enforce the legislation.

Remarks of Commissioner Thomas J. Erickson before the New York State Bar Association, New York, New York

February 22, 2001

Background on the New Legislation

The New Market Structure

In the wake of the bill's passage, most of the media attention focused on legal certainty for swaps and single stock futures. Much less has been said about the regulatory reform part of the bill. Perhaps this is due to the fact that the reform package is similar to rules the Commission approved in November of last year and subsequently withdrew upon passage of the legislation. I think, though, that the reform package's muted reception also reflects the complexity of the new system. And this very complexity seems to create a kaleidoscopic effect: everyone who looks at the legislation seems to see something different. Some see it as an effort to preserve regulation over retail markets. Some look at it primarily as a way to ensure that certain sophisticated parties, notably banks, are not at all subject to regulation. Still others look at it as essentially an effort to provide legal certainty for particular OTC transactions. These aren't necessarily mutually exclusive goals, but trying to accommodate them all creates a tension that runs throughout the bill. Today, I will briefly discuss this new market structure and make a few observations about what it might mean for the Commission and for you.

The Commission's Jurisdiction

So what are we left with? Pre-CFMA, the Act told us that our jurisdiction extended to instruments that behaved like futures contracts and that these instruments, subject to limited exceptions, must be traded on exchanges. This approach to jurisdiction was relatively simple in that it defined jurisdiction in terms of types of transactions. This enabled the CFTC to carve out exemptions for swaps, for example, while maintaining the integrity of a comprehensive regulatory regime over markets. The tension existed around the edges, where we argued about exactly which instruments behaved like futures contracts. Post-CFMA, in the name of legal certainty, things have gotten much more complex. In order to determine whether something falls within our jurisdiction, we now must look to the type of transaction, the type of participant, the type of underlying commodity, and even the type of platform. All of that must be wedged into the preexisting grant of transactional jurisdiction. And, by the way, we can disregard all market characteristics if someone simply asks us to be their regulator.

Tools Lost and New Responsibilities for Markets

Conclusion

Remarks of Commissioner Thomas J. Erickson before the National Introducing Brokers Association at the 10th Annual Conference, Chicago, Illinois

June 23, 2001

Good morning. I'd like to thank Melinda Schramm for extending the invitation for me to join you today. I've gotten to know Melinda through her representation of the NIBA on the CFTC's Agricultural Advisory Committee, where she has been a forceful advocate for the IB community. Through Melinda's work on that Committee, I've become fairly familiar with the membership of your group and its concerns. Of course, there's no substitute for being able to speak with you personally and to become better acquainted with the issues you face, and, more broadly, to discuss some of the issues the Commission and the industry face. In that regard, I thought it might be helpful to start off with a quick overview of how the recently enacted Commodity Futures Modernization Act works and what it might mean to this industry.

The Commodity Futures Modernization Act of 2000, or CFMA, was part of the congressional reauthorization process the CFTC periodically goes through. Reauthorization basically means that, every five years or so, Congress takes a hard look at the agency's mission and its effectiveness in achieving that mission. To the extent the Commodity Exchange Act needs a tune-up, Congress does that at the same time it reauthorizes the agency. As many of you may know, this year's reauthorization was closer to a complete overhaul than a tune-up.

Passage of the CFMA has altered the very nature of the CFTC's mission. In short, we have moved from being a “front-line” regulator to an “oversight” regulator. In general terms, this means that the Commission must take a much more flexible approach to regulation – one which allows industry participants more latitude in deciding how best to comply with regulatory requirements. Commensurate with this approach, the industry has been given much more responsibility to police itself. This means that for the sake of your business, it's imperative that you understand the legal framework within which you now operate.

As far as markets go, the CFMA establishes a multi-tiered approach to regulation based on the notion that certain instruments, certain commodities, certain types of trading platforms,
and certain market participants require less regulation than others. Under the new law, designated contract markets are subject to the highest level of regulatory scrutiny. These markets are closely analogous to traditional exchanges both in terms of permitted participants, commodities allowed to trade, and the level of regulatory scrutiny applied. All existing exchange markets overseen by the CFTC automatically became designated contract markets when the CFMA was signed into law on December 21^st of last year. Designated contract markets must comply with a set of 18 “core principles” that are designed to provide exchanges with more flexibility in their approaches to compliance through self-regulation.

