Remarks of Commissioner James E. Newsome before the Commodity Club, Hyatt Regency Capitol Hill

March 16, 1999

Opening Remarks

Thank you Chandler for that kind introduction and for the opportunity to address this prestigious group. Through my past experiences with the Mississippi Cattlemen's Association, I have learned that as industry comes together to support issues of common interest, the likelihood of achieving the agreed-upon goal increases substantially. It appears to me that The Commodity Club provides a good atmosphere for discussing the issues important to American agriculture and related industries.

Today, I would like to talk to you about the Commodity Futures Trading Commission (CFTC) and issues surrounding the agency. Things are changing at the CFTC. With the 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.

While I have only been in Washington for a few months, I have had the opportunity to meet many of you and look forward to meeting and visiting with more of you in the near future. I have also visited with futures and options industry participants in Chicago, Kansas City, Minneapolis, and New York to discuss my background and philosophy and to hear their concerns. For those of you who don't know me, I believe in free market principles, and have a pro competition, pro business attitude. I firmly believe government should be led by the people for the people.

I 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. I am interested in your business knowledge and wisdom and have shown that I am willing to come to you to get it. Now, I realize that this attitude might come as a shock to those of you who deal with regulatory agencies on a daily basis, but this is a philosophy in which I firmly believe.

I am proud of my agricultural background, and of the values and work ethic it has provided. However, I think it's important for you to know that I did not grow up wanting to be a CFTC Commissioner. In fact, after Senators Lott and Cochran contacted me about the appointment, I tried to turn it down, but they 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.


Agricultural Trade Options (ATOs)

Introduction

An agricultural trade option is an agreement giving an agricultural producer the right to deliver his or her commodity in the future for a set price. Agricultural trade options would not be traded on a commodity futures exchange, but directly between commercial parties. In other words, a local elevator could be the seller of the trade option.

History

Some of you know 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.

Personal Views

I was not at the Commission during creation of the 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 almost 1 year ago, but the National Futures Association has yet to receive any applications for participation.

All producers must have the opportunity to protect themselves against downside price risk, especially given Freedom to Farm, 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 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. 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 have recently been in the process of meeting with industry participants to draft needed changes to the ATO program. I am very optimistic that favorable changes will be implemented in the near future.

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 industry to make this program viable. I believe 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 will be attractive in the dynamic agriculture environment of both today, as well as tomorrow.
 

Over-The-Counter Derivatives

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

While I was not at the Commission when the Concept Release was published, I, along with Commissioner Spears, sent a letter to Congress supporting the moratorium preventing CFTC from taking any regulatory action in the OTC markets. Furthermore, I have committed to Chairman Lugar and Chairman Combest that I will not support any action taken by the Commission until the Congress has had time to address this issue. I believe the most important point to make is that we must maintain legal certainty for the OTC derivative markets.

Additionally, I believe that over-regulation would cause business to flee offshore, which certainly is not in the best interest of the United States. If we are not careful and sensible in this regard as we rethink the Commodity Exchange Act, the markets will evolve without us, we will erode our leadership position in the global economy, and we will lose the ability to have significant, if not controlling, input into policy-making for markets worldwide.


Foreign Board of Trade Terminals

In July of last year, the Commission published a concept release regarding the use in the United States of automated trading systems that would provide access to electronic boards of trade in other countries. I believe the intense interest in this topic is fueled by two issues: first, the rapidly increasing globalization of the futures and options markets in particular and financial markets in general; and secondly, the tremendous advances in electronic trading technologies and activity. The lower transaction costs and the inherent benefits regarding oversight of electronic trading systems make them an attractive alternative or complement to traditional trading methods.

I would note the issue of technological advances in electronic trading is also receiving attention on the Hill, and that Congressman Baker will be holding a hearing on March 25 to review the impact of these changes on the financial services industry. Given this widespread interest, I know that the industry is eager to see what the CFTC's proposed rules on foreign boards of trade terminals would look like.

Indeed, I have shared that eagerness over the past several months, and I am gratified to be able to say that I finally received a copy of the proposed rules this past Friday. However, upon reviewing the draft, I was dismayed to find that it was, in my mind, highly regulatory and overly burdensome in approach and content. Moreover, while I am not prejudging these issues, I believe that there are significant jurisdictional issues raised by the proposal.

Therefore, given the widespread interest in the matter, and the unfortunate delay in its release, I concurred in the issuance of the proposal and wrote a separate statement outlining my concerns with the proposal. Even though I find the proposal to be in an unacceptable form, I took this route to ensure that there are no further delays in this process.

In my concurrence, I urge that interested parties make their views known, particularly on the issues I mention, as well as alternative methods of proceeding, for example, the use of no-action procedures or the CEA's Part 30 Regulations. In reviewing the proposal, I have the interests of our domestic exchanges and the futures commission merchant community foremost in my mind, and I will be very interested in hearing their relative positions on this topic, as well as comments from other affected industry participants.


CFTC Reauthorization

Symposium

Senator Lugar pledged to begin reauthorization hearings early this year. The Senate and House Agriculture Committees held a symposium last month to educate Hill staffers on the Commodity Exchange Act and issues of importance for the upcoming reauthorization. Given the fact that I am relatively new to the commission, I benefited from the discussion and welcomed the comments from industry participants. I believe this is the correct way to approach the reauthorization process- with input from the various industry sectors and market users.

Proposals

There is talk of more specifically defining the jurisdiction of the CFTC, which could possibly lead to a reduction in CFTC authority. Some are even suggesting, as in the past, a merger between the CFTC and the SEC. I believe the discussion regarding the direction of futures and options regulation 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 cooperate with members of the Agriculture Committees to develop a regulatory scheme that discourages fraud and manipulation, but encourages innovation, technology, fair competition, and sound business practices.

Technology

The Commission must work with the Congress in determining how much flexibility the Commission needs to address the changing technological environment. I believe the CFTC should have the flexibility to be innovative from a regulatory standpoint to those within industry who are creative and visionary.

Given the flexibility, the Commission must encourage, not impede those who think outside of the traditional box. For example, 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.

Exchange Regulation

Another important comment I would like to make is that CFTC must decrease the regulatory burden on our domestic exchanges in order for them to not only compete and prosper, but also continue as global leaders. With the growing OTC market, domestic exchanges have encountered new levels of competition.

Decisions will have to be made in the near future on how they plan to do business long term. I firmly believe this determination should be their job, without undue interference from CFTC. With the regulatory burdens currently imposed on our exchanges, the task of competing globally is almost impossible.

I believe the CFTC should do what Congress intended us to do when they created the Commission in 1974- protect market participants against fraud and manipulation.period. This mission should not require heavy-handed regulation, nor ultimately determine the fate of private sector business and industry. Instead, the market should make this determination.

Industry Charge

Finally, I believe industry must unite to assist Congress in addressing reauthorization. Experience and logic tell me that if industry can agree upon several basic issues, then Congress will respond.

These issues may be as simple as:

1.   Less burdensome, common sense regulation so our exchanges and industry participants have the opportunity to compete and prosper

2.   CFTC flexibility to address creative and innovative ideas

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

Now, I know that these issues are not as simple as I just stated; however, I do feel that if industry can agree on some basic issues, Congress will possibly make some substantive changes to the Commodity Exchange Act, changes that could prove beneficial to industry participants.


Closing

I thank you for the opportunity to address this distinguished group. I appreciate your attentiveness and look forward to working closely with you in the future. I will be happy to answer any questions at this time.

Remarks of Commissioner James E. Newsome before the National Grain and Feed Association 1999 Annual Convention in San Francisco, California

March 21, 1999

Opening Remarks

Today, I would like to talk to you about the Commodity Futures Trading Commission (CFTC) and issues surrounding the agency. Given the format of this meeting, I planned to talk to you briefly about a couple of topics I thought might interest you: Agricultural Trade Options (ATOs) and CFTC reauthorization.

