Remarks of Commissioner James E. Newsome, before the Risk Management Technology Conference 2000, E-Commerce for the Capital Markets

June 19, 2000

Introduction

Thank you. I am honored to be here today to discuss regulatory issues in today’s technology-driven workplace. I would like to give you some personal perceptions of today’s marketplace, then discuss some specific things we are working on at the Commodity Futures Trading Commission.

Regulatory Perceptions

I did not come to the Commission two years ago with a background in trading or finance. My experience was in the agriculture sector, so I believe this allowed me to take a fresh look at the regulatory landscape and the state of the industry as a whole.

It did not take me long to realize that regulatory change was in order, given the many outdated rules on the books at the Commission. I believed we needed change mindful of technological advances, dynamic market structures, and innovations by not only our traditional exchanges, but also by new firms and individuals having the vision to design trading platforms cheaper and more efficiently than in the past.

Emergence of Technology

The emergence of technology is obviously a driving factor in today’s markets. Some of our regulatory principles date back to the 1920s, when Congress recognized the need for some oversight of futures trading. We all know how much has changed since that time.

Technology has led to globalization, new market opportunities, and increased competition for domestic futures exchanges from foreign exchanges, from over-the-counter markets, and even from new exchanges.

Technology has helped lower the barriers to entry for new exchanges by effectively lowering start-up costs. Until a few years ago, the CFTC had minimal interest or inquiry from industry participants wanting to create new ventures in the futures market.

In fact, the Commission received only two applications for new exchange designations in the first twenty years of its existence. Neither of them ever got off the ground.

However, recently—especially in the last year—we have received an overwhelming level of interest and even some formal applications from start-up exchanges. The Commission has approved some applications, while others are currently being reviewed.

With all of these changes comes the responsibility of market regulators to meet the challenges of emerging technology by defining the future of regulation. Some of these challenges are: embracing technological advancements, rewarding--not punishing--those who are innovative, creative, and think outside the traditional box, harmonizing our international regulatory structure, updating or negating rules that no longer apply, and developing quicker response times.

Essentially, we must adapt to this modern environment. However, realization of these goals will require flexibility from Congress in our statute and adoption of a flexible regulatory structure in anticipation of future innovations.

Creation of Technology Advisory Committee

To assist us in keeping abreast of technological advancements in the futures industry, the Commission formed a Technology Advisory Committee. Last December, as a prelude to structuring the Committee's activities, the Commission conducted a Technology Roundtable at which leading representatives from both the derivatives and technology industries participated.

The agenda included discussions of current trading technologies, the effects of new technologies on markets, technologies envisioned for the future, and appropriate regulatory responses to this technology. Shortly thereafter, we formalized the membership of the advisory committee, which includes representatives of the exchanges, intermediary and compliance communities, technology providers, and others with knowledge of the legal issues surrounding the Commodity Exchange Act.

In April, we conducted our first meeting. The agenda included discussions of automatic order routing and execution systems, detecting fraud and manipulation in an electronic environment, common trading platforms and common clearing of multiple products. We concluded the meeting with a free-form discussion of cutting edge trends in the industry.

It was obvious from the discussion that technology has made it logistically and economically feasible to offer multiple products on a single trading platform and there is a growing desire in the industry to do so. In keeping with that trend, there is a strong desire for common clearing. An important issue that lawmakers will have to address in the future is whether current statutory barriers to common clearing should be removed and if so, how and by whom this activity should be regulated.

In addition, the participants discussed how the ability of customers to access the marketplace through automatic order routing systems might change current risk management practices. According to some on the committee, it will be possible in the future to perform real-time credit filtering as customers enter the market. This may have significant implications for the efficiency of executing orders and where the responsibility for risk lies in case of default.

Another point brought out at the meeting was that technology will change the nature of trade practice violations and therefore the method of regulation. In open-outcry settings, the focus for detecting certain violations has been on the audit trail, the integrity of which depends upon careful documentation by each person in the process, from order placement to execution.

In an electronic environment this is done automatically. Thus, the potential for manipulating that process to the disadvantage of customers will be reduced. This, of course, will not eliminate fraudulent activity, but most likely will change the method by which certain violations are committed.

Finally, the participants at the meeting stressed that technology has accelerated the pace of innovation in marketplace and the need to get to market quickly with new ideas in order to remain competitive.

The success of market providers will increasingly be determined by the speed with which orders are executed, the lowering of transaction costs, and the choice of services made available to market participants. With that in mind, the Commission is striving to eliminate regulation where it acts as an unnecessary barrier to entry.

Regulatory Reform Package

Under the leadership of the Commission’s Chairman--Bill Rainer, the Commission began a comprehensive review of our rules and regulations. Chairman Rainer created a full-time Task Force of several CFTC senior staff members to formulate this regulatory reform package. Their specific goals were to eliminate unnecessary rules and to generally review the one-size-fits-all style of regulation and its appropriateness in today’s market environment.

Also, the task force considered internationally accepted regulatory principles in the context of our own U.S. markets to address globalization and take a step toward international harmonization of regulatory structures. Finally, they recommended changing the agency from a frontline regulator with specific step-by-step prescriptive rules to an oversight regulator with flexible "core principles."

Task Force Recommendations

The Task Force presented a general framework to the Commissioners and to our authorizing committees in late February 2000. This framework established three regulatory tiers for markets--all subject to varying levels of Commission oversight.

The first level of regulation, the "recognized futures exchange," is most like the current regulatory structure. It will offer the most customer protection and be available to retail investors. The second level of regulation, the "derivatives transaction facility," will be limited mainly to products that are not susceptible to manipulation and which are traded by or through appropriate persons.

The third level of regulation, the "exempt multilateral trade execution facility," will be open only to large or sophisticated investors who trade on products that are considered not susceptible to manipulation. Therefore, the oversight level is dependent on the nature of commodities traded on the facility and the sophistication of the market’s participants.

For example, derivatives on commodities with finite supplies such as agricultural products and those traded by retail customers will be subject to the highest levels of regulation. However, derivatives on products with a nearly inexhaustible supply, like financial products, and commodities whose derivative traders are "institutional" in nature will require lower levels of regulation.

Finally, the task force provided an expansion and clarification of the current swaps exemption aimed at providing the maximum amount of legal certainty for the over-the-counter markets, utilizing the administrative powers of the Commission.

Public Review

Recently, our staff completed specifics for the general framework. The package was brought before the Commission, where we voted to publish the document as a proposed rule. It was published last week in the Federal Register for a 45-day public comment period.

Upon completion of the comment period, the Commission will review all comments received and incorporate any modifications deemed favorable into a final rule. As I have only presented the general framework of the proposed rule, I encourage you all to review it in more detail. It can also be found on our website, www.cftc.gov, under "What’s New and Pending." Generally, most informal industry comments have been favorable to this proposal.

In addition, both Houses of Congress recently introduced similar bills, with both effectively codifying the framework outlined in our reform proposal. Generally, these bills are intended to provide legal certainty for the over-the-counter derivatives market, reform the Shad-Johnson jurisdictional accord by allowing financial exchanges to trade single stock futures, and reform the Treasury Amendment to clarify the Commission’s jurisdiction over "bucket shops" and strengthen our ability to take enforcement action with respect to retail fraud and other unfair practices in the foreign currency market.

Conclusion

As you can see, there are many challenges that lie ahead for market regulators worldwide. I am hopeful that through the intensive review of our overall regulatory structure and the creation of beneficial advisory committees, such as the Technology Advisory Committee, the Commission will be well positioned to meet the challenges of today, as well as obtain the necessary statutory and regulatory flexibility to accommodate the dynamic market of the future.

Thank you for the invitation to join you today. Please feel free to contact my office should you have any questions regarding the statements I have made to

Remarks of Acting Chairman James E. Newsome, before the International Swaps and Derivatives Association's, Energy and Developing Products Conference, Houston, Texas

March 6, 2001

Thank you for inviting me here today and for allowing me the honor of addressing this distinguished group. I have had the opportunity to work with some of you during my tenure at the CFTC and look forward to continuing these productive relationships in the future.

I'd like to first quickly recap the phenomenal progress that has been made this winter, progress that demonstrates just how effectively good government can work when everyone cooperates. First, on December 13^th, after receiving much constructive input from you and others in the marketplace, the Commission published rules to implement last year's regulatory reform proposal.

Then, just two days later, Congress passed the Commodity Futures Modernization Act of 2000 (or "CFMA") which was signed into law on December 21^st. This landmark legislation codifies many of the initiatives reflected in our regulatory reform rules. It also provides legal certainty for over-the-counter derivative markets, deregulates the futures markets, and lifts the ban on single-stock futures. Accordingly, the Commission promptly withdrew its rules and immediately turned its attention to implementation of the CFMA.

That implementation effort is my highest priority. Prompt implementation of the CFMA will require the Commission and its staff, in addition to promulgating rules, to conduct various studies (both independently and in coordination with other members of the President's Working Group on Financial Markets) mandated by the Act and to work closely with the Fed and the SEC to open the markets to single-stock futures. The Act, appropriately in my view, establishes deadlines for the agencies to accomplish these important cooperative tasks and I am fully committed to meeting each of those deadlines. As for issuing rules to implement the CFMA, we are already well under way; in fact, just last Friday, the Commission approved proposed rules governing exempt markets, derivative transaction execution facilities, and designated contract markets.

These proposed rules are now on our website and should appear in the Federal Register in about a week for public comment. I expect our next two sets of proposed rules (those dealing with privacy issues and opting out of segregated funds requirements, respectively) to also be published for comment next week. As always, I look forward to receiving the valuable insights and suggestions of those in the marketplace.

Many of you are familiar with my views on the proper role of regulation. For those of you who may not be, it is worth emphasizing, first, that I believe strongly in, and in fact have taken an oath to fulfill, the responsibilities and mandates of the Commission to maintain market integrity and protect market participants against fraud and manipulation. However, I do not subscribe to the idea of regulation for regulation's sake alone. There are different ways for the Commission to fulfill its responsibilities and I believe that reducing unnecessary and burdensome rules in favor of best management practices that allow flexibility and promote innovation is the appropriate path to take.

While the regulator cannot anticipate the substance of market innovations, the regulator must anticipate that innovations will take place and must stand ready to respond appropriately to, rather than impede and delay, such progress. The temptation to resort to prescriptive regulations that take an inherently static view of markets and technology can be hard to resist for some in the regulatory community. I have and will continue, however, to take a hard-line against reverting to such restrictions on innovation and progress. The alternative to prescriptive regulations, of course, is a rational set of principles-based rules, such as that called for by the CFMA.

I believe the CFMA and the principles-based approach that it advocates could not have come at a better time. Advances in technology are facilitating greater innovation in the markets. New products and new ways to trade existing products are evolving at an increasing pace. These innovations promise to improve both the efficiency of markets and their effectiveness as means of discovering prices and managing risks.

But there is an unavoidable relationship between market regulation and market innovation. The nature of that relationship influences whether resources are invested in valuable new innovations or are consumed in costly adaptation. Too often, inflexible regulations that lack a rational economic basis have forced market participants to adapt in ways that avoid inefficiencies imposed by such regulations but otherwise add no new value to the marketplace. The market bears the cost of such adaptation and whatever public policy the regulator might have been attempting to pursue is quite often not achieved. Not frequently enough, on the other hand, are rules designed with sufficient flexibility to permit (even encourage) true innovation that is driven by the economics of the marketplace and improvements in technology. Flexible rules can be effective in achieving necessary public policy goals without imposing unnecessary inefficiency or triggering costly adaptation.