One step down from designated contract markets are derivatives transaction execution facilities, or DTEFs, which cater to primarily non-retail participants. DTEFs must comply with nine core principles. In return, they are allowed to represent that they are regulated by the CFTC; this is an important factor for trading facilities seeking to do business abroad. Finally, the CFMA creates two categories of exempt markets that generally are free from Commission oversight, subject only to the Commission's anti-fraud and anti-manipulation authorities.

Who, and what, can trade on these various markets depends upon a number of variables. A series of exemptions and exclusions throughout the CFMA define on which tier particular commodities, contracts, or participants may or must trade. For example, most derivative products in financial instruments – if traded among sophisticated parties – are excluded from the CFTC's jurisdiction. Thus, they can trade over-the-counter or on proprietary trading platforms with no regulation by the CFTC. If the market chooses, such instruments can also trade on exempt markets, on DTEFs, or on designated contract markets, depending upon the level of regulatory oversight desired. All other commodities, with the exception of agricultural products, are exempted from the Commission's jurisdiction. These products may trade on designated contract markets, DTEFs, or even on exempt markets. A handful of agricultural products, commonly referred to as the “enumerated agricultural commodities,” must trade on designated contract markets, unless, by rule, the Commission decides to permit trading by DTEFs.

Just to add yet another layer of complexity, electronic platforms enabling sophisticated customers to enter bilateral transactions – presumably trading any product except agricultural products – are excluded from Commission jurisdiction. In fact, those excluded systems are arguably outside the “trading facility” definition in the Act and could never seek to be regulated.

From this brief description, you can see that one of the top priorities of the drafters of this legislation appears to have been an attempt to loosen requirements for markets with sophisticated customers. In addition, this legislation not only acknowledges, but also embraces, the increasing role technology is playing in the derivatives industry. Certainly, one cannot ignore the profound changes technology brings to our industry, or the warp speed at which these changes can take place.

As Chairman of the CFTC's Technology Advisory Committee, I have a chance to discuss the application of new technologies with a broad spectrum of industry participants. The more I hear about these issues from industry participants, the more clear it becomes that when we refer to “technology” we are not simply talking about the face-off between traditional open outcry exchanges and emerging electronic trading platforms. Rather, we are talking about a force that
touches and inalterably changes every aspect of our industry. Yesterday's buzzwords are overtaken by tomorrow's, and phrases like “automated order routing systems” begin to sound quaint when industry participants begin talking in terms of “straight-through processing.” I know many of you have integrated technology into your businesses, and I hope we'll have time in the question-and-answer session to discuss some of the issues you see on the horizon.

So what do the CFMA and the changes it enables mean to introducing brokers? I suppose there is the potential for both good news and bad news in all this innovation. Whether it's good or bad news may depend to a great extent on how willing IBs are to embrace change and think creatively about where they fit in this shifting landscape. As an initial matter, it appears as though open outcry trading will remain a vital part of our industry, at least in the near term. We have not seen our domestic exchanges migrate to electronic trading with nearly the same speed and decisiveness as the European bourses. Nevertheless, electronic trading is plainly here to stay. It's also a safe bet that electronic trading technology will increasingly enable customers to access markets more directly – probably not a comforting thought to the intermediary community.

But just as surely, technology will present potential customers with multiple domestic markets offering similar products. In an environment with so many more options for the derivatives customer, IBs may end up providing a vital link between the customer and the exchange to which that individual's business is best suited. On which market a customer chooses to trade may well depend upon the quality of information he or she has about the way the market works.

By way of example, last Monday, the Commission approved the BrokerTec Futures Exchange's application for designation as a contract market. One of the more significant components of the BrokerTec application is a rule that permits block trading with a reporting timeframe of up to four trading session hours. Block trading permits certain exchange participants to negotiate and execute large trades away from the exchange pit or trading facility for a single price. The block and price are subsequently reported to the floor. By negotiating the trades off the floor, the parties to the trade are not forced to unbundle a large transaction through piecemeal execution over time. The theory of block trades and how they interact with traditional notions of price discovery is something that can be debated, but the CFMA explicitly permits such trades.

Prior to BrokerTec, the Commission had considered block trading petitions from other exchanges and had approved rules for several exchanges, but in no event was the reporting timeframe that was ultimately approved greater than 5 minutes. BrokerTec, at 240 minutes, represents an enormous expansion of the time between when a trade is agreed to and when it must be reported to the exchange and, subsequently, to its participants. As I said in my concurrence to BrokerTec's exchange designation, I can't help but believe that this significant reporting delay will result in a less transparent, more volatile marketplace, and one that might disadvantage retail and modest commercial market participants.