At the appropriate time, I will be happy to take you questions on these or any other topics of interest to you.

Things are changing at the CFTC. With the 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.

While I have only been in Washington for a few months, I have had the opportunity to meet many within the industry and look forward to meeting and visiting with more of you in the near future. I have also visited with futures and options industry participants in Chicago, Kansas City, Minneapolis, and New York to discuss my background, my philosophy and to hear their concerns.

For those of you whom I haven't met, I believe in free market principles, and have a pro competition, pro business attitude. I firmly believe government should be led by the people for the people.

I 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. I am interested in your business knowledge and wisdom and have shown that I am willing to come to you to get it.

Now, I realize that this attitude might come as a shock to those of you who deal with regulatory agencies on a daily basis, but this is a philosophy in which I firmly believe.

I am proud of my agricultural background, and of the values and work ethic it has provided. However, I think it's important for you to know that I did not grow up wanting to be a CFTC Commissioner. In fact, after Senators Lott and Cochran contacted me about the appointment, I tried to turn it down, but they would not take no for an answer.

Agricultural Trade Options (ATOs)

Definition

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.

History

As most of you know, and probably much better than I, 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.

Personal Comments

I was not at 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 commission 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)

Conclusion

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.

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.

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 viable. In fact, Commissioner Spears and I are in the process of meeting with industry participants, and I think Kendall will tell you that I am committed to making necessary changes.

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. On the other hand, if the ATO program is not the answer, then we need to work together to determine what is.

CFTC Reauthorization

Symposium

Senator Lugar pledged to begin reauthorization hearings early this year. The Senate and House Agriculture Committees held a symposium last month to educate Hill staffers on the Commodity Exchange Act and issues of importance for the upcoming reauthorization.

Given the fact that I am relatively new to the commission, I benefited from the discussion and welcomed the comments from industry participants. I believe this is the correct way to approach the reauthorization process- with input from the various industry sectors and market users.

Proposals

There is talk of more specifically defining the jurisdiction of the CFTC, which could possibly lead to a reduction in CFTC authority. Some are even suggesting, as in the past, a merger between the CFTC and the SEC.

I believe the discussion regarding the direction of futures and options regulation 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 cooperate with members of the Agriculture Committees to develop a regulatory scheme that discourages fraud and manipulation, but encourages innovation, technology, fair competition, and sound business practices.

Technology

The Commission must work with the Congress in determining how much flexibility the Commission needs to address the changing technological environment. I believe the CFTC should have the flexibility to be innovative from a regulatory standpoint to those within industry who are creative and visionary.

Given the flexibility, the Commission must encourage, not impede those who think outside of the traditional box. For example, 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.

Agency Mission

I believe the CFTC should do what Congress intended us to do when they created the Commission in 1974- protect market participants against fraud and manipulation.period. This mission should not require heavy-handed regulation, nor ultimately determine the fate of private sector business and industry. Instead, the market should make this determination.

Industry Charge

Finally, I believe industry must unite to assist Congress in addressing reauthorization. Experience and logic tell me that if industry can agree upon several basic issues, then Congress will respond.

These issues may be as simple as:

1.       Less burdensome, common sense regulation so our industry participants have the opportunity to compete and prosper

2.       CFTC flexibility to address creative and innovative ideas

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

Now, I know that these issues are not as simple as I just stated; however, I do feel that if industry can agree on some basic issues, Congress will possibly make some substantive changes to the Commodity Exchange Act, changes that could prove beneficial to industry participants.

Summary

I thank you for the opportunity to address this distinguished group. I appreciate your attentiveness and look forward to working closely with you in the future. I will be happy to answer any questions at this time.

Written Testimony of Commissioner James E. Newsome before the U.S. House of Representatives Committee on Agriculture Subcommittee on Risk Management, Research and Specialty Crops

May 18, 1999

Thank you Mr. Chairman and members of this distinguished subcommittee. I am pleased to be here to testify before you today, and I thank you for the opportunity to discuss issues relating to reauthorization of the Commodity Futures Trading Commission. I applaud your efforts to gather information and data regarding modernization of the Commodity Exchange Act, as I believe that this reauthorization period provides a unique opportunity for Congress to make necessary changes to the Act that will benefit the industry and market participants, as well as provide clearer guidelines for appropriate regulation by the Commission.

There are several topics that I will offer today for your review, but I would like to begin by stressing two overarching principles that I believe are critical in this analysis: providing legal certainty and decreasing regulatory burdens should be the key elements in any review and amendment of the Act. In order to accomplish this, we need to listen to industry participants regarding the effects of regulation on the day-to-day matters of financial and agricultural risk management and price discovery, and respond accordingly. We as public servants are charged with protecting the interests of the public, and we cannot do justice to that obligation unless and until we listen carefully to those most directly affected by our actions. I also feel that, as responsible regulators, the Commission must be responsive to not only industry, but also to the Congress as we work through reauthorization. We must cooperate with members of this Committee to develop a regulatory scheme that discourages fraud and manipulation, but encourages innovation, technology, fair competition, and sound business practices.

In addition, I believe there is a significant corollary issue to the goal of decreasing regulatory burdens that should be considered. It goes without saying that businesses will seek to operate in the most efficient fashion; accordingly, if the opportunity presents itself to avoid

regulatory costs by operating outside the borders of the United States, many businesses will make the logical decision to take advantage of that opportunity. Therefore, I believe it is critically important to engage in sensible cost/benefit analyses in making regulatory decisions, as some of those determinations be of limited utility, and may simply move businesses and dollars out of our economy. (Indeed, I believe in some cases that has already occurred.) Not only that, overly burdensome regulation has the effect of moving those entities outside the sphere of our policy-making authority. In other words, with the exodus of business beyond our borders goes the ability of the United States to continue to make policy determinations that affect the global economy. I do not want to overstate the matter, however, given current technological advancements, I firmly believe that we as law makers and enforcers must be acutely sensitive to this issue in order to maintain the primacy of our markets as world-wide leaders and innovators.

I join with you in the desire to identify areas I believe have suffered from regulatory overreaching, confusion, or misunderstanding; and, indeed, I have already begun the process of taking steps to initiate changes that can be made under our current regulatory authority to decrease regulatory burdens and promote legal certainty. In that vein, I recently convened a meeting with representatives from the three largest futures exchanges in the United States. I asked them to come to this meeting ready to discuss concrete, practical initiatives that we can undertake promptly to address their regulatory concerns. I was extremely gratified with the outcome of that meeting, and have accumulated a significant list of projects that I believe the CFTC can and should act on in an expeditious manner. Furthermore, I plan to continue to exhort staff and industry to work together to review these issues to determine in what areas we can make significant inroads in decreasing unnecessary regulatory burdens.

Along those lines, let me say I believe that regulatory reform should be industry-driven. It is clear to me that market discipline and adherence to best-practice standards can achieve better enforcement of fundamental market integrity concerns than can any amount of overlaid regulation. Accordingly, I advocate stripping away unnecessary, costly regulation, and at the same time maintaining the ability to ensure forceful, swift prosecution and significant punishment for those outliers who commit core violations of the Act. I believe that more reliance on private sector discipline and better use of public regulation fosters these interests and I look forward to hearing from market participants and users to tell us how they envision achieving these goals. I am glad to see that this subcommittee will hear from them this week as well.

With regard to modernization of the CEA, there are several areas of regulatory reform that under current authority cannot be addressed at the agency level—issues that require Congressional review, analysis and disposition. I would like to focus the remainder of my remarks on highlighting general themes and specific topics for your examination. Let me reiterate that, in my opinion, the end result of such review should be regulation that fosters efficient and liquid markets, enhances the ability of market participants to innovate and compete effectively, and does not create artificial and costly barriers to trade and competition. Ultimately, I believe the CFTC should concentrate on what Congress intended us to do when it created the Commission in 1974, that is, protect participants against fraud and manipulation and ensure safe, sound, and competitive markets.