The new regulatory approach that the CFMA calls for empowers the Commission to do just that: accomplish important public policy goals without imposing unnecessary costs on market participants, without stifling innovation made possible by new technology, and without implementing inflexible regulations that quickly become obsolete or ineffective. We have seen a direct benefit to markets when we have, in the past, been able to rationalize rules. A perfect example is what has happened in your own markets since the April 1993 energy exemption. What I hope to do is to make such improvements the rule rather than the exception.

And I believe that we will be successful in this effort. One example, just a first step really, is a new provision of the Act that Ken referred to a few moments ago, Section 2(h). This important section provides legal certainty for transactions in exempt commodities, just as other sections provide legal certainty for transactions in derivative and swap transactions involving excluded commodities. Exempt commodities, as you know, are defined to include all commodities that are neither excluded commodities (such as interest and exchange rates, certain economic or financial indices, and occurrences beyond the control of the parties) nor agricultural commodities. A good example of an exempt commodity is an energy product with a deep, liquid market, such as crude oil.

Section 2(h)(3) may be of particular interest for some because it clears the way for principal-to-principal transactions among eligible commercial entities on an electronic trading facility, or, what can be called an "exempt commercial market." As you know, an eligible commercial entity is a type of eligible contract participant, which is a broader category than the former concept of an "eligible swap participant" and which includes, among other things, a company with total assets of $10MM or a net worth of $1MM that enters into the transaction to manage risks related to assets or liabilities which are carried as a normal part of conducting its business. An eligible commercial entity is such a company that also either (i) has the ability to make or take delivery of the underlying commodity, (ii) incurs some commodity risk beyond price risk, or (iii) is a dealer in the underlying commodity or derivatives transactions involving that underlying commodity. An electronic trading facility is, of course, a type of trading facility that both (a) "operates by means of an electronic or telecommunications network" and (b) "maintains an automated audit trail" of bids, offers, order matches, and executions.

Subject to the normal prohibitions against fraud and manipulation, innovative new exempt commercial markets that provide real value for participants are now free to develop as quickly as technology permits. And an important public policy goal will continue to be served because, if such a facility comes to serve a significant price discovery function in the marketplace, the CFTC's authority to ensure transparency for such a market is preserved.

While passage of the CFMA is a very positive first step, and its prompt implementation is my highest priority, I do have other priorities. I plan to move forward with reviewing the need for comprehensive relief for intermediaries. I also want to respond appropriately to developments in the business-to-business arena as new innovations there enable firms engaged in online procurement to manage price volatility, lock-in prices, and assure themselves of adequate supplies.

I look forward to working in partnership with the various market participants as other innovative products and trading arrangements evolve. You are the experts in your areas of business and your motives properly are profit-driven. We are regulators, not experts in running your business, and as such our role is to protect the public good and should be confined to what I like to call outcome-neutral regulatory action where competition among market participants, not governmental prescription, determines the results. Section 3 of the Act clearly defines those legitimate public interests which should be furthered by this Commission. It is the place of Congress, not this Commission, to create new public policy. In this regard, it is noteworthy that the Commission has been strongly encouraged by members of Congress to utilize its exemptive authority under Section 4(c) and I plan to do so whenever appropriate.

Obviously, the year 2000 was an extremely important year for the futures industry. However, when we look back ten years from now, I predict we will find that 2001 was a critical year because, today, our challenge is to implement the much-needed relief granted by the new legislation, to anticipate future needs, and to react quickly to market dynamics. Your challenge is to help us address these issues properly.

The key to success for a regulator facing such great potential change in the marketplace is to pursue the same innovativeness and creativity that successful market participants rely upon in conducting their business. Fortunately, the CFMA affords us the opportunity to do so. But if we, as regulators, fail to take hold of this opportunity, if we resist the clear need to 'think outside the box', then we risk jeopardizing the leading role of U.S. markets, we risk squandering the current U.S. advantage in B2B and other areas.

There is perhaps no better example of an area in which we must change our regulatory approach, in which we must 'think outside the box,' than with respect to the traditional approach of churning out prescriptive regulations. It's been wisely said that enough regulations will ensure that nothing ever goes wrong in the marketplace but at the same time nothing right will be permitted to take place, either. Principles-based rules that suit the nature of the participant and the nature of the product, that take into consideration the costs as well as the benefits of compliance, and that reflect a common sense approach are most often the rules that are best able to effectively achieve public policy goals. For us, that means preventing fraud and manipulation while promoting markets that are reliable mechanisms for price discovery and risk allocation.

Remarks of Acting Chairman James E. Newsome, at the FIA Conference in Boca Raton, Florida

March 15, 2001

Thank you, for that kind introduction and for inviting me here today. It is both an honor and a pleasure to address this distinguished group. I have had the opportunity to work with some of you during my tenure at the CFTC and look forward to continuing these productive relationships in the future, as well as to building more such relationships.

    As I reviewed the agenda for this conference, the discussion topics seemed to me to lead to one question: "Where do we go from here?" Through competition, innovation, technological advances, and globalization and with businesses being redefined, recreated, or even newly created, many of you are asking that question. We at the CFTC are asking ourselves a similar question: "How do we, as regulators, make allowances for these changes in the marketplace and continue to carry out the core mission of the agency?"

    This is obviously an exciting time for the industry. Congress exhibited great vision and determination in passing the Commodity Futures Modernization Act, a truly landmark piece of legislation that is very responsive to market changes. Its passage represents tremendous progress and demonstrates just how effectively good government can work when everyone cooperates, public and private sector alike. Passage of the Act was an important first step and I commend Congress for taking it. Now, we must continue the momentum as we attempt to define the future of regulation.

    As busy as we were last year, I expect us to be even more so in 2001. Prompt implementation of the new Act is my highest priority. The CFMA, quite appropriately in my view, establishes deadlines for accomplishing numerous tasks, both individual and in cooperation with other Federal regulators. I welcome the challenge and am fully committed to meeting each of those deadlines.

    Implementation efforts at the CFTC are already well under way. The Commission has approved a set of proposed rules governing execution facilities, which were published in the Federal Register last Friday. The Commission also recently approved other proposed rules regarding privacy and opting out of segregated funds.

    As for joint rulemakings with other agencies, we have assembled our team and are actively working with the relevant agencies to develop proposals. As always, I look forward to receiving the valuable insights and suggestions of those in the marketplace as proposed rules are published. There will be a lot of proposals coming at you in the next several months and I want to thank you in advance for your responsiveness and continued interest.

    Many of you are familiar with my views on the proper role of regulation. For those of you who may not be, it is worth emphasizing, first, that I believe strongly in, and in fact have taken an oath to fulfill, the responsibilities and mandates of the Commission to maintain market integrity and to protect market participants against fraud and manipulation.

    However, I do not subscribe to the idea of regulation for regulation's sake. There are different ways for the Commission to fulfill its responsibilities and I believe that reducing unnecessary and burdensome rules in favor of best management practices that allow flexibility and promote innovation is the appropriate path to take. The temptation to resort to prescriptive regulations that take an inherently static view of markets and technology has traditionally been hard to resist for some in the regulatory community. However, I have and will continue to take a hard line against reverting to such restrictions on innovation and progress.

    You are the experts in running your businesses. We, as regulators, are not. Our role is to protect the public good and should be confined to what I like to call outcome-neutral regulatory action where competition among market participants, not governmental prescription, determines the results. Section 3 of the Act clearly defines those legitimate public interests that should be furthered by this Commission. It is the place of Congress, not this Commission, to create new public policy.

    The alternative to prescriptive regulations, of course, is a rational set of principles-based rules and I believe, therefore, that the Commodity Futures Modernization Act and the principles-based approach it takes could not have come at a better time. Advances in technology are facilitating great innovation in the marketplace. New competitors and industry veterans alike are developing new products and new ways to trade existing products. In my view, these innovations promise to improve both the efficiency of markets and their effectiveness as a means of discovering prices and managing risks. But such changes would quickly make any set of inflexible or prescriptive regulations obsolete, burdensome, and, frankly, unnecessary.

    There is an unavoidable relationship between overly burdensome market regulation and market innovation. The nature of the regulatory approach influences whether resources are invested in valuable new innovations (if the regulatory approach is flexible and economically sound) or are consumed in costly adaptation efforts (if regulations are overly burdensome and inflexible). Too often, an inflexible and prescriptive regulatory approach that lacks a rational economic basis has forced market participants to adapt to regulations in ways that avoid the inefficiencies imposed by such regulations but otherwise add no new value to the marketplace.

    The market bears the added cost of such efforts and whatever public policy the regulator might have been attempting to pursue is quite often not achieved. Not frequently enough are rules designed with sufficient flexibility to permit (even encourage) true innovation, innovation driven by the economics of the marketplace and improvements in technology. Yet flexible rules can be very effective in achieving necessary public policy goals without imposing unnecessary inefficiency or triggering costly adaptation.

    The new regulatory approach that is called for by the CFMA empowers the Commission to do just that: accomplish important public policy goals without imposing unnecessary costs on market participants, without stifling innovation driven by new technologies and the evolving needs of customers, and without implementing inflexible regulations that quickly become obsolete or ineffective.

    We have seen a direct benefit to markets when we have, in the past, been able to rationalize rules. What I hope to do is make such improvements the rule rather than the exception and I believe that we will be successful in this effort. Subject to the normal prohibitions against fraud and manipulation, market innovations that provide real value for participants are now free to develop as quickly as technology permits and customer demand requires.

    While passage of the CFMA was a very positive first step, and its prompt implementation is, as I’ve said, my highest priority, I do have other priorities. I plan to move forward with reviewing the need for comprehensive relief for intermediaries. I also plan to propose, in appropriate circumstances, using our exemptive authority under Section 4(c).

    Obviously, the year 2000 was an extremely important year for the futures industry. However, when we look back ten years from now, I predict we will find that 2001 was also a critical year because, today, our challenge is to implement the much-needed relief granted by the new legislation, to anticipate future needs, and to react quickly to market dynamics. Your challenge is to help us address these issues properly.

    The key to success for a regulator facing such great potential change in the marketplace is to pursue the same innovativeness and creativity that successful market participants rely upon in conducting their businesses. Fortunately, the CFMA affords us the opportunity to do so.

    It’s been wisely said that enough regulations will ensure that nothing ever goes wrong in the marketplace…but at the same time, nothing right will be permitted to take place either. Principles-based rules that suit the nature of the participant and the nature of the product, that take into consideration the costs as well as the benefits of compliance, that allow business people to conduct business without unnecessary restrictions, and that reflect a common sense approach to regulation through a genuine partnership with market participants, are most often the rules that are best able to achieve public policy goals. These are my ideas about where we go from here and what the core mission of our agency should be. I look forward to working with you as we move forward.

Testimony of Commissioner James E. Newsome, before the U.S. House of Representatives Committee on Appropriations, Subcommittee on Agriculture, Rural Development, FDA and Related Agencies

March 21, 2001

Thank you, Chairman Bonilla and members of the Subcommittee. I am pleased to be here to testify before you on behalf of the Commodity Futures Trading Commission, and I appreciate the opportunity to discuss issues related to the Commission’s budget appropriation.