Why do I tell you all this? Because I think this represents both the opportunity and the risk inherent in the new regulatory scheme under which we all operate. I believe the new law and changing marketplace will require you, as IBs, to consider how to provide new value to potential customers. For example, the distinctions between the operating procedures – such as block trading rules – of various exchanges may become significant factors in a customer's decision regarding on which exchange to trade. The IB who introduces that customer's trade may serve a key role in helping the customer identify what type of exchange best suits his or her objectives and risk tolerance.

In addition, the increased and more direct accessibility to markets by retail customers may make some of you consider the advantages of providing more direct trading advice. I am pleased to see that you will have the chance later in your program to learn more about registration as commodity trading advisors. Certainly, in the context of securities futures products that will be traded on both futures and securities exchanges, it's worth considering how you might add value to your services, because you will be competing directly with securities broker dealers.

It's my hope, and expectation, that as the character of our markets changes, new avenues of opportunity will open for industry participants. In keeping with the thrust of the CFMA, these new opportunities will also mean increased responsibility for industry participants as the Commission takes a step back, into an oversight role. The Commission is in the process of implementing the new law. Among the many priorities in this regard is a study of the regulation of intermediaries. I believe the Commission's request for comment was published in the Federal Register yesterday. This will be an opportunity for you to weigh-in on those issues that affect you most directly.

In a similar vein, I'd also like to say a few words about a topic that I know concerns a great many of you: the NFA's recent increase in its membership dues and registration fees. I know there is significant concern among you based of the stack of mail in my in-box. First, a bit of background.

The NFA's decision to raise membership dues and registration fees for all classes of registrants was based on its desire to stabilize operating capital by reducing its dependency on transaction fees. The NFA informed the Commission's staff that the proposed increases were reviewed and supported by its Advisory Committees – including the IB Advisory Committee.

As I said, I understand your concerns. But I must stress that the decision with regard to fees is, in effect, a business decision of the NFA. The Commission would only intervene in such a decision in the most extraordinary of circumstances.

I think there are a couple of lessons for all of us embedded in the fee debate. First, both the industry and the agency are operating under new rules. Under these rules, SROs such as the NFA will be the industry's “front-line” regulators and first point of contact for industry participants on many more issues. As an oversight regulator, the Commission will not intervene when an SRO has made a business decision that can be rationally explained and meets the limited standards established in law. Second, under this new regime, more responsibility is placed on both industry participants and their SROs. Accordingly, it is incumbent upon industry participants to take a proactive role and to work closely with their SROs to achieve results that are in their mutual business interests. I believe these are important lessons for us all because, in the end, public confidence in our markets will depend on how the industry adapts to and carries out its new responsibilities under the law. This will only occur with the energetic participation of all of industry participants in the self-regulatory process.

Thank you again for the invitation. I'd be happy to answer a few questions if we have time.

Remarks of Commissioner Thomas J. Erickson before the Futures Industry Association at the Futures and Options Expo 2001, Chicago, Illinois

November 29, 2001

Good afternoon. I am pleased to be here with you in Chicago and to participate in the Futures Industry Association’s Expo 2001. The FIA Expo has a tradition of linking the futures business with the technology that not just supports it, but is increasingly woven into the fabric of our markets. As chairman of the Commission’s Technology Advisory Committee, I thought it would make sense to take advantage of these synergies by holding a committee meeting in conjunction with this week’s events, which we did two days ago on Tuesday.

I thought what I’d do today is to provide a little background about what your peers in the industry talked about at the Technology Advisory Committee. I’d also like to share some reflections regarding September 11 from a regulatory perspective. And finally, I will conclude with some thoughts about these matters in the context of the Commodity Futures Modernization Act of 2000.

Advisory committees play a vital role for independent agencies such as the Commission. The CFTC maintains three such committees: the Agriculture Advisory Committee, chaired by Commissioner David Spears; the Global Markets Advisory Committee, chaired by Commissioner Barbara Holum; and the Technology Advisory Committee. The Technology Advisory Committee was established nearly two years ago by then Chairman Bill Rainer. Until this year, our current Acting Chairman Jim Newsome chaired it. It has been a privilege for me to work with and learn from the industry leaders serving on this panel.

I consider the advisory committees to be more than a biannual opportunity for an industry reunion. Rather, advisory committees should be a forum for timely and active debate. These committees are one of the most important vehicles for industry input to the Commission. Providing such a vehicle is my goal for the Technology Advisory Committee. This Tuesday’s meeting committee far exceeded my already high expectations for the committee. The depth of the discussion is a tribute to the dedication and commitment of the roughly two-dozen members of the committee.