Electronic Trading Issues

During the past year, I have been struck by the number of issues that in some way involve electronic trading; it is clear that we are witnessing a sea change in the way markets work. For example, who would have thought ten 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 ten more years? I believe it is critically important that the CFTC have the flexibility to be innovative from a regulatory standpoint regarding those within industry who are creative and visionary, and we must work with the Congress in determining how much flexibility the Commission needs to address the changing technological environment. Given this regulatory agility, the Commission can encourage, and not impede, those who think outside of the traditional box.

As I have stated before, I believe the intense interest in this topic is fueled by two issues: first, the rapidly increasing globalization of the futures and options markets in particular and financial markets in general; and secondly, the tremendous advances in electronic trading technologies and activity. The lower transaction costs and the inherent benefits regarding oversight of electronic trading systems make them an attractive complement or alternative to traditional trading methods. However, at the time of the promulgation of the Act and regulations, it obviously was not possible to contemplate such incredible changes in the way markets today effect transactions and conduct business. Accordingly, I think Congress needs to take a comprehensive look at the Act with an eye toward making amendments to accommodate these changes relating to electronic trading. I would submit, for example, that provisions relating to designation of a completely electronic exchange should be reviewed. Also, as the movement to electronic trading systems may have an effect on the design of exchange governance systems, let me say that the current law envisions designation of traditional membership exchanges, as opposed to proprietary exchanges, and I believe these issues also deserve Congressional attention.

Issues Relating to Legal Certainty

In May 1998, the Commission issued a concept release relating to over-the-counter derivatives. The issuance of that document created significant legal uncertainty in a dynamic and vital market. Ultimately, this resulted in Congressional action instituting a moratorium on Commission action until Congress has the opportunity to address the issue. That opportunity is now before you. I remain committed to the principles I have stated time and again during my tenure at the CFTC: market participants must have clear and unambiguous understanding of the nature of their regulatory responsibilities. I recognize that there are several different avenues that have been suggested to you in this area. For example, some exchanges have proposed making a distinction between privately- and publicly-negotiated instruments, and regulating accordingly. You have also heard of proposals relating to allowing market participants to choose their regulator. You have heard discussions of institutional, as opposed to functional regulation. Once again, let me say that I do not have answer for you as to how you should make your final judgments: the various sectors of the industry must make clear to you what their concerns and desires are in order for you to best make your determinations in this area. I look forward to continuing discussions with market participants and with other regulators to review the numerous aspects and ramifications of regulatory options on this topic, and I would offer that we should keep in mind during this debate the primary public policy aims I have mentioned.

Let me also mention that legal uncertainty has not been confined to the issue of OTC instruments. We have also heard many comments regarding this problem as it relates to other issues, for example, the definition of a forward contract. As I am made aware of these issues by market participants, I hope that they will also convey their concerns to you.

Regulatory Merger

There has been discussion of specifically reducing the regulatory authority of the CFTC, and/or merging the CFTC and the SEC. I want to state that I believe the agricultural emphasis should be maintained in a clearly defined way, given the role commodity markets play as significant risk management and price-discovery tools for American agriculture. In whatever manner this issue is ultimately addressed, the CFTC should have the statutory flexibility to allow markets to grow and prosper, and to continue to be useful mechanisms for agribusiness concerns.

Conclusion

I believe that the Commodity Futures Trading Commission has an extremely talented and dedicated group of people, committed to public service, and I am proud to be associated with them. However, the fact of the matter is that times have changed, we must change with them, and I am confident that we have professional, responsible staff to carry out the mandates issued by this Congress. Let me reiterate my belief that providing legal certainty and decreasing overly burdensome regulation should be paramount concerns as you proceed in this task, and I am committed to working with you, your staffs, other regulators, and industry participants as we take advantage of this unique opportunity to modernize the Commodity Exchange Act. I recognize that this will not be an easy or quick undertaking, and that it will require compromise on the part of all interested parties to reach an appropriate consensus. However, as noted in the recent GAO report on the CFTC’s reauthorization, the cost of not reaching consensus in this area is high, and I encourage the industry to continue their efforts to make their viewpoints known to Congress and to regulators. Thank you, and I would be happy to answer any questions you may have.

Remarks of Commissioner James E. Newsome before the Mississippi Agricultural Economics Association, Mississippi State University

June 24, 1999

Introduction

Thank you for the opportunity to be here with you today. I would like to thank Dr. Marty Fuller for inviting me to this conference, and all of the people who organized and planned today's activities.

I firmly believe that this kind of dialog is beneficial for all who attend, myself included, because it fosters relationships between farmers, agribusinesses (including lenders and insurers), university officials, and government representatives. As many in agriculture are currently experiencing hardship, we must work together to ensure the long-term stability of an industry that serves as Mississippi's economic leader.

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 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 am proud of my agricultural background, and of the values and work ethic it has provided.

The Commodity Futures Trading Commission functions as an independent government agency created in 1974 to protect market participants against fraud and manipulation and ensure safe and fair markets.

In the interest of time, I'll try to make my comments brief regarding risk management.

Risk Management Concept in Agriculture

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)

There are several reasons why producers are not aggressively marketing their crops. Probably the main reason is that they haven't had to. Our farm policy prior to 1996 was geared more toward supply management, with guaranteed government payments for base acres of production.

This policy created a price floor for program commodities, which led to many producers placing more emphasis on areas of their farming operation other than marketing. However, today's market-oriented approach to farm policy has created an incentive for producers to adopt some type of marketing strategy to ensure downside price protection.

Other reasons why farmers and ranchers have not instantly adopted existing risk management tools range from a lack of trust of the commodity exchanges to the new and untested instruments to a general lack of marketing tool awareness.

While there have been some instances in years past where fraud and manipulation of commodity markets has occurred, I believe that utilizing today's technological advancements and learning from past experiences, the exchanges have made significant enhancements to their market systems. The exchanges and the CFTC have also improved their coordination, which has led to better surveillance activities.

Many producers who have utilized exchanges in carrying out their marketing function have benefited from this type of risk management. However, for the above-mentioned reasons, some will probably never market their crop using that medium.

Agricultural Trade Options (ATOs)

Given these dynamics, I believe that we must find a way to create products that are attractive to the agricultural sector, both producers and agribusinesses, while ensuring the preservation of market integrity. The CFTC made an attempt to do this in April of last year with the introduction of the Agricultural Trade Options pilot program.

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.

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 difference in the ATO program and exchange-traded options is where the deal is done. With ATOs, "traded between commercial parties" could mean that a farmer hedges their crop with the purchase of trade options from a local grain elevator or other local entity, who would be the Ag Trade Options Merchant (ATOM), or seller of the option.

While I was not a Commissioner at CFTC during the creation of the pilot program, I do support the general concept. However, most agribusinesses (who would be the primary sellers of options) have complained that the program rules are too burdensome in nature, making the program more trouble than it's worth. In fact, since it's creation over one year ago, there have been no applications to become ATOMs, which effectively has made the program useless.

A cattleman involved in analyzing this program probably summed it up best 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."

Since arriving at the Commission last year, I have met with industry participants around the country, and there appears to be several common areas of concern regarding the program: overburdening paperwork requirements, the exemption level, the lack of cash settlement ability, and registration issues. We are working to fix the program and we hopefully will have some beneficial changes out very soon.

The program must be attractive, not only to farmers and ranchers, but also to local elevators and other agribusiness firms. In order to achieve such a goal, the process must be industry-driven. Industry knows best what it needs and what will actually work.

I believe 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 will be attractive in the dynamic agriculture environment of both today, as well as tomorrow.

Summary

Dr. Coble talked about the different risk management products available or becoming available in agriculture, and the roles that private and public institutions will play in development, as well as the initial and long-term offering of these products.

While I cannot predict what will be available long-term or what will fit each individual producer's marketing needs, I will say that risk management is evolving rapidly and producers need to familiarize themselves with these new products and decide which ones accomplish their desired marketing goals and be willing to switch strategies if newer and better products become available.