First, I would like to discuss the mission and responsibilities of the agency, and provide you with a detailed description of the manner in which we have utilized previous budget allocations to carry out our responsibilities as the Federal regulator for domestic futures and option markets. In addition, I would like to discuss the profound changes in the regulatory landscape resulting from the passage of the Commodity Futures Modernization Act of 2000, and the concomitant regulatory initiatives required by its enactment.

Mission of the Agency

The mission of the Commodity Futures Trading Commission as an oversight regulator is two-fold: to foster open, competitive, and financially safe and sound futures and options markets in the United States, and to protect the public from fraud, manipulation, and abusive practices in these markets. To achieve these goals, the Commission employs a well-trained, dedicated, and responsive staff, consisting of lawyers, economists, accountants, auditors, futures trading specialists, computer specialists, and support and administrative staff. The staff is primarily comprised of three main operating divisions (Economic Analysis, Trading & Markets, and Enforcement), and two offices (Office of International Affairs and Office of the General Counsel). The Commission is headquartered in Washington, D.C., and maintains regional offices in Chicago, New York, Kansas City, Los Angeles and Minneapolis. Commission staff oversee the activities of futures exchanges and registrants—futures commission merchants, salespeople, floor brokers, floor traders, commodity pool operators, commodity trading advisors, and introducing brokers— in addition to working with the exchanges as self-regulatory organizations (SROs) and the National Futures Association (NFA), a statutorily-recognized SRO overseen by the Commission, to maintain safe and secure markets.

Responsibilities of the Agency

The oversight functions of the Commission encompass many diverse areas. The Division of Economic Analysis (EA) has a critical responsibility to ensure that futures and option markets operate competitively, free of manipulation and congestion, and serve the risk-shifting and price-discovery needs of the United States and world economies. EA staff conduct daily market surveillance to ensure that the markets are functioning in an orderly manner and can, in an emergency, order an exchange to take specific action to restore an orderly market. EA staff also analyze reports of large trader positions, in order to identify and address potentially problematic concentrations in the marketplace. The Commission is briefed weekly regarding any surveillance issues or concerns, and additional briefings are scheduled as necessary in response to specific market events. EA staff maintain ongoing liaison with other federal regulators—for example, the United States Department of Agriculture and the Federal Energy Regulatory Commission—to discuss issues of common interest and to share information regarding market conditions.

The Division of Trading and Markets (T&M) develops, implements, and interprets regulations that protect customers, prevent trading and sales practice abuses, and assure the financial integrity of the futures markets and firms holding customer funds. T&M staff oversee the compliance activities of the futures industry self-regulatory organizations, including the futures and options exchanges, their clearinghouses, and the NFA. Regarding solicitation of customers, T&M staff monitor issues relating to the requirements that registrants disclose market risks and past performance information to prospective investors. T&M staff also review registrant compliance with the requirements that customer funds be kept in accounts separate from those maintained by the firm for its own use. In addition, staff ensure that customer accounts are adjusted to reflect the current market value at the close of each trading day. T&M staff oversee NFA’s activities relating to registration of companies and individuals that handle customer funds or give trading advice, and make appropriate referrals to enforcement staff as necessary. Moreover, T&M staff monitor registrants’ supervision systems, internal controls and sales practice compliance and ethics programs. T&M and EA staffs perform trade practice surveillance, and work closely with exchanges in their self-regulatory capacity to ensure that their rules and regulations comport with federal regulation in various areas, including clearance of trades, trade orders and records, position limits, price limits, disciplinary actions, and floor trading practices. The staffs conduct comprehensive semiannual reviews of all domestic futures and options exchanges to ensure that they remain in compliance with the Commodity Exchange Act and its regulations.

The Division of Enforcement (DOE) investigates and prosecutes alleged violations of the Commodity Exchange Act and Commission regulations. DOE takes actions against individuals and firms registered with the Commission, those who are engaged in commodity futures and options trading on designated domestic exchanges, and those who improperly market futures and options contracts.

DOE staff base investigations on information they develop independently, as well as information referred by other Commission divisions; industry self-regulatory organizations; state, Federal, and international authorities; and members of the public. At the conclusion of an investigation, DOE staff may recommend that the Commission initiate administrative proceedings or seek injunctive and ancillary relief on behalf of the Commission in Federal court. Administrative sanctions may include orders suspending, denying, revoking, or restricting registration and exchange trading privileges and imposing civil monetary penalties, cease and desist orders, and orders of restitution. The Commission also may obtain temporary restraining orders and preliminary and permanent injunctions in Federal court to halt ongoing violations, as well as civil monetary penalties. Other relief may include appointment of a receiver, the freezing of assets, restitution, and disgorgement of unlawfully acquired benefits. The CEA also provides that the Commission may obtain certain temporary relief on an ex parte basis including restraining orders preserving books and records, freezing assets, and appointing a receiver. When those enjoined violate court orders, DOE staff may seek to have the offenders held in contempt.

The Division of Enforcement works with the Department of Justice in the prosecution of criminal activity involving commodity-related issues. In addition, DOE staff provide expert help and technical assistance to U.S. Attorneys’ Offices, other Federal and state law enforcement agencies, and international authorities. The Commission and individual states may join as co-plaintiffs in civil injunctive actions brought to enforce the Commodity Exchange Act.

The Office of International Affairs (OIA) assists the Commission in responding to global market and regulatory changes by coordinating the Commission’s international activities. OIA provides information and technical support to the Commission and to its other offices and divisions on international matters; assists the Commission in developing rulemakings having foreign implications; analyzes foreign regulatory developments; develops regulatory information sharing arrangements; shares regulatory and fitness information with foreign authorities; and coordinates technical assistance to foreign jurisdictions. OIA represents the Commission in international organizations, organizes international conferences on behalf of the Commission, and provides technical comments to other U.S. financial regulators with respect to relevant international activities.

The Office of the General Counsel (OGC) is the Commission’s legal advisor. OGC represents the Commission in appellate litigation and in certain trial-level cases, including bankruptcy proceedings that involve futures industry professionals. Through its opinions program, OGC assists the Commission in performing its adjudicatory functions. As legal advisor, OGC reviews all substantive regulatory, legislative, and administrative matters presented to the Commission. OGC also advises the Commission on the application and interpretation of the Commodity Exchange Act and other administrative statutes.

Utilization of Previous Budget Allocations

The Commission’s FY 2000 appropriation was $62.8 M. This was $1.6 M or a 2.6% increase over our FY 1999 level. Actual staffing levels for FY 2000 were down to 556 FTEs in FY 2000 from 567 FTEs in FY 1999.

Approximately three-fourths of the CFTC’s appropriation is to cover the salary and benefits of the Commission staff. Recruiting and retaining a professional staff, consisting primarily of attorneys and economists, continues to be one the Commission’s largest management challenges. Beginning in FY 2000 and continuing in this fiscal year, the Commission has moved aggressively to recruit, and more importantly retain, its highly specialized professional staff by using, when fiscally feasible, all of the flexibilities available to it within Title V.

The remaining quarter of the Commission’s budget covers all other operating expenses. The two largest operating expenses are the lease of office space and the cost of maintaining an information technology infrastructure that enables the Commission to maintain an effective enforcement and market surveillance presence.

Keeping pace with the rapid information technology developments in the futures industry is perhaps the Commission’s second largest management challenge. For the first six months of the year 2000, the Commission undertook an independent assessment of its information technology program. The report included a number of specific recommendations including:

1. Reorganizing the Office of Information Resources Management;
2. Reestablishing an information technology strategic planning body with enhanced senior management involvement;
3. Increasing staff, over a two-year period, from 38 FTEs to 58 FTEs, to bring the Commission to acceptable industry standards;
4. Implementing skill requirements for staff based upon the Chief Information Officer’s Council Core Competencies framework;
5. Changing the information technology infrastructure including an enhanced security program; and
6. Reengineering the change management process.

The Commission initiated a number of these changes with FY 2000 and FY 2001 resources. For example, the Commission has already reallocated an additional six FTEs for information technology positions.

In addition to the significant resources devoted to the substantial revisions to the Commodity Exchange Act, the following are some highlights from the on-going work of the Commission’s programs:

Enforcement: In the program areas, the CFTC has used its appropriations to maintain an effective enforcement and market surveillance presence in the growing futures and option markets. The largest share of our resources goes to support the Commission’s enforcement program. The primary goal of the enforcement program is to police futures markets for conduct that violates the Commodity Exchange Act or Commission regulations. The Enforcement program continuously looks for new ways to enhance the Commission’s ability to detect and deter wrongdoing. In FY 2000, for example, the Enforcement staff took action in a variety of areas including:

Fraudulent Internet Solicitations. Internet fraud poses a grave new threat because technology now enables malefactors to solicit business fraudulently from millions of people quickly and cheaply. To combat this threat, the Commission’s enforcement program:

• Published a new consumer advisory;
• Participated in surveillance or "surf days" in cooperation with the Securities and Exchange Commission and the Federal Trade Commission; and
• Trained international enforcement agencies in the investigation and litigation of Internet-related fraud actions.

On May 1, 2000 the Commission announced the initial results of a coordinated enforcement initiative with the Securities and Exchange Commission and the Federal Trade Commission aimed at cleaning up Internet Web-sites. As part of the initiative, the Commission filed and simultaneously settled 10 administrative enforcement actions.

Fraudulent Illegal Commodity Contracts. Illegal futures or option contracts continue to pose a financial threat to the public. The Enforcement program actively seeks to protect the public from wrongdoers who fraudulently solicit customers for what are purported to be financed speculative purchases of precious metals and other commodities but which are in fact illegal futures or option contracts. In FY 2000, the Commission brought several civil actions charging defendants with this type of misconduct. The Commission has also issued a Consumer Advisory to address these issues. In the Consumer Advisory, the Commission warns that companies making such pitches often overstate profit potential while minimizing the risk involved, falsely claiming that they are purchasing and storing metal, and charging phony "storage" and "interest" fees.

Other enforcement initiatives focused on fraudulent trade allocations – targeting, for example, wrongdoers who purposefully failed to provide account numbers for trades until after they knew the prices at which the trades had been confirmed in order to allocate profits and losses among their customers.

Market Surveillance, Analysis and Research: As noted above, one of the Commission’s principal responsibilities is to assure that futures markets operate competitively, free of manipulation and congestion, and serve the price-discovery and risk management needs of the US and world economies. The Market Surveillance, Analysis and Research programs in the Division of Economic Analysis focus on these objectives, periodically examine the effectiveness of their programs, and seek to institute revisions that reduce the costs of compliance. The following are examples of FY2000 initiatives in these programs.

Adoption of New Procedures for New Contract Listing and Rule Reviews. The Commission proposed a far-reaching and fundamental change to its procedures for listing new contracts offered by US exchanges. The change responds to US futures exchanges’ concerns that their ability to list new contracts without delay is important to their continued competitiveness, particularly with foreign exchanges. Specifically, the Commission adopted procedures allowing an exchange to list new contracts one day after the exchange files a notice with a certification that the contract meets the Commission’s requirements. The certification, in conjunction with fast-track procedures for approval of new contracts previously adopted by the Commission, ensures that the benefits of a new contract can be brought to the marketplace as soon as possible. Since then, the Commission further streamlined the exchange rules approval process to permit single, weekly summary filings rather than individual submissions.