Last May, the Technology Advisory Committee established two subcommittees – the Standardization Subcommittee and the Market Access Subcommittee. Each of these subcommittees produced written interim reports for the consideration of the full committee.

The Standardization Subcommittee established as its focus the issue of standardization of electronic communications in the futures and options industry. The subcommittee engaged in a comprehensive review of electronic communications within the futures and options industry, as well as those occurring throughout other parts of the financial services industry. The results of that study are contained in the subcommittee’s two areas of recommendations.

First, the subcommittee set out to review communication protocols. Communication protocols generally are the instructions embedded into communication systems that define how we communicate electronically. The subcommittee reviewed various protocols currently employed in various sectors of the financial services industry and recommended a series of best practices for protocol standards.

Second, the subcommittee sought to identify the data content that should be included in every electronic transaction from the point a customer initiates an order to the point the transaction is confirmed back to that customer. The interim report includes a detailed list of the content the subcommittee recommends be included in electronic transactions.

The Market Access Subcommittee set out to review market access privileges in solely electronic market venues. With the emergence of all-electronic markets, the broadest conceivable range of participants – from institutional to retail – have direct access to markets. For the members of the subcommittee, this possibility raised questions about the fairness of access to markets across the spectrum of customers. The Market Access Subcommittee developed a set of recommendations for best practices in the provision of access to this broad and varied group of customers.

As I mentioned, each of the subcommittees prepared comprehensive reports. I commend them to you and encourage you to review them and provide any comment to members of the subcommittees. Final reports to the full committee are expected at the next meeting this spring. The reports are available for your review at the Commission’s web site.

These discussions of standardization leap into relief following the attack of September 11 when it became crucial for all markets and their participants to communicate and cooperate on an unprecedented level. The importance of technology simply cannot be overstated.

In the aftermath of the September 11 attacks, there has been much discussion focused on what the industry needs to do to prepare itself for emergencies. Given the experience of the New York exchanges, we can say with certainty that there is no substitute for business continuity planning and disaster recovery planning – not to mention a hefty dose of hard work and goodwill. The New York exchanges would not have been able to get back on line as quickly as they did without careful planning beforehand and the work of extraordinarily dedicated staff afterwards. They deserve all the accolades they are receiving, and we can learn a great deal from their experience.

In the months before the September 11 attack, this industry – like others – viewed technology primarily as a means of maximizing productivity and profitability and reducing expenses. In the wake of September 11, technology is being viewed through the lens of what happened that day and the financial services industry as a whole is being asked to consider and weigh extraordinary investments in the electronic and physical architecture of financial markets. Where once we were focusing on streamlining, we are now talking about cloning and redundancy. From what I have seen at this year’s FIA Expo, the entrepreneurial spirit is alive and well in this industry, and I expect there will be a number of business solutions available to you to meet many of these new demands.

You all are going to face these issues for years to come and you will no doubt have to make some difficult decisions. This afternoon, I’d like to pose a few questions to you regarding the role of the regulator in market breaks.

Back in May, some months before the September 11 attacks, the Technology Advisory Committee met in Washington. One of the panels at that meeting was titled “Disaster Scenarios in Linked Markets: Who's in Charge?” The focus of the panel in May was the rippling effects a profound market break might have in a world of linked markets, who should respond to such breaks, what they are able to do, and what they should do. I doubt any of us envisioned the kind of physical devastation that occurred in New York in September, but the questions asked by that panel are more relevant than ever.

So I put it to you: what is your expectation of a regulator in such situations? Do those expectations mesh with the authorities vested in that regulator?

We all know that the Commodity Futures Modernization Act granted markets unprecedented flexibility, and it also expected the Commission to step back from hands-on regulation, even during times of market emergencies. The trade-off, of course, is that the industry accepts more responsibility.

The flexibility and freedom gives all markets and their participants enhanced abilities to compete, and to succeed or fail. In this environment, who is looking out for the public interest and market integrity? By and large, it is you.

Things worked as well as they did in New York because of the incredible spirit of cooperation between and among markets, their participants and the Commission. In this new, less rule driven environment, I submit to you that must be the model for how we work together.