Thanks again for the invitation to be with you today. Please feel free to contact me in Washington if you ever have any questions or comments about anything that the CFTC is doing. I will be happy to answer any questions at this time.

Remarks of Commissioner James E. Newsome before the Mississippi Agricultural Economics Association, Luncheon Keynote Address, Mississippi State University

June 24, 1999

Introduction

Good afternoon. I would like to begin by recognizing and thanking a couple of people. Marty Fuller, thank you for the invitation and the opportunity to be here with this group today. Also, I would like to thank the Mississippi Agricultural and Forestry Experiment Station and Dr. Vance Watson for hosting me last night.

It is always good to be back in Mississippi, particularly here at Mississippi State University (MSU). In addition, I definitely feel at home at this conference of agricultural economists. As many of you already know, after I received a Food and Resource Economics degree from the University of Florida, I came here to MSU for my graduate work. While not my major, I did earn a minor in Agricultural Economics under the supervision of Dr. David Laughlin. Upon completion of my graduate studies, I spent several years as an Animal Science instructor here at MSU. During my years with the Mississippi Cattlemen’s Association, I worked very closely with Charlie Forrest, Randy Little, and several others in the department. As a result, I am very familiar with both the area and the people here.

While I have seen several of you since I was confirmed as a Commissioner on the Commodity Futures Trading Commission (CFTC) in August of last year, I have not had the opportunity to visit with all of you. I hope that this will soon change.

I have to confess that I did not grow up dreaming to be a CFTC commissioner and I did not seek the position. In fact, it was Senator Cochran and Senator Lott who contacted me about the nomination. Of course, I remembered learning about the CFTC in the classroom at both the University of Florida and MSU, but never did I think I would serve on the Commission. However, I found it very difficult to tell our senators no and so I found myself packing up and heading to Washington.

Public service has proved to be not only a rewarding experience, but a tremendous learning experience as well. You may be surprised that only 15% of the futures and options business deals with agriculture. The bulk of the business deals with energy, metals, and financial instruments. As a result, I have had to do my homework to familiarize myself with the broad spectrum of issues pending at the CFTC.

Commodity Futures Trading Commission

Realizing that only some of you are unfamiliar with the CFTC and the Commodity Exchange Act (CEA), I will be very brief in the remainder of my comments.

When the CEA was enacted in the mid 1930s, all futures contracts were between commercial parties dealing with agricultural products. In addition, the futures contracts were regulated by a division of the U.S. Department of Agriculture (USDA).

However, after great expansion and growth in agricultural products and the addition of non-agricultural products, Congress created the CFTC in 1974. The CFTC is responsible for ensuring safe and sound markets and for protecting market users from fraud and manipulation.

The growth of the markets has been nothing short of phenomenal. Our domestic exchanges have enjoyed primacy in the marketplace. This is true primarily in Chicago and New York. The United States government, through the CFTC, has enjoyed the role as the primary policy developer for the markets. However, as a result of this phenomenal growth industry is changing. Today there are larger and more sophisticated market users, with more complex products available.

The CFTC has a very defined role to play. However, in my opinion, this role has recently been over regulatory and burdensome in nature. Now, for good reason, based on the history of commodity trading, the agriculture sector has demanded that the CFTC keep a tight reign on exchanges. However, times have changed. I believe that now is the proper time to decrease regulatory burdens imposed by the CFTC on our domestic exchanges. We have learned from prior mistakes of both the exchanges as well as the CFTC. More importantly, we need to recognize changes in technology, which have led to better audit trails and advanced surveillance systems.

The CFTC and the U.S. exchanges must respond to the heightened foreign competition that has arisen recently. Specifically, the CFTC must not put the U.S. exchanges at an unfair disadvantage by imposing burdensome regulations. The CFTC must ensure that our domestic exchanges have the ability to compete in a global environment.

Reauthorization

As you may know, the CFTC is in the process of another reauthorization. I believe that this process should provide Congress with an opportunity to make some necessary changes to both the CFTC and the Commodity Exchange Act.

First, I believe that the CFTC needs more freedom to handle our ever-changing technological advancements. Ten years ago, who would have ever considered the concept of trading over the Internet? Likewise, who can tell what type of technological advancements will require regulatory flexibility ten years from now? The CFTC must have the flexibility to deal with future innovations in a responsive manner in order to promote and encourage "outside the box" thinking.

Second, I believe that the reauthorization process should be primarily between Congress and industry. I firmly believe that industry knows best what works and what does not work. Therefore, it seems to me that industry should be the group that has the greatest input into the reauthorization of the CEA.

Summary

Today is definitely an exciting time to be at the CFTC and to be working with the futures and options industry. I pledge that I will work hard to be an effective, industry-responsive regulator, always mindful of the U.S. agricultural producer. Again, thank you for the invitation to speak to this distinguished group of people. I want each of you to know that anytime you have questions, thoughts, or concerns about anything regarding market regulation and the CFTC, you are more than welcome to give me a call. If you are ever in Washington, please stop by for a visit.

At this time, I would like to open the floor to any questions that you might have.

Remarks of Commissioner James E. Newsome before the National Introducing Brokers Association Eight Annual Conference, Embassy Row Hilton, Washington, DC

June 26, 1999

Current Issues Affecting Introducing Brokers
Presented to the National Introducing Brokers Assn. Annual Conference
 

Introduction

I am delighted to be with you here this morning, and I thank you for the opportunity to talk with you about issues we are currently facing at the CFTC and issues that are of significant interest and import to you and to the Introducing Brokers (IB) community.

Many of you already know who I am and where I come from, but let me give a little background about myself for those of you I have not yet had the opportunity to meet. I, along with my three brothers, grew up on our family's farming and cattle operation in Florida.

Before joining the Commission, I was an instructor at Mississippi State University and most recently served ten years as the Executive Vice President of the Mississippi Cattlemen's Association and Beef Council.

Consequently, I tend to look at issues from the producer's point of view. I certainly feel that the views of industry are of utmost importance to both Congress and regulatory agencies.

I find the theme of this conference, "Building Business by Building Relationships," very fitting because I believe the CFTC, as a regulatory agency, should have the goal to build a closer relationship with industry to promote business and encourage, not impede, innovation and technological advancement.

To accomplish this, both regulatory agencies and industry must dismiss the notion that these two groups are advisaries. Instead, we must realize that we are interdependent. By working together, we can accomplish much more than we can if we work against one another.

Consequently, I am interested in your business knowledge and wisdom and I not only appreciate but solicit your input as the Commission moves forward on a variety of issues.

Now, I realize that this attitude might come as a shock to those of you who deal with regulatory agencies on a regular basis, but this is a philosophy in which I firmly believe. I have learned that as industry comes together to support issues of common interest, the likelihood of achieving the agreed-upon goal increases substantially.

I am proud of my agricultural background, and of the values and work ethic it has provided. I think that it's important for you to know that I did not grow up wanting to be a CFTC Commissioner; in fact, I tried to turn it down, but Mississippi Senators Trent Lott and Thad Cochran would not take "no" for an answer.

I ascribe to the belief that our government should be run by and for the people. Although some in Washington seem to think this is an antiquated idea, I call it time-honored and time-tested.

I hold to the conviction that in "governing best by governing least," we foster those ideals which allow our businesses, our farms, and our financial services to retain their primacy in the global marketplace.

Because of the beliefs I've just described, I commend and encourage those in the private sector for thinking "outside the box" and for being innovative and creative in their business activity, I can pledge to you that in my tenure as a Commissioner at the CFTC, I will think "outside the Beltway" in making decisions regarding appropriate regulation of those activities.

As you know, the Commission is facing yet another reauthorization. Although this often elicits groans from those involved in the process, I am looking at it as an opportunity: indeed, I believe that Congress has the occasion now to address and resolve several key concerns of both regulators and regulatees.

Let me take a few minutes to address some of those topics, as well as some other current regulatory issues and then I will be open to any questions you might have.