Listing of a Variety of New Products. The Commission approved 29 new futures and option contracts, two of which were approved under 10-day fast track procedures, and 13 of which were approved under 45-day fast track provisions. In addition, exchanges filed 23 new contracts for listing under the Commission’s certification procedures, which permit exchanges to certify their own contracts and list them prior to receiving Commission approval. Examples of new contracts include:

• US Agency Notes based on Freddie Mac and Fannie Mae instruments;

• Illinois Waterway Barge Freight and St. Louis Harbor Barge Freight futures;

• Cottonseed Oil futures and futures option contracts;

• US equity index contracts, including the Dow Jones Utilities Average and the Dow Jones Transportation Average, as well as the Dow Jones Composite Average;

• Dairy and Livestock Products, such as the cash-settled live cattle futures and option contracts based on the value of cattle at slaughter weight;

• Regional Electricity Contracts such as the MidColumbia electricity futures contract, which provides electricity market participants with risk management tools to respond to the evolving electricity cash market in the Pacific Northwest region of the US.

Trading and Markets. As noted above, T&M staff develop, implement, and interpret regulations that protect customers, prevent trading and sales practice abuses, and assure the financial integrity of the futures markets and firms holding customer funds. During FY 2000, the Commission published the following final rules, proposed rules, orders, and advisories as part of the Commission’s effort to reduce regulatory burdens:

Block Trading Proposals. The Commission approved a proposal by the Cantor Financial Futures Exchange, Inc. (Cantor) to establish block-trading procedures at Cantor. The block-trading program at Cantor allows qualified market participants to negotiate and arrange futures transactions of a minimum size bilaterally, away from the centralized, competitive market. Once the specific terms of the block transaction are agreed to, the counterparties report the relevant details of the transaction to the exchange for clearing and settlement. The Commission also approved a later submission from the Chicago Mercantile Exchange to establish block trading.

Electronic Signatures. The Commission adopted new rules permitting futures commission merchants or FCMs, introducing brokers or IBs, commodity trading advisors and commodity pool operators to accept from their customers, clients or pool participants electronic signatures in those instances where Commission rules require registrants to obtain a signature on a document – such as an acknowledgement of receipt of required disclosure. The new rules include a definition of "electronic signature" patterned on the definition in the Uniform Electronic Transaction Act and a requirement to employ reasonable safeguards in accepting electronic signatures.

Average Price Calculations. The Commission issued an advisory permitting FCMs to calculate average prices for their customers when multiple prices are received on an order or series of orders, when permitted to do so by exchange rules. Previously, the Commission had authorized only US trading clearinghouses to perform the calculations. FCMs now have greater flexibility and increased efficiency in providing average pricing.

Foreign Futures and Options. The Commission adopted a rule permitting foreign firms acting in the capacity of FCMs and IBs to accept and execute foreign futures and option orders received directly from certain sophisticated US customers without the firms being required to register with the Commission.

Commodity Futures Modernization Act of 2000

The Commodity Futures Modernization Act (CFMA) is a sweeping overhaul of the federal futures regulatory framework as set forth in the Commodity Exchange Act. It creates an innovative regulatory regime for domestic futures exchanges, codifies exclusions from futures regulation for swaps and other over-the-counter derivatives, and repeals the 18-year-old prohibition against futures contracts on single securities and narrow-based security indices. The Act is designed to decrease regulatory burdens for domestic exchanges and to provide increased legal certainty for over-the-counter (OTC) derivatives, in accordance with the recommendations of the November 1999 President’s Working Group (PWG) Report on OTC derivatives. In addition, the CFMA clarifies the Commission’s oversight authority regarding the off-exchange sale of foreign currency futures and options to the retail public. The Act also provides a regulatory framework for entities that provide clearing of derivative instruments, a key recommendation of the PWG report.

In furtherance of these objectives, the CFMA requires that the Commission undertake several rulemakings within a statutorily specified time period. For example, the Commission must promulgate rules relating to privacy issues within six months of the date of enactment, as well as rules relating to foreign security futures products within twelve months. In addition, several joint rulemakings with the Securities and Exchange Commission are mandated by the Act in order to permit the trading of security futures products in the United States. Commission staff have formed staff teams to address each of these issues, and have set timetables for completion of each of these projects.

Moreover, enactment of the CFMA resulted in the elimination of certain procedural rules, which previously allowed the Commission to perform its basic oversight functions and approve new markets and contracts. Without new rules in place, the Commission will be hampered in its ability to protect the integrity of the futures markets. Accordingly, the Commission must enact new regulations that will enable it to carry out its oversight responsibilities as well as allow new applicants to be designated or recognized by the Commission. For example, the CFMA created two new categories of Commission-registered or -designated facilities: designated contract market and derivative transaction execution facility. In order to process the applications of entities wishing to operate in either of these categories, the Commission must promulgate procedural rules.

In addition, the CFMA clarified the Commission’s jurisdiction regarding prosecution of fraudulent retail foreign currency bucket shop transactions, and provided a new regulatory framework for the oversight of designated clearing organizations. These provisions could likely increase the regulatory responsibilities and staff workload at the Commission, as could the provisions relating to processing of applications for designated contract markets and derivatives transaction execution facilities. At the same time, as noted above, the Commission is committed to increasing its information technology processes and services, which will involve significant allocation of staff resources.

Finally, technological advancements have had a dramatic effect on the futures and options markets that we regulate. Markets have become increasingly electronic and global, which has caused fundamental changes in the way they develop, function and interact. Accordingly, the Commission is faced with the challenge of adapting our regulatory responsibilities, as well as our internal technological capabilities, to emerging market structures in order to ensure that we foster, rather than impede, technological innovation in financial markets.

All of these changes profoundly alter federal regulation of the commodity futures and option markets; however, they do not diminish the Commission’s oversight responsibilities of self-regulatory organizations, Commission registrants and participants that make up these markets.

Thank you for the opportunity to discuss our mission, our responsibilities, and the challenges that we face in the coming year in rethinking our former methods of regulating the safest, soundest futures and options markets in the world. The Commission looks forward to working with Congress and other federal financial regulators to ensure that we foster innovation and competition in the marketplace to enable the markets to grow and maintain their global leadership role. I would be happy to answer any questions you may have.

Oral Testimony of Commissioner James E. Newsome before the U.S. House of Representatives Committee on Appropriations, Subcommittee on Agriculture, Rural Development, FDA, and Related Agencies

March 21, 2001

Thank you Chairman Bonilla and members of the Subcommittee. I appreciate the opportunity to be here today to testify before you on behalf of the Commodity Futures Trading Commission.

    Since creating the Commission in 1974, Congress has tasked the CFTC both with protecting participants in the commodity futures and options markets against manipulation, abusive trade practices, and fraud and with enabling the markets to better serve their critically important economic role of providing a mechanism for price discovery and a means of managing risk. Most of the participants in the futures and option markets are commercial or institutional users of the commodities they trade and those commodities wind up ultimately in countless food and consumer products or are consumed in the provision of many important services.

    I believe strongly in the oath I took to pursue that mission faithfully, to maintain the integrity of the futures and options markets and to protect participants against fraud and manipulation.

    As you know, 2000 was a very exciting and challenging year for our agency and for our industry, and we expect this year to bring even more of the same. The Commodity Futures Modernization Act, or CFMA, was signed into law on December 21, 2000, and with its enactment we were given the monumental task of overhauling the entire regulatory structure of the commodity futures and options industry. While we recognize the tremendous pressures this will bring to bear on our staff and resources, we are extremely pleased to have the opportunity to carry out the mandates of our new, flexible oversight structure, and we are firmly committed to doing so in accordance with the timetables that are given within the statute.

    The CFMA provides legal certainty for over-the-counter markets, lightens regulatory burdens on domestic exchanges, and lifts the ban on single-stock futures. In each area, the new Act requires action by the Commission, including 15 rulemakings and 3 studies. In some cases, we are required to coordinate our efforts with those of other federal regulators. The timetables, quite properly in my opinion, are aggressive and our staff is working diligently to ensure that we meet each deadline.

    The CFMA also clarified the Commission’s authority with regard to prosecuting foreign exchange bucket shops and provided a new framework for the oversight of designated clearing organizations. Implementation of these provisions will require a tremendous commitment of resources and effort, both this year and next.

    Additionally, the Act moved the Commission from a role as a front-line regulator to a more flexible oversight role. Some may believe that, in our new capacity, the agency will need fewer resources than in the past. I would respectfully submit to you, Mr. Chairman, that just the opposite is true. It seems to me that a driving force behind passage of the CFMA was the desire to liberate the markets and allow innovation and flexibility to permit clearing organizations to respond appropriately to these market developments. I believe that market participants will respond enthusiastically to this opportunity. Indeed, they have already begun to do so.

    For example, rapid developments in technology, particularly in telecommunications and the Internet especially, have sparked great interest in electronic exchanges and trading platforms. In just the last year or so, the Commission has approved three new exchanges and granted no-action relief to two electronic trading platforms for energy products. By comparison, only two new exchanges were designated during a more than ten-year period prior to that and neither became an economically viable trading platform.

    I suspect that those three new exchanges represent just the tip of the iceberg. We are currently reviewing the applications of, or have received serious inquiries from, another half dozen proposed electronic exchanges and we anticipate that some of the B2B electronic cash markets may also give rise to additional electronic futures exchanges.

    This exciting growth and innovation in the marketplace has begun, and will continue, to provide real benefits to market participants, customers, and the economy as a whole. However, because our primary responsibilities have not changed, growth and innovation will also place increasingly greater demands on our resources. Several areas in particular appear to me to require significant attention and effort:

(i) new exchanges and alternate trading platforms, for which tailored oversight must be fashioned to fit each market along a spectrum of regulatory classifications from full oversight to basic fraud and manipulation protections;

(ii) a new product area (single-stock futures) which potentially will lead to new contracts;

(iii) advancements in the practices of clearing houses to respond properly to these new products and new trading platforms; and

(iv) an expansion of our enforcement mission to now include prosecutions in the increasingly problematic area of foreign-exchange bucket shops.

    To effectively fulfill our responsibilities in these areas, the Commission and its staff must rely heavily upon information management and telecommunications resources that are capable, efficient, and up-to-date in order to allow flexible, fast, and appropriate responses to market conditions and events. I should emphasize that, as a financial regulator, and particularly a regulator that is witnessing phenomenal growth in electronically-based market activity, the Commission depends upon its information management and telecommunications resources for far more than mere administrative tasks such as facilitating inter-office communication. Without adequate resources in this area, we cannot effectively monitor markets to detect potential problems on a timely basis. Nor can we reconstruct market events when disputes arise or when violations are alleged. These monitoring and investigative responsibilities require the processing of vast quantities of information and our Office of Information Resources Management represents not a support function but rather a mission-critical core competency of the Commission.

    But our human resources, the dedicated people that interpret and act upon the information provided by our computer resources, are even more critically important to the performance of our mission, to the protection of market participants and the markets themselves. This mission requires staff members with the proper training and with solid experience in the specifics of the markets we oversee. All too often, however, we lose good people just as they are coming into their own as commodity lawyers, economists, and trading specialists.

    In most cases the CFTC’s ability to compensate such highly skilled people lags not only far behind that of the private sector, but, I think more critically, well behind other federal financial regulators. This is particularly hard on our Enforcement division, where we hire and train excellent litigators who then leave for higher compensation at other agencies. I recognize that this situation is not entirely unique. However, as an agency, we operate and compete primarily in the financial sector. Therefore, Mr. Chairman, I respectfully request this Committee’s support for removing the agency from the Title V restrictions regarding pay so that we may successfully hire and retain the dedicated staff we need to accomplish the important mission that have in front of us.