Before I close I want to take a moment to thank you, the members of this industry and the staff of the Commission, for the Herculean efforts made to bring U.S. derivatives markets back up following September 11. It was truly inspiring for me to witness the strength of the human spirit. You all worked through your own personal tragedies to ensure the continuity of business in this country. We are indebted to you all.

Thank you.

Oral Testimony of Commissioner James E. Newsome Regarding the President's Working Group OTC Study and Long-Term Capital Management before the United States Senate Committee on Agriculture, Nutrition and Forestry

December 16, 1998

Mr. Chairman and members of the Committee, I am pleased to testify before you today regarding the President’s Working Group Over-the-Counter Derivatives Study and Long-Term Capital Management. I thank you for this opportunity. My comments will be brief and general, and I would request that my submission of written comments be included in the record of this hearing. The issues we are addressing today are at the forefront of discussions among and between financial market regulators and participants, and I applaud the Committee’s efforts to bring clarification and direction to this ongoing debate. Additionally, I look forward to hearing comments from the Committee on these issues.

Over the past decade, the over-the-counter marketplace has become increasingly important and attractive to the risk management requirements of financial market participants, not only in this country, but worldwide. The expanding nature of these markets, in size and complexity, has been driven by the necessities of global financial and business enterprise. The United States has enjoyed a vital role in this expansion and innovation, and I believe that with appropriate regulation, mindful of the free market principles that have given our economy its vitality and stability, such leadership by the United States in this area can and will continue. However, I believe just as adamantly that inappropriate or heavy-handed regulation will surely stifle financial market innovation, and send these important markets overseas. Accordingly, let me state the central and most important theme of my comments today: I believe it is imperative that legal certainty be restored to these vitally important markets. To that end, I reiterate the commitment in the September 11, 1998 letter to you, Mr. Chairman, in which Commissioner Spears and I affirmed that we would not vote to propose or issue any new rules, regulations, interpretations or policy statements to regulate swaps or hybrid instruments prior to Congress having the opportunity to review and analyze issues relating to OTC derivatives. I am gratified that this commitment of a majority of the Commission was subsequently codified by Congress, inasmuch as this gives concrete reassurance to markets and market participants, and serves considerably to decrease regulatory and legal uncertainly. Also, I agree with the proviso that the moratorium not interfere with the Commission’s ability to take action in furtherance of any determination by the President’s Working Group, and I am committed to prompt implementation of any action that the Working Group and Congress deem appropriate. Once again, let me emphasize my firm belief that these fundamental issues of regulation should be determined by Congress prior to any intervening regulatory activity.

Furthermore, I commend and fully support the requests made of the President’s Working Group on Financial Markets to undertake studies on OTC markets and on hedge funds. I look forward to cooperating with the other members of the Working Group and with the Steering Committee as we work on these studies, and I believe that these documents will provide significant insight and guidance on various issues to facilitate Congressional deliberation and determination. It is my understanding that several sections of both studies have been drafted, and that the hedge fund study should be completed early in the new year. It is my hope that the OTC study will subsequently be completed as soon thereafter as possible. Although neither I nor my staff have been personally involved in the Working Group or Steering committee discussions, at the appropriate time I would welcome such interaction, and I look forward to reviewing drafts of both studies, and to a joint effort by the Working Group members and their staffs.

As an important caution to this discussion, let me say that I believe it is premature to make any predictions about the conclusions of these studies prior to their completion. Similarly, I believe it imprudent to state overly broad opinions regarding the possible hazards or deficiencies of particular transactions or entities, prior to having the facts at hand to the fullest extent possible. Mr. Chairman, too often, the predicting of imaginable jeopardies becomes a self-fulfilling prophecy, and the issues we are contemplating are too important to put at risk with prognostication or supposition. With those qualifying factors in mind, I believe it may be beneficial to review certain questions as we proceed to carry out our work on these studies, such as promotion of best practices standards, possible enhanced disclosure of credit concentration, and study of risk modeling. Most importantly, I believe it is imperative to keep in mind that less intrusive, rather than more intrusive regulation is the desirable outcome of these endeavors.

Again, thank you Mr. Chairman for the opportunity to make these comments, and I would be happy to answer any questions.

Remarks of Commissioner James E. Newsome before the National Grain Council, 1999 Annual Meeting in Rancho Mirage, California

February 11, 1999

Opening Remarks

Thank you Bob for the opportunity to address this prestigious group. I have been anxiously awaiting this meeting and only regret that I can't be with you for its entirety. I would like to congratulate Dan Dye, your new chairman and Jim Lindau for the leadership he has provided to this organization the last two years.