CFTC Reauthorization

I believe reauthorization provides a unique opportunity for Congress to make changes to the Act that will benefit the industry and market participants, as well as provide clearer guidelines for appropriate regulation by the Commission.

There are several topics that I will offer today, but I would like to begin by stressing two overarching principles that I believe are critical in this analysis: providing legal certainty and decreasing regulatory burdens should be the key elements in any review and amendment of the Act.

In order to accomplish this, we need to listen to industry participants regarding the effects of regulation on the day-to-day matters of financial and agricultural risk management and price discovery, and respond accordingly.

We as public servants are charged with protecting the interests of the public. We cannot do justice to that obligation unless and until we listen carefully to those most directly affected by our actions.

I also feel that, as responsible regulators, the Commission must be responsive to not only industry, but also to the Congress as we work through reauthorization. We must cooperate to develop a regulatory scheme that discourages fraud and manipulation, but encourages innovation, technology, fair competition, and sound business practices.

In addition, I believe there is a significant corollary issue to the goal of decreasing regulatory burdens that should be considered. With the growing OTC market, domestic exchanges have encountered new levels of competition. Decisions are being made and will have to be made in the near future on how they plan to do business long term.

I firmly believe this determination should be their job, without undue interference from CFTC. With the regulatory burdens currently imposed on our exchanges, the task of competing globally is almost impossible.

It goes without saying that businesses will seek to operate in the most efficient fashion; accordingly, if the opportunity presents itself to avoid regulatory costs by operating outside the borders of the United States, many businesses will make the logical decision to take advantage of that opportunity.

Therefore, I believe it is critically important to engage in sensible cost/benefit analyses in making regulatory decisions. Not only that, overly burdensome regulation has the effect of moving those entities outside the sphere of our policy-making authority.

In other words, with the exodus of business beyond our borders goes the ability of the United States to continue to make policy determinations that affect the global economy.

I do not want to overstate the matter, however, given current technological advancements, I firmly believe that we as law makers and enforcers must be acutely sensitive to this issue in order to maintain the primacy of our markets as world-wide leaders and innovators.

The Commission must work with the Congress in determining how much flexibility the Commission needs to address the changing technological environment. I believe the CFTC should have the flexibility to be innovative from a regulatory standpoint to those within industry who are creative and visionary.

I believe we should work together to identify Commission regulations that result in regulatory overreaching, confusion, or misunderstanding; and, indeed, I have already begun the process of taking steps to initiate changes that can be made under our current regulatory authority to decrease regulatory burdens and promote legal certainty.

In that vein, I recently convened a meeting with representatives from the three largest futures exchanges in the United States. I asked them to come to this meeting ready to discuss concrete, practical initiatives that we can undertake promptly to address their regulatory concerns.

I was extremely gratified with the outcome of that meeting, and have accumulated a list of projects that I believe the CFTC can and should act on in an expeditious manner. Furthermore, I plan to continue to exhort staff and industry to work together to review these issues to determine in what areas we can make significant inroads in decreasing unnecessary regulatory burdens.

Along those lines, let me say I believe that regulatory reform should be industry-driven. It is clear to me that market discipline and adherence to best-practice standards can achieve better enforcement of fundamental market integrity concerns than can any amount of overlaid regulation.

Accordingly, I advocate stripping away unnecessary, costly regulation, and at the same time maintaining the ability to ensure forceful, swift prosecution and significant punishment for those outliers who commit core violations of the Act. I believe that more reliance on private sector discipline and better use of public regulation fosters these interests.

I believe industry must unite to assist Congress in addressing reauthorization. Experience and logic tell me that if industry can agree upon several basic issues, then Congress will respond. These issues may be as simple as:

1.       Less burdensome, common sense regulation so our exchanges and industry participants have the opportunity to compete and prosper

2.       CFTC flexibility to address creative and innovative ideas

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

With regard to modernization of the CEA, there are several areas of regulatory reform that under current authority cannot be addressed at the agency level--issues that require Congressional review, analysis and disposition.

Let me reiterate that, in my opinion, the end result of such review should be regulation that fosters efficient and liquid markets, enhances the ability of market participants to innovate and compete effectively, and does not create artificial and costly barriers to trade and competition.

Ultimately, I believe the CFTC should concentrate on what Congress intended us to do when it created the Commission in 1974, that is, protect participants against fraud and manipulation and ensure safe, sound, and competitive markets.

Agricultural Trade Options

Another issue currently under consideration by the Commission is revisions to the ATO pilot program. While I was not at the Commission during the creation of the pilot program, I do support the general concept of additional risk management tools for agricultural producers.

I am fully aware that many in this organization have concerns about these potential revisions. I listened intently to comments recently from Scott Stewart at the Commission's Agricultural Advisory meeting and the Senate Agriculture Committee's Risk Management hearing.

Commission staff is evaluating comments and concerns proposed by all interested parties and will soon prepare a draft for Commission consideration. While I am sensitive to and will take into account the concerns of all industry participants before developing a final opinion, I will not apologize for my desire to assist the ailing sector of production agriculture with every logical risk management tool possible.

If we determine that ATOs are not a viable solution, then I will continue to work with you and other industry participants to develop new and innovative risk management tools.

Foreign Board of Trade Terminals

Earlier this year, the Commission released proposed rules on foreign boards of trade seeking terminal access in the United States. I was dismayed to find that the proposed rules were, in my mind, highly regulatory and overly burdensome in approach and content.

Given the widespread interest in the matter, and the unfortunate delay in its release, I concurred in the issuance of the proposal and wrote a separate statement outlining my concerns with the proposal. Even though I found the proposal to be in an unacceptable form, I took this route to ensure that there were no further delays in this process.

In my concurrence, I urged that interested parties make their views known, particularly on the issues I mention, as well as alternative methods of proceeding, for example, the use of no-action procedures.

In reviewing the proposal, I had the interests of our domestic exchanges and the futures commission merchant community foremost in my mind, and I have been very interested in hearing their relative positions on this topic, as well as comments from other affected industry participants.

In effect, this would allow foreign boards of trade to have access to US customers, with lessened regulatory requirements. A major concern about this matter is the issue of fair competition--the argument is that if we allow foreign terminals to be set up over here, then a US exchange should be able to set up terminals in foreign jurisdictions, with similar regulatory treatment.

I share this concern and feel that equal access should be granted to our exchanges. I believe the intense interest in this topic is fueled by two issues: first, the rapidly increasing globalization of the futures and options markets in particular and financial markets in general; and secondly, the tremendous advances in electronic trading technologies and activity.

The lower transaction costs and the inherent benefits regarding oversight of electronic trading systems make them an attractive alternative or complement to traditional trading methods.

I would note the issue of technological advances in electronic trading is also receiving attention on the Hill, and that the House Banking Committee has held a couple of hearings to review the impact of these changes on the financial services industry. The Agriculture Committees in both the House and the Senate have identified technology as a key issue to be reviewed during the reauthorization process.

Also, as an aside, I have discussed with Acting Chairman Spears reconstituting the existing Financial Products Advisory Committee (FPAC) as a Technology and Financial Products Advisory Committee, inasmuch as technology issues will provide us with some of our greatest regulatory challenges in the future.

On June 3 of this year, the CFTC lifted the ban on foreign futures exchanges installing electronic trading systems in the United States. My fellow commissioners and I have instructed the staff to begin processing "no action" requests from foreign exchanges seeking to place trading terminals in the US. The staff is instructed to review applications from foreign exchanges on a case-by-case basis.

This new approach also commits the CFTC to simultaneously address regulatory parity, a crucial issue for US exchanges that fear their overseas competitors will be able to offer electronic trading with fewer regulatory restrictions.

The only foreign futures exchange that now has its terminals in the US is the German/Swiss exchange Eurex. That exchange received "no action" approvals in 1996 to have a limited number of members in the US with electronic trading privileges. Eurex has requested to increase the number of member firms and expand the range of contracts it makes available to US customers.