    Again, I am proud to represent the Commission here today and I thank you for the opportunity. I would be happy to answer any questions you may have.

Remarks of Acting Chairman James E. Newsome to the Silver Users Association 

May 23, 2001

Introduction

Thank you, for that kind introduction and for inviting me here today. It is both an honor and a pleasure to address this distinguished group. This is obviously an exciting time for your industry and others that utilize the futures and options markets.

I believe that Congress exhibited great vision in passing the Commodity Futures Modernization Act, a truly landmark piece of legislation that clears the path for revolutionary changes in the marketplace. Passage of the Act was an important first step and I commend Congress for taking it. Now, we at the CFTC must continue the momentum as we implement the Act's provisions. And prompt implementation of the new Act is my highest priority.

Overview of the CFMA

The Act has three primary goals. The first is to provide regulatory relief to futures and options exchanges. The second is to provide legal certainty for over-the-counter derivatives. And, finally, the Act lifts the ban on single-stock and narrow-based stock index futures. I would imagine that the provisions seeking to further the first goal may be of greatest interest to many of you, as users of our domestic futures and options exchanges. And I believe that, as those exchanges become even more competitive as trading platforms, as they improve both their efficiency and their effectiveness, you and other users will be the ultimate beneficiaries.

Implementation efforts at the CFTC are already well under way. The Commission has adopted final rules that protect customer privacy and that allow certain participants on designated transaction execution facilities to opt out of segregated funds treatment. Proposed rules to implement new regulatory frameworks for both exchanges and clearinghouses have been published for public comment. And we've got a lot more work ahead of us. All together, the Act directs the CFTC to accomplish almost two dozen separate tasks, including several joint rulemakings and studies with the SEC, and we are making substantial progress, both on individual projects and in productive cooperation with the SEC.

I am firmly committed to having in place by August 21^st all the rules necessary for eligible contract participants to trade security futures products should they so choose and, by December 21^st, all the rules necessary for retail participation. As always, I look forward to receiving the valuable insights and suggestions of all interested market participants as proposed rules are published for comment. Lots of these proposals are coming at you now and will continue to come over the next several months so I want to thank you in advance for your responsiveness and continued interest.

Review of Philosophy

Some of you are familiar with my views on the proper role of regulation in the economy. For those who may not be, I should emphasize, first, that I believe strongly in, and in fact have taken a[n] [solemn] oath to fulfill, the responsibilities and mandates of the Commission to maintain market integrity, to prevent manipulation of prices, and to protect market participants against fraudulent practices. I'm confident that the events of 1980 are as fresh in our minds at the CFTC as they are in yours. The CFTC will continue to vigorously prosecute those who attempt to manipulate markets or to defraud market participants.

However, I do not subscribe to the idea of regulation for regulation's sake alone. There are different ways for the Commission to fulfill its responsibilities and I believe that reducing unnecessary and burdensome rules in favor of implementing best management practices that allow flexibility and promote innovation is the appropriate path to take. The temptation to resort to prescriptive regulations that take an inherently static view of markets and technology has traditionally been hard to resist for some in the regulatory community. However, I have and will continue to take a hard-line against reverting to such restrictions on innovation and progress.

You and other market participants are the experts in running your respective businesses. We, as regulators, are not. Our role is to protect the public good and should be confined to what I like to call outcome-neutral regulatory actions where competition among market participants, not governmental prescription, determines the results. It is the place of Congress, not this agency, to create new public policy.

How the CFMA Helps

Principles versus Prescription: The alternative to prescriptive regulations, of course, is a rational set of principles-based rules and I believe, therefore, that the Commodity Futures Modernization Act and the principles-based approach it takes could not have come at a better time. Advances in technology are facilitating great innovation in the marketplace. New competitors and industry veterans alike are developing new products and new ways to trade existing products. In my view, these innovations promise to improve both the efficiency of markets and their effectiveness as a means of discovering prices and managing risks. For you, the ultimate user of the commodity, improved efficiency and effectiveness should translate directly into more reliable supplies and more reasonable prices.

Adaptation versus Innovation: There is an unavoidable relationship between overly burdensome market regulation and market innovation. The nature of the regulatory approach influences whether resources are invested in valuable new innovations (if the regulatory approach is flexible and economically sound) or are consumed in costly adaptation efforts (if regulations are overly burdensome and inflexible). Too often, an inflexible and prescriptive regulatory approach that lacks a rational economic basis has forced market participants to adapt to regulations in ways that avoid the inefficiencies imposed by such regulations but otherwise add no new value to the marketplace. Someone in the market ... often the commodity user ... must bear the added cost of such avoidance efforts. And whatever public policy the regulator might have been attempting to pursue is quite often not achieved anyway.

Not frequently enough, on the other hand, are rules designed with sufficient flexibility to permit (and even encourage) true market innovation, innovation that is driven by the economics of the marketplace and by improvements in technology. This is where flexible rules can be most effective: in achieving necessary public policy goals without imposing unnecessary inefficiency or triggering costly avoidance behaviors.

The CFMA's New Approach: The new regulatory approach that is called for by the CFMA empowers the Commission to do just that: accomplish important public policy goals without imposing unnecessary costs on market participants, without stifling innovation driven by new technologies and the evolving needs of the customers, and without implementing inflexible regulations that quickly become obsolete or ineffective. Congress has provided the opportunity for market innovations that provide real value to develop as quickly as technology permits and customer demand requires.

For example, one provision of the Act clears the way for principal-to-principal transactions among eligible commercial entities on an electronic trading facility, what will be called an “exempt commercial market.” An eligible commercial entity is just one type of eligible contract participant. This category is much broader than the former concept of an “eligible swap participant.” It includes, among other things, a company with total assets of $10MM or a net worth of $1MM that enters into the transaction to manage risks related to assets or liabilities that are carried as a normal part of conducting its business. An eligible commercial entity is also either (i) has the ability to make or take delivery of the underlying commodity, (ii) incurs some commodity risk beyond price risk, or (iii) is a dealer in the underlying commodity or derivatives transactions involving that underlying commodity. An electronic trading facility is a trading facility that both (a) “operates by means of an electronic or telecommunications network” and (b) “maintains an automated audit trail” of bids, offers, order matches, and executions.

This provision means that innovative new exempt commercial markets that provide real value for participants are now free to develop as quickly as technology permits. And an important public policy goal will continue to be served because -- if such a facility comes to serve a significant price discovery function in the marketplace -- the CFTC's authority to ensure transparency for such a market is preserved.

Conclusion.

The key to success for a financial regulator facing such great potential change in the marketplace is to pursue the same innovativeness and creativity that successful market participants rely upon in conducting their businesses. Fortunately, the CFMA affords us the opportunity to do so.

It's been wisely said that enough regulations will ensure that nothing ever goes wrong in the marketplace...but at the same time, nothing right will be permitted to take place either. Principles-based rules that suit the nature of the participant and the nature of the product, that take into consideration the costs as well as the benefits of compliance, that allow business people to conduct business without unnecessary restrictions, and that reflect a common sense approach to regulation through a genuine partnership with market participants, are most often the rules that are best able to achieve public policy goals.

And, when combined with a continued focus on vigorously prosecuting those who attempt to manipulate markets or to defraud market participants, this regulatory innovativeness can help guarantee that our markets will not only be the safest, but also as efficient and effective as possible.

These are my ideas about where we go from here and what the core mission of our agency should be. I look forward to working with you as we move forward.

Remarks of Acting Chairman James E. Newsome before the European Financial Markets Convention, Panel Discussion on Transatlantic Relations, (Presented by Marcia Blase, Counsel to the Acting Chairman)

June 15, 2001

It is my pleasure to be in Paris to present the remarks of Acting Chairman Jim Newsome to this European Financial Markets Convention. As transnational business becomes increasingly important, discussions such as this one, to explore the evolving role of regulatory authorities, are vital.

This Conference is particularly timely. The announcement on June 6 of the creation of a committee of financial regulatory authorities drawn from the members of FESCO and of a securities advisory committee (the ESC) to assist the European Commission in implementing your framework directives, mark a significant milestone in Europe’s movement toward a common financial market.

The CFTC applauds the tremendous accomplishments of the EU in harmonizing national laws and in developing an analytical framework for making its planned European market a reality. Your actions are one model for other regulatory authorities to consult when considering cross-border issues.

Which brings me to the subject of today’s remarks: the evolution of the CFTC’s regulatory response to the increase in cross-border business.

World markets are not new to us. The history of the US futures markets demonstrates that commodity transactions are not confined within a single jurisdiction. Users often are located outside the jurisdiction of the market; derivatives designers can choose reference prices from anywhere in the world; and risk managers and hedgers will seek whatever means are available to reduce geographic risk.

Congress established the CFTC in 1974 as an independent regulator for futures markets and related intermediaries, at least partly in response to perceived global developments in the grain futures and gold options markets and to the emergence of futures markets in world commodities, such as cocoa, coffee, and foreign currency. From the outset, therefore, the CFTC’s powers reflected that futures trading was a global business.

However, there were not many futures markets outside the US in 1974. But, this quickly changed. Beginning in the 1980s, many jurisdictions developed futures markets, some of which entered into linked trading and/or clearing with CFTC-regulated markets. In 1982, Congress recognized the growing participation by US residents in foreign markets and the increased participation in US markets by residents of other countries. In response, it expanded the CFTC’s authority over the offer and sale of foreign futures in the US and made it easier for the CFTC to cooperate with foreign futures authorities.

In granting the CFTC broad authority to protect US customers trading on non-US markets, Congress made clear that it did not intend for this authority to be used to impose our own design on those markets. Congress cautioned the CFTC to exercise its authority by “tak[ing] into account the customs and practices of foreign boards of trade or markets and [by] recogniz[ing] that differences may exist between the practices of foreign boards of trade and their US counterparts.”

Congress also made clear that it did not intend for the CFTC to use its authority to approve the contracts or rules of a foreign board of trade, or to approve rules that would place the solicitation or acceptance of orders in the US for bona fide foreign futures contracts at a comparative disadvantage with similar solicitation and acceptance of orders for domestic futures contracts.

Today, forty-five markets outside the US report their futures trading volume to the Futures Industry Association. During the last year, Europe accounted for more than forty-five per cent of that volume overall. As trading between US and non-US markets in derivatives products increasingly moves in both directions, the day-to-day operations of staff increasingly involve communications with their foreign counterparts.

For example in March of this year, of the large traders required to file reports with the CFTC, forty-two per cent of those trading in agricultural products, and thirty-eight per cent of those trading in financial instruments, were foreign based. To get an idea of size, during three selected weeks in March, almost 1,000 of these reporting traders, approximately forty per cent of which reported in financial instruments, were foreign-based.

During the first quarter of 2001, based on reports filed by nearly 200 of the largest brokers, US FCMs reported secured amounts held with respect to foreign trades in the aggregate amount of approximately 7.4 billion dollars, or about twelve per cent of the total amount segregated.

The CFTC also has permitted numerous foreign stock indexes to be offered to US customers and we continue to receive new proposals for alliances between markets in different jurisdictions.

We expect these trends to continue. Indeed, as collective investments, such as pension funds are permitted to invest in a broad range of asset classes, fund managers increasingly may need to hedge their global, as well as their domestic risks in available markets. Because of their low transaction costs and short settlement periods, futures products are particularly suited for this purpose.