Things are changing at CFTC. With the recent announcement of Chairperson Born that she will not seek another term as head of our agency, and the recent presidential nomination of Tom Erickson to take the place of outgoing Commissioner John Tull, we are experiencing some significant leadership changes.

I have had the opportunity to meet many of you on recent trips to Chicago, Kansas City, and Minneapolis to discuss my background and philosophy. I believe in free market principles, and have a pro competition, pro business attitude. I believe government should be led by the people for the people.

I also tend to look at issues primarily from a producer/industry viewpoint, and I certainly feel that the views of the industry to both Congress and regulatory agencies are of utmost importance. As I have already shown, I am interested in your knowledge and viewpoint and am willing to come to you to get it.

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 Senators Lott and Cochran would not take no for an answer.

I would like to discuss generally several issues that are currently before the Commission, talk about my ideas as we approach reauthorization, and finally take any questions you might have.

Issues

Dual Trading

We all understand the reason for Congress including this in the FTPA. However, that was ten years ago. Times have changed dramatically since then: electronic trading has become a reality in the marketplace and will become more widespread in the coming years; and exchanges have, across the board, made major improvements to their audit trail systems.

The Commission is in the process of final review of the Chicago exchanges' petitions, and I expect and hope that those will be voted on in the near future. While I won't prejudge the issue, I will certainly review the exchanges' systems as a whole, and will make my decision accordingly.

Agricultural Trade Options (ATOs)

An agricultural trade option is an agreement giving the agricultural producer the right to deliver his or her commodity in the future for a set price. The producer is not obligated to deliver and may simply choose to "walk away" from the option contract. In return for this right, the producer pays a fee, usually called the option premium. Agricultural trade options would not be traded on a commodity futures exchange, but directly between commercial parties. I realize that we are not all in agreement on this issue.

There has been a long history of on-again, off-again options trading, both on- and off-exchange. Since 1974, there has been a gradual lessening of the regulatory prohibitions on trading commodity options, the last of which has been the lifting of the off-exchange agricultural trade options ban. The Commission lifted the ban in April 1998 with the introduction of a 3-year pilot program.

I was not Commission during creation of pilot program, but support the concept of additional risk-management tools for the agricultural industry. I am concerned, however, about the usefulness of the pilot program under current rules. It was launched over 9 months ago, but the National Futures Association has yet to receive any applications for participation.

All producers must protect themselves against downside price risk, given the Freedom to Farm Act, increased market volatility, and most recently, exceptionally low commodity prices. However, most producers do not use the futures market (only about 10 percent according to one study).

Given these dynamics, I believe that we must find a way to create a product that is attractive to the agricultural sector, both producers and agribusinesses, while ensuring the preservation of market integrity, given the changing structure of agriculture. The program must be attractive, not only to farmers and ranchers, but also to local elevators and other processing facilities. In order to achieve such a goal, the process must be industry-driven. Industry knows best what it needs and what will actually work. To that end, Commissioner Spears and I are meeting with industry participants to draft needed changes to the ATO program.

I believe that if the ATO program is successful, the exchanges will see new business generated through the ATOM's need to hedge their risk-- risk incurred when selling trade options to agricultural producers. I am committed to working with you in order to make this program viable. I believe that the more risk-management tools available to industry and the higher the level of competition, the better the products will ultimately be. If ATOs are not the answer, then we need to work together to determine what is.

International Issues

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 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.

Commission staff is currently putting together final rules for consideration by Commissioners, and I hope that this will move along expeditiously.

CFTC Reauthorization

Senator Lugar pledged to begin reauthorization hearings early this year. Many members of Congress have expressed concern regarding actions taken by the CFTC over the last year, particularly with the Commission's Concept Release concerning the Over-The Counter (OTC) Derivatives Market, and believe these issues should be addressed in reauthorization process. Many of you have been involved or have closely followed this process and know my position on this issue.

There is talk of more specifically defining the jurisdiction of the CFTC, which could possibly lead to a reduction in CFTC authority or, as in the past, some are even suggesting merging the CFTC with the SEC. The Senate and House Agriculture Committees will hold a symposium later this month to educate Hill staffers on the Commodity Exchange Act and issues of importance for the upcoming reauthorization. I am sure that several proposals will be introduced or re-introduced during this discussion.

I believe that discussion is primarily for you [industry] to take up with Congress. I also believe that whatever action is ultimately taken by the Congress, the agricultural emphasis can and should be maintained in a clearly defined way, given the role commodity markets play in the risk-management arena.