Other exchanges interested in placing their terminals in the US include LIFFE, IPE, SYCOM, and the New Zealand Futures and Options Exchange.

Summary

In conclusion, I thank you for allowing me to speak with you today. I hope that I have provided some insight that will prove informative and useful to you as an introducing broker. I look forward to working with you in the future to promote our combined interests. At this time, I will open the floor for any questions that you might have.

Testimony of Commissioner James E. Newsome before the U.S. House of Representatives Committee on Agriculture Risk Management, Research, and Specialty Crops Subcommittee

August 5, 1999

Thank you Mr. Chairman and members of this distinguished subcommittee. I am pleased to be here to testify before you today, and I thank you for the opportunity to discuss important issues relating to regulatory relief for U. S. futures exchanges. As I stated in testimony before your subcommittee in May, this continues to be an area of major significance and concern to me.

Given my background and experience, I tend to look at issues from the private sector point of view, that is, as a producer and businessman rather than as a regulator. Accordingly, I am acutely sensitive to circumstances that produce anticompetitive or unfair results. As I have stated repeatedly since I came to the Commission in August of 1998, I am pro-business and believe strongly in fair competition; those are the foundations which form the bases for my decisions as a regulator. Accordingly, in looking back over speeches and testimony I have delivered in the past year, I find consistent reiteration of my belief that our exchanges need significant regulatory relief. Well before any discussions of foreign exchanges and no-action requests, I was making rounds to agricultural groups, to industry participants, and to our domestic exchanges, listening to their concerns, and finding out what areas of regulatory relief could be addressed immediately, and in what areas the Commission needed guidance from our oversight committees.

In my testimony in May, I stated that I had convened a meeting of representatives from the three largest domestic exchanges to discuss the issue of regulatory relief. They provided me with a list of items to address some of their concerns, and I have shared that list with this Committee. In the intervening months, I have made consistent, strong efforts to try to get certain items on that list accomplished, specifically, relief from pre-approval of contract market designation rules, a payment for order flow advisory, a market maker program advisory, and a final resolution on dual trading orders. I chose those items from the exchanges’ lists as ones that could and should be addressed immediately, without changes in existing authority and without further direction from Congress.

However, as you know, regulatory relief issues have become enmeshed in matters relating to no-action relief for foreign exchanges. During the past months, I have consistently stressed my belief that the Commission should address the domestic exchanges’ concerns regarding these four issues prior to acting on foreign exchange requests, not for any protectionist reasons but simply for the reason that we had the authority, ability, and information necessary to act promptly, and accordingly should do so. Given the posture in which we now find ourselves, I will continue to press for this relief as quickly as possible, and I welcome input from this Committee on the ongoing effort.

Also, I welcome the opportunity we now have to address the joint 4(c) exemption petition from the three largest domestic exchanges. I believe that this should be a matter for comment on the public record, which, combined with responsive comments to the Commission’s recent release on proposed designation pre-approval procedures, will greatly enhance our ability to make correct determinations regarding appropriate regulatory costs and benefits in this and other areas.

As to other items on the exchanges’ lists (for example, large trader reporting, price reporting, account identification, and segregation of customer funds), it was my determination that these issues addressed core provisions of the Commodity Exchange Act, and that input from many sectors—including industry participants, agricultural producer groups, and especially our oversight Committees—is not only appropriate but necessary prior to Commission action. I continue to believe this is the correct approach, given the fundamental nature of these issues and their relationship to the customer protection and fraud and manipulation prosecution functions of the Commission. I look forward to receiving input on these matters.

Our domestic exchanges deserve the benefits of true competition and a level playing field, as do the industry participants who use these markets. This does not mean I believe in protectionism for the exchanges. However, it does mean that I wholeheartedly support efforts to revamp our Act and regulations to give the Commission, as an oversight agency, the flexibility to allow for development or improvement of technological advancements and to enable domestic exchanges to compete without unnecessary hindrances. Any regulation under which they operate should have clear benefits, which outweigh the costs of that regulation. I believe this calculus is critical in fashioning an appropriate regulatory framework. Furthermore, I believe our domestic exchanges are among the most dynamic enterprises in the world, and I will continue my efforts to allow them to compete without undue regulatory burdens.

If I may, let me reiterate a point I have made repeatedly in the past year: if the cost of doing business is too high, business will go where costs are lower, outside of the sphere of United States policy-making authority. We cannot afford to lose the exchanges, we cannot afford to lose other industry participants, and we cannot afford to lose the ability to make policy determinations that affect the global economy due to being overly regulatory. With that in mind, I commend your efforts to bring more rationality to the regulatory structure affecting domestic exchanges, and I will continue to work with you, with the industry, and with other regulators to achieve that goal. I thank you, and would be happy to answer any questions you may have.

Remarks of Commissioner James E. Newsome before the Chicago Kent Derivatives and Commodities Law Institute, Chicago, Illinois

October 28, 1999

I am delighted to be here today to speak with you and my fellow panelists about the CFTC's agenda for the coming months and years, and I'd like to thank the Chicago-Kent Law School, and also particularly thank Gloria Matthews, for all the hard work that has gone into making this a successful and productive conference and to Barbara Wierzynski for her work on setting up this panel.

First of all, let me make the traditional disclaimer that these remarks represent my own views, and not necessarily those of my colleagues or of the Commission. That said, I believe this is one of the most interesting, exciting, and challenging topics on the Chicago-Kent docket this year. Where will the industry be headed in the next few years? Where will business grow, and where will it falter? And how will the regulators respond? With the technological, legal, and political landscape changing so rapidly and so dramatically, it will take some farsighted thinkers to anticipate and address the numerous issues facing our industry. I think a great many of those people are here at this conference. If I may, I'd like to take some time to add my thoughts to the discussion of an appropriate regulatory agenda, and to give you some ideas about how we might accomplish that.

Given my background and experience, I tend to look at issues from the private-sector point of view. This leads to two basic points I want to emphasize today: first, I believe we need to appropriately deregulate our domestic exchanges to allow them to compete in today's global financial markets, and second, we need to provide legal certainty for over-the-counter markets to allow them to continue to thrive. How do we do this, and why? I'll start with the second part of that question. Let's take it as axiomatic that business seeks to operate in the most efficient manner possible; therefore, if there is an opportunity to increase efficiency (and therefore profits) by operating outside the United States in order to avoid overly burdensome regulation, the rational business decision is to do just that. Accordingly, those business entities that migrate offshore are no longer within our policy-making authority. In other words, with the exodus of business beyond our borders goes the ability of the United States to continue to make policy determinations that affect the global economy. I believe it is critical that regulators in this country recognize this fact, and act so as to foster innovation that will allow American businesses to continue to grow as worldwide market leaders.

Now to the first part of the question—how do we accomplish an appropriate regulatory agenda? Although it may seem overly simplistic, I believe as a crucial first step, regulators should engage in cost/benefit analyses before taking any action whatsoever. Too many times the government acts, even with the best of motives, without giving due notice of and attention to the costs of its action. For the reasons I've just mentioned, we cannot afford to do that. So I will start from the premise that we take regulatory actions when, and only when, the benefits of such actions clearly outweigh the costs.

Soon after coming to the Commission, it was obvious to me the need for reduced regulation. Several months ago, I convened a meeting of representatives from the three largest domestic exchanges to discuss the issue of regulatory relief. They provided me with a list of items to address some of their concerns. In the intervening months, I have made consistent, strong efforts to try to get certain items on that list accomplished, specifically, relief from pre-approval of contract market designation rules, a payment for order flow advisory, a market maker program advisory, and a final resolution on dual trading orders. I chose those items from the exchanges' lists as ones that could and should be addressed immediately, without changes in existing authority and without further direction from Congress. More broadly, it is apparent to me that the umbrella approach of regulating all markets the same is antiquated. Markets have changed, competition has changed, and regulatory needs have changed. We must develop a system that recognizes levels of sophistication, levels of need, risk of manipulation, and regulate accordingly.