Thus, long before the Internet challenged us to think about where markets are located, the commercial nature and the global scope of futures markets challenged us to think about how to regulate a market where certain features are located outside the US, or depend on the conditions in another market.

On a day-to-day basis then, we have no choice. We must cope with an international market from our perspective as a national regulator.

Consequently, CFTC policy makers have faced some of the same issues as the EU in developing its directives calculated to create an internal market for financial services within Europe. Although differing in content and in detail, our approaches share a common acknowledgment of the limits of our practical capacity to reach outside our national borders. The CFTC, while ceding no jurisdiction over cross-border transactions and arrangements, has concluded, therefore, that to be effective, oversight arrangements must be founded on cooperation with other regulatory authorities. Indeed, this observation began at home.

To promote thinking about this type of regulatory cooperation, the CFTC has actively supported efforts in IOSCO and in some cases, has led its own initiatives like the Boca Declaration with other interested regulators to clarify what types of practical arrangements between regulators are useful and appropriate in overseeing cross-border business. The CFTC also has worked on its own and with others to promote the movement toward common standards, both in IOSCO, with respect to screen based trading systems, and in the Windsor Declaration and the Tokyo Communique.

We have applied these practical techniques in our own program. For example, the CFTC has developed cooperative regulatory arrangements to support cross-border industry ventures, such as clearing through a mutual offset system and mutual access to linked markets; to permit reliance for some purposes on foreign regulators’ authorization processes to admit brokers selling offshore products to US customers and to permit foreign terminals to be accessed from the US; and to strengthen the capacity of regulators to oversee linked markets by specifying in advance information that would be immediately available under bilateral information sharing agreements for surveillance purposes, information that could be passed to markets for oversight of market integrity, and information that would support the more rigorous oversight of members operating in related markets located in different jurisdictions.

Illustrative examples of these arrangements include:

(1) Mutual Offset. As early as 1984, the CFTC approved a mutual offset system for clearing between the Singapore International Monetary Exchange and the Chicago Mercantile Exchange. Under the harmonized rules of the two markets, futures contracts could be put on in one jurisdiction and closed out in another. This arrangement made each local clearing organization a member of the other system and required working out common margining, emergency management, information sharing, and taxation issues. The CME/SIMEX linkage is still in place and, during the first quarter of this year, 892,000 trades were executed on the CME for inter-exchange transfer to SIMEX, and 4,361,000 trades were executed on SIMEX for inter-exchange transfer to the CME.

(2) Cross-Access Arrangements. Later, the CFTC approved an arrangement whereby the members of one exchange could access products on another. Several of these arrangements were tried over the years, the most recent in 1997. The very first was an arrangement between the then French MATIF and the CME, which used common trading rules for Globex-traded products. In permitting cross-access to each market, neither regulatory authority ceded any jurisdiction. The contracts that were permitted to trade between the markets were designed so as to contain no rules that were materially inconsistent with either regulatory regime, were supported by the availability of equivalent information to each regulator on the transactions occurring on the system, and assumed that each market in the first instance would discipline its own members when trading on either market.

(3) Comparability or Substituted Compliance. Also in the 1980s, the CFTC developed rules intended to permit brokers located outside the US to sell non-US futures products to US customers without being registered as futures commission merchants under our rules. In place of FCM registration, the CFTC accepted notification and substituted compliance with comparable rules of the foreign regulatory authority. This arrangement required the CFTC to depend on the other regulator to assure the fitness of the broker and assumed that the authorization requirements in place were sufficiently harmonized that, a US broker restricted from offering customer services here, could not end-run our system by registering offshore. The rules also relied primarily on the so-called “home regulator” for oversight of the prudential aspects of the broker’s business, but added some additional customer protections (such as segregation of customer funds and, in some cases, enhanced risk disclosures) to permit the tracing of customer money in the event of a loss and to eliminate any potential confusion in the expectations of US customers. This certification procedure also required foreign brokers granted relief to ensure access to books and records and to consent to US jurisdiction for their activities relating to US customers.

(4) Foreign Terminal Recognition-No Actions. The Commission, although clearly concerned with equivalent conditions of competition among US and non-US markets, also declined to regulate US access to foreign terminals as separate markets. Instead, the terminals received staff no-action relief from CFTC exchange designation requirements. The resulting de facto recognition of the related foreign market is based on compliance with the international standards for derivatives screen-based trading systems adopted by IOSCO and submission by the operators to jurisdiction in the US for enforcement purposes.

(5) Specific Cooperative Undertakings. The CFTC also has entered into a number of practical arrangements to provide to regulatory authorities outside the US, specified information on US-authorized firms—such as, information on certain large exposures of common members, information on fitness and propriety, and information on financial and operating capacity—in order to support access to those markets by our US-authorized firms.

Each of these solutions required us to seek practical partnerships with other regulators. In each of these cases, many of the matters evaluated by the EU, where certain types of inter-jurisdictional cooperation are mandated by treaty, were relevant to the CFTC’s consideration of appropriate arrangements. Among others, these included:

• the level of harmonization of the relevant law;
• the amenability of the activities within our jurisdiction to enforcement and dispute resolution;
• the accessibility of records; and
• appropriate levels of information sharing between regulators on the continuing fitness and authorization status of firms taking advantage of the arrangements.

Not surprisingly, these arrangements were concluded only after some difficult negotiations. Further, their success depends not only on the will of the affected regulators to cooperate with each other, but also on how well the cooperative arrangements work in practice. In any case, the bridges we built between markets and regulators have also been useful in addressing market problems that span jurisdictions, such as the collapse of Barings and the manipulation of Sumitomo, and in facilitating the process when we need to work jointly to investigate and sanction transnational misconduct.

The most recent legislative changes in the US have again recognized the importance of transnational business. Just enacted last December, the Commodity Futures Modernization Act of 2000 (CFMA) removed many prescriptive requirements that could render harmonization across borders difficult. It also directs the CFTC to take account of competition and of the differences between US and non-US markets. For example, the new Act directs that, in developing rules to permit the offer and sale of a security futures product traded on a foreign board of trade, the CFTC “shall take into account, as appropriate, the nature and size of the markets that the securities underlying the security futures product reflect.” In addition, the CFMA acknowledges that a US regulator can rely on certain parts of a foreign regulatory regime if it meets relevant standards.

In adopting the CFMA, Congress explicitly recognized the importance of global cooperation by adopting a sense of Congress provision that made clear that the CFTC was to continue its cooperative efforts with foreign authorities and its participation in international organizations to encourage, among other things, the facilitation of cross-border transactions through the removal or lessening of any unnecessary legal or practical obstacles, the development of internationally accepted standards of best practice, and the enhancement of international supervisory cooperation.

As you may know, there is an ongoing rulemaking related to implementing the CFMA and to the design of those portions of the regulatory regime for the offer and sale of security futures products within the US that are not explicitly set out in the legislation. As these rules will affect how offshore products may be sold in the US, you may wish to offer comments during the short public comment period afforded by the timeframes in the statute.

If you doubt whether cross-border cooperation can succeed, we have an example before us. Our host today, EURONEXT, is the product not only of a meeting of minds among business leaders, but also of a meeting of minds among three competent regulatory authorities. These regulators have concluded a practical memorandum of understanding pertaining to the oversight of EURONEXT’s rulebook, its common members and a tri-jurisdictional trading platform. I am told that at least one of the three of you called this MOU the second miracle of Amsterdam.

In conclusion, while the challenges of globalization—like the challenges of EU integration—are great, ultimately, increased harmonization and common approaches can facilitate both the seamless cross-border access that customers and market users demand and the high level of customer and market protection that they take for granted.

Written Testimony of Chairman James E. Newsome of Commodity Futures Trading Commission, before the U.S. Senate Committee on Energy and Natural Resources

January 29, 2002

Thank you, Chairman Bingaman, and members of the Committee. I appreciate your having given me the opportunity to testify here today on behalf of the Commodity Futures Trading Commission and to contribute to the discussion of important issues you have raised.

I would first like to say -- both as a federal financial regulator and as a citizen -- that I have great sympathy for those who were misinformed by incomplete and inaccurate information they may have received. I also share the concern that appropriate action be taken to ensure that investors, creditors, commercial counterparties, and others who rely on the accuracy and completeness of financial disclosures by publicly-held companies can continue to do so with the fullest confidence. I commend the Securities and Exchange Commission for having opened an investigation into these matters.

I would also like to take a moment to commend Mr. Viola and all the people at the New York Mercantile Exchange, as well as their friends and colleagues at the New York Board of Trade, for their remarkable reactions to the September 11^th attacks. Their courage, tenacity, and foresight in quickly restoring market operations in the face of unprecedented challenges and terrible personal tragedies deserve the gratitude of every business, investor, and consumer because these markets can play critical roles in the U.S. and world economies. For example, the West Texas Intermediate Crude oil contract traded on NYMEX is relied upon as a price benchmark around the globe. The fact that NYMEX and NYBOT were up and running within only days of the attacks helped avert the possibility of economic disruptions across the economy and should give us all great confidence in the resilience and strength of these institutions.

With your permission, I would like to tell you a little bit about the important role of the futures markets in the U.S. economy and the role of the CFTC in overseeing those markets. I will describe how the Commission responded to the Enron situation last fall. I will also discuss our role with respect to the energy markets and how that role changed with passage of the Commodity Futures Modernization Act of 2000. Finally, I would like to offer some thoughts on how the Commission might make a contribution as we move forward.

Background:

The Commission was created by Congress in 1974 to oversee the nation’s commodity futures and options markets. The Commission perceives its mission to be twofold: to foster transparent, competitive, and financially sound markets, and, to protect market users and the public from fraud, manipulation, and abusive practices. There are important differences between the futures markets and the stock markets. While the stock markets provide a means of capital formation, a way for new and existing businesses to raise funds, the futures markets provide producers, distributors, and users of commodities with a means to manage their exposure to commodity price risk.

Historically, commodity futures and options were traded on agricultural products. And while contracts based on agricultural products are traded as actively today as ever, a great many futures contracts are now based on non-agricultural physical commodities like precious metals or energy products and on financial commodities like interest rates, foreign currencies, or stock market indices. Because they serve the risk management needs of businesses in virtually every sector of the economy, the volume of trading in these financials and non-agricultural physicals is now nine times that in agricultural contracts. While farmers and ranchers continue to use futures contracts to effectively lock in the prices for their crops and herds months before they come to market, manufacturers now can also use futures contracts to plan their raw material costs and to reduce uncertainty over the prices they receive for finished products sold overseas. Mutual fund managers can use stock index futures to protect against market volatility and effectively put a floor on portfolio losses. And electric power generators can use futures contracts to secure stable pricing for their coal and natural gas needs.

These producers, distributors, and users of commodities (whether physical or financial) are called hedgers. The futures contract positions that hedgers put on are referred to as covered positions. For example, a power generator’s obligation to purchase natural gas will be covered by its ability to use that natural gas in its electricity generation. There are other participants in the futures markets who take uncovered positions in the hope of making profits rather than mitigating risks. These individuals and firms are known as speculators and they contribute to the smooth operation of a futures market by increasing its liquidity. Because the needs of different hedgers for long or short positions may not always be perfectly balanced, the presence of speculators increases market effectiveness by better ensuring that hedgers will be able to put on positions they need.