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 work withmembers of the Agriculture Committees to develop a regulatory scheme that discourages fraud and manipulation, but encourages innovation, technology, fair competition, and sound business practices.

The Commission must work with the Congress in determining how much flexibility the Commission needs to address the changing technological environment. Who would have thought 10 years ago that we would be considering trading over the Internet? Who knows what technological advancements in futures and options trading will be presented to us in 10 more years? These are issues in which both Chairman Lugar and Chairman Combest have expressed an interest, and most likely will be taken up during the reauthorization process.

We must decrease the regulatory burden on our domestic exchanges in order for them to not only continue to compete and prosper, but continue to be global leaders. This means we must encourage, not impede those who think outside of the traditional box. The CFTC must have the flexibility to be innovative from a regulatory standpoint to those within industry who are creative and visionary. Finally, 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 regulation so our exchanges and industry may prosper

2.   CFTC flexibility to address creative and innovative ideas

3.   Jurisdictional boundaries- who do you want your regulators to be?

Now, I know that these issues are not as simple as I just stated; however, if industry cannot agree on some basic issues, the outcome will be disappointing to all. I thank you for the opportunity to be here in California for your annual convention. I appreciate your attentiveness and look forward to working closely with you throughout the year.

Remarks of Commissioner James E. Newsome before the National Cattlemen's Beef Association Annual Convention and Trade Show Live Cattle Committee in Charlotte, North Carolina

February 13, 1999

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 that are of significant interest and import to your membership. As you know, things are changing at the CFTC: the Chair has announced that she will be living at the end of her term, Commissioner Tull will be leaving the Commission at the end of this month, and the President has recently made a new nomination to the Commission. At the very least, one can say that there will be leadership changes at the Commission in the near future. However, please be assured that we will endeavor to provide a seamless continuation of public service at the CFTC, and that your interests, and the interests of all market participants, will be heard and considered as we tackle the major issues before us.

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 my family's cattle operation in Florida. For the last ten years, I have worked as the Executive Vice President of the Mississippi Cattlemen's Association and Beef Council, and consequently, I tend to look at things from the producer's point of view. I, like you, 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 Senators Lott and Cochran would not take "no" for an answer.

I bring to the Commission a free market philosophy that is pro-competition and pro-business, and, although I often find myself in the minority, I still 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, and 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 can make a commitment to you: just as 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.

FutureCom

FutureCom has applied to the CFTC to become an Internet-based futures exchange, where participants can actually trade contracts electronically, directly on the Internet rather than through an intermediary. While this represents a sea change in the way risk management tools have traditionally been transacted, it's clear that electronic trading is part of the future for all of us, and, indeed, I think this is only the first among many such efforts that we will see in the years to come. Let me say that I commend Bill O'Brien for his innovative thinking and his entrepreneurship; but as he will tell you, when you're breaking new ground, sometimes the soil can be pretty hard.

I certainly support the concept of multiple investment/hedging options for producers and other industry participants; furthermore, I believe all participants should have a level playing field in this area to encourage pure competition. And, in accordance with my earlier comment to you about thinking "outside the Beltway," I recently convened a meeting of CFTC staff and FutureCom in order to help facilitate progress on the regulatory side; and I believe that it was a productive meeting. This type of innovative thinking raises some regulatory issues regarding the guidelines of the Commodity Exchange Act, and will probably need to be addressed in CFTC reauthorization. In the meantime, I will continue to exhort CFTC staff to encourage, not impede, creative market thinking. As responsible regulators, we should work with the Congress to address regulatory challenges, therefore encouraging visionary ideas.

Dual Trading

Dual trading refers to the practice of trading on the floor of an exchange for both one's customers and oneself. As you know, in the Futures Trading Practices Act of 1992 (FTPA), Congress directed the CFTC to implement dual trading prohibitions in certain markets. Several exchanges petitioned the Commission for exemptions from this prohibition, and for the past several years the Commission and exchanges have been working on these petitions. We all understand the reason for Congress including this in the FTPA. However, that was ten years ago. Times have changed dramatically since then: electronic trading has become a reality in the marketplace and will become more widespread in the coming years; and exchanges have, across the board, made major improvements to their audit trail systems. The Commission is in the process of final review of the Chicago exchanges' petitions, and I expect and hope that those will be voted on in the near future. While I won't prejudge the issue, I will certainly review the exchanges' systems as a whole, and will make my decision accordingly.