Now to the more difficult query:  how do we determine the costs? The short answer is, the regulator listens to the regulated. As many of you already know, I believe that regulatory reform should be industry driven, and there's a good reason for that:  the markets know best what's best for the markets. We need to hear what your problems are, but more importantly, we need to hear your suggested solutions. Obviously, we're going to get competing concerns, and competing resolutions, but we cannot make appropriate decisions without industry input. I believe that is the only reliable method for a regulator to truly determine the potential costs of an action.

Perhaps most importantly, I believe there is a fundamental question that should be asked prior to our taking regulatory action: what is the federal interest? In other words, has Congress vested within our regulatory purview a specific interest to protect? And do we have the flexibility to act appropriately? If not, then we should not, indeed, cannot act. Federal agencies can become unwieldy vehicles, precisely because they are not driven by market forces; that is all the more reason for us to act only upon specific authority, only within our particular area of federal interest, and only with an appropriately targeted focus. We should not embellish or embroider what Congress charges us with doing, and we should recognize that our public service can be best accomplished with regulatory prudence rather than zealousness.

As I've stated previously, I believe that market discipline and adherence to best-practice standards can achieve better enforcement of fundamental market integrity concerns than can any amount of overlaid regulation. This does not mean that I slight in any way the Commission's duty to protect the public—indeed, just the opposite is true. I believe we best accomplish that goal by protecting the integrity of the markets we oversee, and we do that through sensible use of our antifraud and anti-manipulation authorities. Ultimately, an appropriate regulatory focus should protect the public, ensure safe, sound, and competitive markets, and otherwise get out of the way so people can get on with the business of doing business.

I haven't yet spoken about technological change, but I don't believe this discussion can be relevant without addressing the issue. In other words, talking about the CFTC's upcoming role means talking about dealing with electronic trading systems. The dramatic and rapid evolution of these systems has, and will continue to have, a profound impact on all aspects of our industry—from the way transactions are effected, to the place they are effected, to the manner in which they are cleared, and to the business structure of the entities that are operating execution and clearing functions, just to name a few.

In that vein, I would urge all of us to “think outside the box” in coming up with proposals for regulatory reform. I have listened to discussions of some rather radical ideas for reform, and I'm heartened by the creativity they embody. We're all realistic enough to know that no one will get everything they want, and that the end result will most likely not be perfect. But we have a singular opportunity at this point in time to create a new structure, a new paradigm of regulation, that will foster innovation, strengthen the safety and soundness of the markets, and lead us to new challenges we've not yet envisioned. I look forward to working with Congress, with the industry, and with other regulators to arrive at a workable, reasonable, and most of all beneficial resolution of our regulatory issues. I am hopeful that, at the end of the day, market activity flows to and from various industry sectors because of true economic competitive forces, and not because of regulatory obstacles. Thank you.

Remarks of Commissioner James E. Newsome before the Futures Industry Association's Futures and Options Expo '99

November 11, 1999

I am delighted to be here today to give my views on some issues that might be of interest to you. I would like to thank FIA for not only organizing this expo, but also for the excellent job they do in representing your interests. Chairman Rainer sends his regards and regrets that he was unable to be here today.

Today is a new day at the Commission, with new leadership and a new vision. It is also the most exciting, interesting, and challenging time during my tenure. Some of the questions we are now asking include: Where is the industry headed in the next few years? Where will business grow, and where will it falter? And how will the regulators respond? With the technological, legal, and political landscape changing so rapidly and so dramatically, it will take some farsighted thinkers to anticipate and address the numerous issues facing our industry. Many of those people are here at this expo.

Over the last two weeks, you have heard general thoughts and ideas of a different regulatory direction from the Commission. If I may, I’d like to take a few moments to add my thoughts to the discussion of an appropriate regulatory agenda, and to share some ideas about how and when you can have input to accomplish these changes.

Given my background and experience, I tend to look at issues from the private-sector point of view. This leads to two basic points I want to make today and that I have previously emphasized: first, I believe we need to appropriately deregulate our domestic exchanges to allow them to compete fairly, from a regulatory standpoint, in today’s global financial markets, and second, we need to provide legal certainty for over-the-counter markets to allow them to continue to thrive.

How do we accomplish an appropriate regulatory agenda? Although it may seem overly simplistic, I believe as a crucial first step, regulators should engage in cost/benefit analyses before taking any action whatsoever. Too many times the government acts, even with the best of motives, without giving due notice of and attention to the costs of its action. We cannot afford to do that. So I will start from the premise that we take regulatory actions when, and only when, the benefits of such actions clearly outweigh the costs.

Now to the more difficult query: how do we determine the costs? The short answer is, the regulator listens to the regulated. As many of you already know, I believe that regulatory reform should be industry driven, and there’s a good reason for that: the markets know best what’s best for the markets. We need to hear what the problems are, but more importantly, we need to hear suggested solutions. Obviously, we will get competing concerns, and competing resolutions, but we cannot make appropriate decisions without industry input.

I believe there is a fundamental question that should be asked prior to our taking regulatory action: what is the federal interest? In other words, has Congress vested within our regulatory purview a specific interest to protect? And do we have the flexibility to act appropriately? If not, then we should not, indeed, cannot act. Federal agencies can, even with the best of intentions, become unwieldy vehicles, precisely because they are not driven by market forces; that is all the more reason for us to act only upon specific authority, only within our particular area of federal interest, and only with an appropriately targeted focus. We should not embellish or embroider what Congress charges us with doing, and we should recognize that our public service can be best accomplished with regulatory prudence rather than zealousness.

As I’ve stated previously, I believe that market discipline and adherence to best-practice standards can achieve better enforcement of fundamental market integrity concerns than can any amount of overlaid regulation. This does not mean that I slight in any way the Commission’s duty to protect the public—indeed, just the opposite is true. I believe we best accomplish that goal by protecting the integrity of the markets we oversee, and we do that through sensible use of our antifraud and anti-manipulation authorities. Ultimately, an appropriate regulatory focus should protect the public, ensure safe, sound, and competitive markets, and otherwise get out of the way so people can get on with the business of doing business.

It has become apparent to me that the umbrella approach of regulating all markets the same is antiquated. Markets have changed, competition has changed, and regulatory needs have changed. We must develop a system that recognizes levels of sophistication, levels of need, risk of manipulation, and regulate accordingly.

I have yet to mention technological change, but I don’t believe this discussion can be relevant without addressing the issue. In other words, talking about the CFTC’s upcoming role means talking about dealing with electronic trading systems. The dramatic and rapid evolution of these systems has, and will continue to have, a profound impact on all aspects of our industry—from the way transactions are effected, to the place they are effected, to the manner in which they are cleared, and to the business structure of the entities that are operating execution and clearing functions, just to name a few.

Recognizing these market innovations, the Commission is in the process of organizing a new advisory committee, called the Technology Advisory Committee (TAC). This committee will replace the Financial Products Advisory Committee (FPAC), which some of you may be familiar with. The Commission plans to hold a public roundtable during the week of December 6 to discuss the direction of this new important committee. I believe it is imperative that the CFTC keep informed of the ever evolving technological environment, the impact of technology on our markets, market professionals and other market participants, and to consider regulatory reform as appropriate.

The Technology Advisory Committee’s charter directs the committee to assist the Commission in

1)    reviewing emerging technologies utilized by financial services and commodity markets and their participants,

2)    identifying technology providers for the financial services and commodity markets,

3)    analyzing the impact of emerging technologies on financial services and commodity markets,

4)    reviewing the CEA and Commission regulations to assess their applicability to electronic issues and to ensure the Commission’s ability to exercise appropriate fraud and manipulation authority, and

5)    examining ways that the Commission may respond to the increasing use of technology in financial services and commodity markets.