Although I have described the primary purpose of futures markets as tools for risk management, it should be noted that many futures markets play another important role in the economy, that of price discovery. Many businesses and investors that are not direct participants in the futures markets nonetheless refer to the quoted prices of futures market transactions as reference points or benchmarks for other types of transactions and decisions. This is particularly important in many agricultural markets where no other means of price discovery exists outside of the quoted futures prices but it is also true in other sectors, including many energy markets.

How the CFTC Performs Its Mission:

In seeking to fulfill its mission to foster transparent, competitive, and financially sound markets and to protect market users and the public from fraud, manipulation, and abusive practices, the Commission focuses on issues of integrity. We seek to protect the economic integrity of the futures markets so that they may operate free from any fraud or manipulation of prices. We seek to protect the financial integrity of the futures markets so that the insolvency of a single market participant does not become a systemic problem affecting other market participants or financial institutions. We seek to protect the operational integrity of the futures markets so that transactions are executed fairly, so that proper disclosures are made to existing and prospective customers, and so that fraudulent sales practices are not tolerated.

The Commission pursues these goals through a multi-pronged approach to market oversight. We seek to protect the economic integrity of the markets against attempts at manipulation through direct market surveillance and through oversight of the surveillance efforts of the exchanges themselves. The heart of the Commission’s direct market surveillance is a large-trader reporting system, under which clearing members of exchanges, commodity brokers (called futures commission merchants or FCMs), and foreign brokers electronically file daily reports with the Commission. These reports contain the futures and option positions of traders that hold positions above specific reporting levels set by CFTC regulations. Because a trader may carry futures positions through more than one FCM and because a customer may control more than one account, the Commission routinely collects information that enables its surveillance staff to aggregate information across FCMs and for related accounts.

Using these reports, the Commission’s surveillance staff closely monitor the futures and option market activity of all traders whose positions are large enough to potentially impact the orderly operation of a market. For contracts which at expiration are settled through physical delivery, such as in the energy futures complex, staff carefully analyze the adequacy of potential deliverable supply. In addition, staff monitor futures and cash markets for unusual movements in price relationships, such as cash/futures basis relationships and inter-temporal futures spread relationships, which often provide early indications of a potential problem.

The Commissioners and senior staff are kept apprised of significant market events and potential problems at weekly market surveillance meetings, and on a more frequent basis when needed. At the weekly market surveillance meetings, surveillance staff brief the Commission on broad economic and financial developments and on specific market developments in futures and option markets of particular concern. At least one energy product market is usually discussed and officials of the Energy Information Administration of the Department of Energy periodically attend such meetings.

If any indications of attempted manipulation are found, the Commission’s Enforcement Division investigates and prosecutes alleged violations of the CEA and Commission regulations. Subject to such actions are all individuals that are (or should be) registered with the Commission, those who engage in trading on any domestic exchange, and those who improperly market commodity futures or option contracts. The Commission has available to it a variety of administrative sanctions against wrongdoers, including revocation or suspension of registration, prohibitions on futures trading, cease and desist orders, civil monetary penalties, and restitution orders. The Commission may seek federal court injunctions, restraining orders, asset freezes, receiver appointments, and disgorgement orders. If evidence of criminal activity is found, matters may be referred to state authorities or the Justice Department for prosecution of violations of not only the CEA but also state or federal criminal statutes, such as mail fraud, wire fraud, and conspiracy. Over the years, the Commission has brought numerous enforcement actions and imposed sanctions against firms and individual traders for attempting to manipulate prices, including the well-publicized cases against Sumitomo for alleged manipulation of copper prices and against the Hunt brothers for manipulation of the silver markets.

In protecting the financial integrity of the futures markets, the Commission’s two main priorities are to avoid disruptions to the system for clearing and settling contract obligations and to protect the funds that customers entrust to FCMs. Clearinghouses and FCMs are the backbone of the exchange system: together, they protect against the financial difficulties of one trader from becoming a systemic problem for other traders or the market as a whole. Several aspects of the oversight framework help the Commission achieve these goals:

• requiring that market participants post a performance bond, referred to as “margin,” to secure their ability to fulfill obligations;
• requiring participants on the losing side of trades to meet their obligations, in cash, through daily (and sometimes intraday) margin calls;
• requiring that FCMs segregate customer funds from their own funds and protect these customer funds from obligations of the FCM; and
• monitoring the capitalization and financial strength of intermediaries, such as FCMs and clearinghouses.

The Commission works with the exchanges and the National Futures Association (NFA) to closely monitor the financial condition of FCMs. The Commission, the exchanges, and the NFA receive various monthly, quarterly, and annual financial reports from FCMs. The exchanges and the NFA also conduct annual audits and daily financial surveillance of their respective member FCMs. Part of this financial surveillance involves looking at each FCM’s exposure to losses from large customer positions that it carries and one way in which such positions are tracked is through the large trader reporting system. As an oversight regulator, the Commission primarily reviews the audit and financial surveillance work of the exchanges and the NFA but also monitors the health of FCMs directly, as necessary and appropriate. We also periodically reviews clearinghouse procedures for monitoring risks and protecting customer funds.

As with attempts at manipulation, the Commission’s Enforcement Division investigates and prosecutes FCMs that are alleged to have violated financial and capitalization requirements or to have committed other supervisory and compliance failures in connection with the handling of customer business. Such cases can result in substantial remedial changes in the supervisory structures and systems of FCMs and can influence the way particular firms conduct business. This is an important part of the responsibility of the Commission to ensure that sound practices are followed by FCMs.

Protecting the operational integrity of the futures markets is also accomplished through the efforts of several divisions within the Commission. The Division of Trading and Markets promulgates requirements that mandate appropriate disclosure and customer account reporting, as well as fair sales and trading practices by registrants. Trading and Markets also seeks to maintain appropriate sales practices by screening the fitness of industry professionals and by requiring proficiency testing, continuing education, and supervision of these persons. Extensive recordkeeping of all futures transactions is also required. Trading and Markets also monitors compliance with those requirements and supervises the work of exchanges and the NFA in enforcing the requirements.

And, as with the Commission’s efforts to protect the economic and financial integrity of the futures markets, the Division of Enforcement also plays an important role in deterring behavior that could compromise the operational integrity of the markets. Enforcement investigates a variety of trade and sales practice abuses that affect customers. For example, the Commission brings actions alleging unlawful trade allocations, trading ahead of customer orders, misappropriating customer trades, and non-competitive trading. The Commission also takes actions against unscrupulous commodity professionals who engage in a wide variety of fraudulent sales practices against the public.

The CFTC’s Role in the Energy Markets and Our Response to the Enron Situation:

The Commission oversees on-exchange trading of energy-related futures and options contracts based on such things as crude oil, natural gas, heating oil, propane, gasoline, and coal. Several U.S. exchanges are designated to trade energy product futures and options, but the overwhelming majority of on-exchange transactions are executed on NYMEX, where contracts in each of the products I mentioned are actively traded. Please note that the CFTC does not regulate trading of energy products on the spot (cash) market or forward market (non-standardized contracts), which are excluded from our jurisdiction by the Commodity Exchange Act (CEA). However, the Commission can, for example, look at the spot market under our anti-manipulation oversight authority if we believe the spot market in a commodity that underlies a futures contract has been manipulated and we want to determine whether manipulation of the futures market for that commodity has been attempted.

Because Enron was a large trader of energy-based contracts traded on the NYMEX, its on-exchange activity has been monitored by our market surveillance over the years. At this time, we have no indication that manipulation of any on-exchange futures market was attempted by Enron. However, the rapid financial deterioration of Enron last year presented an additional concern about the markets: Could its on-exchange futures positions be unwound without sudden price volatility or reduced liquidity? As it turned out, although Enron had a significant presence in these markets, the company was but one of many participants in what are very large and liquid markets. When its financial difficulties became known and Enron wound down its activities, energy futures price showed remarkably little reaction: The markets for energy-related futures were not roiled and prices did not spike nor did liquidity dry up.

As would the financial difficulties of any large futures customer, Enron’s difficulties also raised concerns about the ability of the FCMs that carried Enron’s on-exchange futures positions to successfully close out those positions if Enron were to fail to meet margin calls. When Enron’s financial troubles became known last fall, staff from our Division of Trading and Markets worked closely with the NYMEX clearinghouse and the affected FCMs to monitor and to manage the winding down of these positions. By appropriately adjusting margin requirements, the clearinghouse was able to ensure that adequate Enron funds remained on deposit at the FCMs, which both provided additional security for the FCMs and their customers and gave Enron a strong incentive to reduce its positions as quickly as possible.

The winding down of Enron’s on-exchange positions was accomplished quickly and smoothly so that, by the time of Enron’s bankruptcy filing, the risks to which FCMs were exposed had dropped by 80% from only a week earlier. By mid-December, all of Enron’s positions on the regulated exchanges had been liquidated. (Enron also owned a small subsidiary FCM, Enron Trading Services, that carried no positions for other customers and only a very small portion of Enron’s own on-exchange positions. At all times, ETS had regulatory capital several times the required level. By mid-December, ETS had transferred its customers to other FCMs.) I believe that this episode was a success for the system of financial controls in the on-exchange futures markets. There were no disruptions to the system of clearance and settlement. Enron met all its obligations. No customer lost any funds entrusted to any FCM.

How the Commodity Futures Modernization Act Changed Things:

In 1999, the President’s Working Group on Financial Markets -- which is chaired by the Secretary of the Treasury and includes the Chairs of the Federal Reserve, Securities and Exchange Commission, and CFTC -- released a report entitled “Over-the-Counter Derivatives and the Commodity Exchange Act.” The report recommended changes to the CEA to, among other things, create legal certainty for off-exchange derivatives transactions, such as swaps. Congress considered these recommendations and ultimately codified many of them, together with substantial reforms of the regulatory regime for domestic exchange-trading of futures and options, in the Commodity Futures Modernization Act of 2000 (CFMA).

With respect to the energy markets, the CFMA exempts two types of markets from much of the CFTC’s oversight. Such markets are described in Section 2(h) of the CEA, as amended by the CFMA. The Act defines exempt commodities as, roughly speaking, all commodities except agricultural and financial products. This category, which for the most part represents futures contracts based on metals and energy products, may be traded on the two types of markets covered by Section 2(h). The first is bilateral, principal-to-principal trading between two eligible contract participants, which include sophisticated entities such as regulated banks or insurance companies and well-capitalized companies or individuals (for example, those with assets of at least $10 million), among others. The second is electronic multilateral trading among eligible commercial entities, which include, among others, eligible contract participants that can also demonstrate an ability to either make or take delivery of the underlying commodity and dealers that regularly provide hedging services to those with such ability. While the Commission does not directly regulate these transactions, we do retain antifraud and antimanipulation authority. The public policy issues implicated by such trading among sophisticated entities were addressed by Congress during passage of this important legislation.

Suggestions on Moving Forward:

I would like to first note that the CFTC, as a member of the President’s Working Group on Financial Markets, is participating in a study of corporate disclosure issues relating to auditing and accounting which may yield valuable suggestions for how both industry and the government may seek to prevent repeats of the Enron situation. Within the Commission, we have recently proposed a reorganization of the CFTC that will consolidate our market oversight functions into one division to help improve what is already an excellent program.