Agricultural Trade Options (ATOs)

As most of you know, there has been a long history of on-again, off-again options trading, both on- and off-exchange, and that, in large part, provides the basis for the circumstances we find ourselves in today. Since 1974, there has been a gradual lessening of the regulatory prohibitions on trading commodity options, the last of which has been the lifting of the off-exchange agricultural trade options ban. The Commission lifted the ban in April 1998 with the introduction of a 3-year pilot program. The pilot program was the result of long and intensive study and review at the Commission and with various agricultural interests.

I was not at Commission during creation of pilot program, but support the concept of additional risk-management tools. I am concerned, however, about the usefulness of the pilot program under current rules, and think the chairman of this live cattle marketing committee, Mr. Paul Hitch, summed it up best at the CFTC Agricultural Advisory Committee meeting last August. He said since we [CFTC] had the pilot program open for a few months and had yet to have anyone register, that we "might have perfected a hemorrhoid transplant. There is a world of potential donors, but there are no willing recipients out there."

In fact, the pilot program was launched over 9 months ago, but as yet there have been no applications for participation. I have met with industry participants in Chicago, Minneapolis, Kansas City, New York, and there appears to be common areas of concern regarding the program: overburdening paperwork requirements, the exemption level, the lack of cash settlement ability, and registration issues.

Given these dynamics, I believe that we must find a way to create a product that is attractive to the agricultural sector, both producers and agribusinesses, while ensuring the preservation of market integrity, given the changing structure of agriculture. ATOs are one alternative, but several things will have to change before the program will have a chance to succeed. The Commission must first create a program that is attractive, not only to farmers and ranchers, but also to local elevators and other processing facilities. In order to achieve such a goal, the process must be industry-driven. Industry knows best what it needs and what will actually work. To that end, Commissioner Spears and I are meeting with industry participants to draft needed changes to the ATO program.

I believe that if the ATO program is successful, the exchanges would see new business generated through the ATOM's need to hedge their risk-- risk incurred when selling trade options to agricultural producers. I am committed to working with you in order to make this program a success. I believe that the more risk-management tools available to industry, the higher the level of competition, and the better the products will ultimately be. I am still optimistic about the potential of ATOs to become a viable risk-management tool in the future; however, if ATOs are not the answer, then we need to work together to determine what is.

Foreign Terminals

On July 24, 1998, the Commission published a concept release regarding the placement of foreign board of trade terminals in the United States. 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. Commission staff is currently putting together final rules for consideration by Commissioners, and I hope that this will move along expeditiously.

Future Regulatory Challenges

Importantly, I believe we must decrease the regulatory burden on our domestic exchanges in order for them not only to continue to compete and prosper but to remain global leaders. The Commission must have the flexibility to be innovative regarding those within the industry who are creative and visionary. Finally, industry input will be critical in this process; experience and common sense tell me that if market participants can agree on basic issues, then Congress will respond.

CFTC Reauthorization

Senator Lugar pledged to begin reauthorization hearings early this year. Many members of Congress have expressed concern regarding actions taken by the CFTC over the last year, particularly with the Commission's Concept Release concerning the Over-The-Counter (OTC) Derivatives Market, and believe these issues should be addressed in reauthorization process.

There is talk of more specifically defining the jurisdiction of the CFTC, which could possibly lead to a reduction in CFTC authority or some are even suggesting merging the CFTC with the SEC. The Senate and House Agriculture Committees will hold a symposium later this month on the Commodity Exchange Act and issues of importance for the upcoming reauthorization. I am sure that several proposals will be introduced or re-introduced during this discussion.

I believe that whatever action is ultimately taken by the Congress, the agricultural emphasis can and should be maintained in a clearly defined way, given the role commodity markets play in the risk-management arena. 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 work with members of the Agriculture Committee to develop a regulatory scheme that discourages fraud and manipulation; that doesn't impede, but rather encourages innovation, technology, fair competition, and sound business practices.

Thank you for the opportunity to be here; I look forward to working with you in the years to come.

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Remarks of Commissioner James E. Newsome before the National Grain Council, 1999 Annual Meeting in Rancho Mirage, California

Remarks of Commissioner James E. Newsome before the National Cattlemen's Beef Association Annual Convention and Trade Show Live Cattle Committee in Charlotte, North Carolina

Remarks of Commissioner James E. Newsome before the National Cattlemen's Beef Association Annual Convention and Trade Show Live Cattle Committee in Charlotte, North Carolina

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