I anticipate the Technology Advisory Committee will provide a valuable forum for information exchange and advice on these matters. The committee’s membership will include representatives of the technology-driven marketplace, firms and market users most directly involved in and affected by the technological evolution of the industry. This membership will be balanced in terms of points of view represented. Toward that end, the Commission is considering for membership a broad cross-section of persons representing technology providers, exchanges, regulatory organizations, financial intermediaries, end-users, traders and academics. I look forward to working with this advisory committee and to the information and advice it provides the Commission.

Most of you have probably heard about the speech given by the CFTC’s new chairman, Bill Rainer, here a couple of weeks ago at the Chicago Kent conference, as well as Tuesday’s release of the President’s Working Group (PWG) Study on OTC Derivatives Markets and the Commodity Exchange Act, which was unanimously approved by the members of the PWG. While I can only give you my personal thoughts on the document, I am very excited about its content. I believe the general goals of the PWG report are to enhance competition and efficiency, to encourage innovations through technology, and to mitigate systemic risk by encouraging clearing houses for OTC instruments. The challenge, as I see it, will be to define how we implement these goals, not only for OTC markets, but also for financial futures. I can assure you that the Commission will not take this challenge lightly, nor will the Commission operate in a closed environment.

Chairman Rainer recently set up an internal task force consisting of 9 CFTC professional and experienced staff members who are working full time to review the CEA in light of the PWG recommendations. This task force is charged with laying the groundwork for development of a modern regulatory model for the futures industry. Consequently, on December 2, the Commission will hold a major roundtable discussion on the future of futures. This roundtable will be the first of many opportunities for the Commission to engage industry participants and other interested parties to begin constructing the appropriate regulatory model for the future. Additionally, the CFTC will also hold a public meeting next Wednesday, November 17, to vote on a final rule regarding contract market designation, as well as proposed amendments to Regulation 1.41, contract market rule review procedures. This should signal the beginning of the Commission’s sincere effort to provide an appropriate regulatory framework for all market entities. It is my hope that the Commission can move quickly on this agenda, relying on input from a variety of sources and working closely with Congress throughout the reauthorization period.

In that vein, I would urge all of us to "think outside the box" in coming up with proposals for regulatory reform. I have listened to discussions of some rather radical ideas for reform, and I’m heartened by the creativity they embody. We’re all realistic enough to know that the end result will most likely not be perfect. But we have a singular opportunity at this point in time to create a new structure, a new paradigm of regulation, that will foster innovation, strengthen the safety and soundness of the markets, and lead us to new challenges we’ve not yet envisioned. I look forward to working with Congress, with the industry, and with other regulators to arrive at a workable, reasonable, and most of all beneficial resolution of our regulatory issues. I am most hopeful that, at the end of the day, market activity flows to and from various industry sectors because of true economic competitive forces, and not because of regulatory obstacles. Thank you.

Remarks of Commissioner James E. Newsome, before the National Cattlement's Beef Association Annual Convention and Trade Show Live Cattle Marketing Committee, Phoenix, Arizona

January 27, 2000

Introduction

Thank you. I appreciate the invitation to speak with you today. I would like to thank Lemmy Wilson for his leadership of this committee and of his willingness to participate in the various activities at the CFTC and kindly share the comments and concerns of your industry.

It’s an exciting time to be at the CFTC, as the industry and the Commission are both undergoing many changes. Technology and innovative thinkers are driving the derivatives business, and I for one am excited about the future.

Market Glance

Since I spoke to you last year, the Commission has received a new chairman, Bill Rainer, who is leading us into reauthorization of the CFTC, away from heavy-handed regulation and into a modern oversight role. This potential policy shift will move from specific rules to adherence to "best management practices" with strong enforcement capabilities to preserve the integrity of our markets. Global derivatives markets are no longer myths, but realities. For many years, the Chicago Board of Trade (CBT) has been the largest futures exchange in the world. However, in 1999, the all-electronic German-based Eurex exchange replaced the CBT with that distinction. Just to give some perspective, the CBT’s total trading volume for 1999 was 255 million contracts, while Eurex’s reported volume for the same period was 379 million. Real competition for our domestic futures exchanges is coming from foreign exchanges, over-the-counter markets, and electronic systems.

Regulatory Challenges

This dynamic market has created some interesting regulatory challenges. Different execution types (the traditional open outcry pit model vs. electronic screen-based systems) has raised new regulatory issues, such as should the Commodity Exchange Act be overhauled to account for modernization and emerging technologies? Has the need for specific regulation changed given today’s market environment? Competition, especially for financial contracts, has forced the Commission and Congress to review the entire Commodity Exchange Act and accompanying regulations to ensure a level playing field for all market participants. However, the Commission has received some comments expressing a continued need for the CFTC to supervise agricultural contracts, given the lack of competition for that business.

Potential Solutions

Some have suggested different regulations for different markets, given the characteristics of each particular market and makeup of trading participants. Although competition from many different angles raises regulatory questions, I believe it solves many of our historical regulatory problems by increasing the quality of products available.

FutureCom

As most of you know, FutureCom has applied to the CFTC to become an Internet-based futures exchange, where participants can actually trade contracts electronically, via the Internet rather than through an intermediary on a traditional futures exchange. Approval of FutureCom has been stayed by the CFTC as more information was gathered and analyzed. I am pleased to report that just last week, the stay was lifted and Commission staff hopes to complete the application review in the very near future. As stated last year, I commend Mr. Bill O’Brien for his innovative thinking and believe that these are the ways technology can and will benefit your business in the near future.

Contract Market Rules

On November 26, 1999, the CFTC published in the Federal Register a request for public comment on a proposal to revise its procedures for the review of contract market rules and rule amendments. The original comment period expires January 25, 2000. By letter dated January 3, seven agricultural organizations requested a thirty-day extension of the comment period to permit the membership of each organization to fully consider the implications of the proposed procedures. The CFTC has granted this request, therefore accepting comments until February 24, 2000. This proposed rule would allow exchanges to implement rule changes without prior CFTC approval, as long as the exchange "certifies" to the Commission that changes are fully in compliance with the Commodity Exchange Act. Exchanges have requested this change in order to be able to respond immediately to changes in the marketplace and/or competitive pressures. As this proposed rule is pending approval by the CFTC and we are in the process of receiving comments, I am unable to comment any further on this issue. However, as I know many of you will have comments, I encourage you to submit comments prior to February 24.

Speculative Position Limits

The Chicago Mercantile Exchange has proposed amendments to the Exchange's live cattle futures and option contracts. On Monday, the Commission published the proposal in the Federal Register for comment. The comment period closes on February 8, 2000. Since the matter is pending Commission approval, I cannot comment further than to say I look forward to reviewing the proposal and subsequent comments received.

Agricultural Trade Options (ATO's)

An ATO is an agreement giving the agricultural producer the right, but not the obligation to deliver his or her commodity in the future for a set price. ATO’s are generally similar to the tradition exchange-traded options, but are traded directly between commercial parties. As I reported last year, I was not at the CFTC during the creation of our ATO pilot program, but I did support the concept of additional risk-management tools for farmers and ranchers. However, I told you some things would need to be changed in order to make the program successful. On December 6, 1999, the Commission adopted several changes to the program that should increase the success of the program. Highlights of changes include permitting cash settlement and offset or cancellation of ATO’s and streamlining disclosure statements, registration requirements, and reporting/record-keeping requirements. These program changes are effective on February 4, 2000.

Summary

I am excited about the future of this industry, given the emergence of technology and market participants, such as Bill O’Brien, who are bold enough to use it. I predict in the near future, there will be more competition in all markets, giving potential users more options. I also believe the regulatory structure will, and should, adapt to allow the business to grow and prosper. The CFTC should not determine winners and losers, but rather the market should make that determination. The role of the CFTC should be to maintain basic customer protections, effective surveillance and enforcement programs, while eliminating unnecessary and outdated regulations. I look forward to working with Congress and with market users, like yourselves, to ensure the Commission has the ability to respond to market innovations.