Mr. Chairman, as a government regulator, I believe that it is important to constantly review current policies and procedures, especially given today’s dynamic marketplaces, to ensure that appropriate levels of regulation are maintained. The significance of the Enron situation and its ramifications generally deserve study and recommendations for improvements. Some of these responses will come from the Congress, while others will come from regulators, and still others will come from the industry. Having said this, I was a supporter of the CFMA because I sincerely believed that a one-size-fits-all approach to regulation was outdated, especially with all of the business and technological innovations that we have seen in recent history.

Tailoring regulations to the nature of the participant, the product, and the facility on which it is traded seemed, in my view, to be appropriate concepts on which to define a federal regulatory interest. To date, I have seen no evidence to the contrary in my agency’s initial analysis of the Enron situation. However, we will continue to monitor the markets within our jurisdiction, and we will continue to utilize all authorities given to us by the Congress to aggressively pursue CEA violations.

The Commission stands ready to work with this Committee, the Congress, other regulators, and the industry to find appropriate responses. Thank you for the invitation to appear before your Committee. I will be happy to answer any questions you may have.

Introductory Remarks of Chairman James E. Newsome before the Luncheon Panel Discussion on Single Stock Futures at the MFA Conference in South Beach, Florida

February 5, 2002

Thank you for inviting me here today. It is a pleasure to address this distinguished group. I look forward to the panel discussion on single stock futures and will keep my remarks brief. Solid progress has been made in moving toward actual trading in single stock futures and other security futures products. The Commission has issued final rules on notice registration, listing standards, self-certification of rules and rule amendments, data reporting, speculative position limits, and cash settlement or physical delivery of SFPs. Together with the SEC, we have also issued final rules on the key issue of how to determine whether an index is a narrow-based security index subject to joint regulation or a broad-based index subject only to our traditional rules. We have published for comment our proposed rules on dual trading of SFPs. And, with the SEC, we have published jointly proposed rules on margin, customer funds protection issues, cash settlements, and trading halts.

Perhaps most importantly, SEC Chairman Pitt and I have agreed generally on how to best address the issues that remain before these products can trade. We believe the CFMA does not require that implementation of portfolio margining for security futures be deferred until it has been approved for exchange-traded options, as long as we avoid regulatory arbitrage between SFPs and exchange-traded options. And we have committed our respective agencies to promulgating final rules on margin and customer funds protection at the earliest possible date, with a goal of permitting actual trading by early in the second quarter. Chairman Pitt and I issued a joint statement to that effect on December 21^st, the first anniversary of the CFMA's enactment, and I fully intend to meet that commitment. However, we realize that it is most important to finish them appropriately versus just quickly.

With your indulgence, I'd like to bring you up to speed on efforts in several other areas before the panelists begin their discussion. First, I want to commend all those here today who faced the unprecedented challenges, and personal tragedies, of September 11^th to get the futures markets back up and running within mere days. The steady hand of industry leaders and management teams, the foresight and flexibility of many contingency plans prepared in the aftermath of the 1993 attacks or in anticipation of Y2K, the prudent investments of some institutions in redundant facilities and backup systems, and -- most of all -- the courage and tenacity of every person at every firm in this industry should give us all great confidence in the strength and resilience of our financial system.

The Commission has undertaken a study of the industry's response to this crisis and will soon be releasing its initial report. Invaluable lessons were learned and issues identified in the area of disaster recovery and business continuity plans, for regulators as well as market participants. It is my hope that, by sharing through this initial report what we've learned thus far about our own preparedness as a federal financial regulator and about the preparedness efforts of the exchanges, clearinghouses, and firms we oversee, we might trigger further discussion among market participants. I believe that the same creativity and ingenuity that has produced so many innovative new financial products and trading platforms will also generate the best solutions to the challenge of preparing ourselves for disasters we hope to never face.

I would also like to mention our efforts with respect to the Patriot Act and its provisions on money laundering. As many of you are aware, Title III of the Act imposes a number of new anti-money laundering requirements on all financial institutions, including CPOs.  The Treasury Department has authority under the Act to develop a number of regulations that may impact your compliance efforts. The Commission has and will continue to be consulted and to participate actively in this process. Our staff is working closely with Treasury, other regulators, the MFA, and others to ensure that your concerns are considered and that any regulations in this area do not place CFTC registrants at a disadvantage relative to other financial service providers.

The ongoing Enron situation has also generated challenges for the Commission and I'd like to mention some of our efforts in that area. Among other things, I recently testified before the Senate Energy Committee and will share with you some of the items I discussed there. As many of you know, the Commission has an aggressive market surveillance program in which both we and the exchanges closely monitor the aggregated positions of large traders. As I stated at the hearing, we have no indication at this time of any manipulation or attempted manipulation of the regulated markets in energy-based futures or options but we will continue to monitor them closely and pursue all appropriate inquiries. We also closely monitor the financial integrity of the clearing system and Commission staff worked closely with clearinghouses and clearing FCMs to ensure that, at no time last fall, were the funds of other customers or the smooth functioning of the clearing process threatened by the difficulties of any individual trader, large or small.

The markets for energy-based futures showed as much resilience as the clearing system last fall. These markets were not roiled by price spikes nor did liquidity suffer. Obviously, as an oversight regulator, we will continue to look at how and why markets within our jurisdiction respond the way they do, whether well or poorly, to a situation such as the failure of a significant participant and we will continue to evaluate the public good as we seek to appropriately fulfill our statutory responsibility. Separately, as a member of the President's Working Group on Financial Markets, I am participating with Secretary O'Neill, Chairman Greenspan, and Chairman Pitt to review, for the President, possible improvements in accounting, auditing, and disclosure practices with respect to publicly-held companies.

Recent events have led some to call for further responses from the Congress and the regulators, even for re-regulation of markets that were provided legal certainty by the Commodity Futures Modernization Act. While I agree that it is prudent for a regulator to constantly review its policies and procedures to ensure that an appropriate level of oversight is exercised, I also believe that a situation of this magnitude deserves careful consideration before action is taken. One reason for my caution is that I believe we should make sure that we identify the true problem before we pursue remedies to that problem. With all that is going on in the world, I think it is important for the government to respond appropriately, but that does not mean we should act just for the sake of acting.

I was a supporter of the CFMA because I sincerely believed that a one-size-fits-all approach to regulation was outdated, especially with all of the business and technological innovations that we have seen in recent history. Rules tailored to the participant, the product, and the trading facility seemed to me to be a more appropriate regulatory concept relative to the prescriptive regulations of the past. Many aspects of the CFMA were intensely debated during the legislative process and key issues received a full airing. Important changes to the law were agreed upon as a result of that debate. Globally, competitive issues were of utmost importance during this debate to assure that the U.S. remained a focal point for financial markets. I believe that a departure from the path of progress represented by this important piece of legislation should be approached with caution.

Finally, in spite of the challenges presented by events last year, the Commission has not slowed its efforts in other areas. We have just announced a major restructuring of the Commission that is designed to make us a more responsive, more effective agency. We are actively interviewing candidates to lead the divisions in this new structure.

I recognize that there are many issues, which the Commission needs to address. We are looking forward to completion of the intermediary study called for by the CFMA. As I have said before, modernization of rules for intermediaries is a priority for me. Your inputs and participation will be a key part of this effort.

Thank you again.

Written Testimony of Chairman James E. Newsome before the Subcommittee on Energy and Air Quality of the Committee on Energy and Commerce, U.S. House of Representatives

February 13, 2002

Thank you, Chairman Barton, and members of the Subcommittee. I appreciate your having given me the opportunity to testify here today on behalf of the Commodity Futures Trading Commission. I would first like to say -- both as a federal financial regulator and as a citizen -- that I have great sympathy for those who are harmed by incomplete or inaccurate financial information. I also share the concern of many that appropriate action be taken to ensure that investors, creditors, commercial counterparties, and others who rely on the accuracy and completeness of financial disclosures by publicly-held companies can continue to do so with full confidence.

Today, I would like to tell you about the important role of the futures markets in our economy and the role of the CFTC in overseeing those markets -- particularly with respect to energy-based contracts -- and how that role has changed under the Commodity Futures Modernization Act. I will also describe how the Commission responded to the Enron situation last fall and would like to finish with some thoughts on how the Commission might make a contribution as we move forward.

Background:

The Commission was created by Congress in 1974 to oversee the nation’s commodity futures and options markets. The Commission perceives its mission to be twofold: to foster transparent, competitive, and financially sound markets, and, to protect market users and the public from fraud, manipulation, and abusive practices. There are important differences between the futures markets and the stock markets. While the stock markets provide a means of capital formation, a way for new and existing businesses to raise funds, the futures markets perform a different role, providing producers, distributors, and users of commodities with a means to manage their exposure to commodity price risk.

Historically, commodity futures and options were traded primarily on agricultural products. And while contracts based on agricultural products are traded as actively today as ever, a great many futures contracts are now based on non-agricultural physical commodities like precious metals or energy products and on financial commodities like interest rates, foreign currencies, or stock market indices. Because they serve the risk management needs of businesses in virtually every sector of the economy, the volume of trading in these financials and non-agricultural physicals is now nine times that in agricultural contracts. While farmers and ranchers continue to use futures contracts to effectively lock in the prices for their crops and herds months before they come to market, manufacturers now can also use futures contracts to plan their raw material costs and to reduce uncertainty over the prices they receive for finished products sold overseas. Mutual fund managers can use stock index futures to protect against market volatility and effectively put a floor on portfolio losses. And electric power generators can use futures contracts to secure stable pricing for their coal and natural gas needs.

These producers, distributors, and users of commodities (whether physical or financial) are called hedgers. The futures contract positions that hedgers put on are referred to as covered positions. For example, a power generator’s obligation to purchase natural gas will be covered by its ability to use that natural gas in its electricity generation. There are other participants in the futures markets who take uncovered positions in the hope of making profits rather than mitigating risks. These individuals and firms are known as speculators and they contribute to the smooth operation of a futures market by increasing its liquidity. Because the needs of different hedgers for long or short positions may not always be perfectly balanced, the presence of speculators increases market effectiveness by better ensuring that hedgers will be able to put on positions they need.

Although I have described the primary purpose of futures markets as mechanisms for risk management, it should be noted that many futures markets play another important role in the economy, that of price discovery. Many businesses and investors that are not direct participants in the futures markets nonetheless refer to the quoted prices of futures market transactions as reference points or benchmarks for other types of transactions and decisions. This is particularly important in many agricultural markets where no other means of price discovery exists outside of the quoted futures prices but it is also true in other sectors, including many energy markets.

How the CFTC Performs Its Mission:

In seeking to fulfill its mission to foster transparent, competitive, and financially sound markets and to protect market users and the public from fraud, manipulation, and abusive practices, the Commission focuses on issues of integrity. We seek to protect the economic integrity of the futures markets so that they may operate free from any fraud or manipulation of prices. We seek to protect the financial integrity of the futures markets so that the insolvency of a single market participant does not become a systemic problem affecting other market participants or financial institutions. We seek to protect the operational integrity of the futures markets so that transactions are executed fairly, so that proper disclosures are made to existing and prospective customers, and so that fraudulent sales practices are not tolerated.

The Commission pursues these goals through a multi-pronged approach to market oversight. We seek to protect the economic integrity of the markets against attempts at manipulation through direct market surveillance and through oversight of the surveillance efforts of the exchanges themselves. The heart of the Commission’s direct market surveillance is a large-trader reporting system, under which clearing members of exchanges, commodity brokers (called “futures commission merchants” or “FCMs”), and foreign brokers electronically file daily reports with the Commission. These reports contain the futures and option positions of traders that hold positions above specific reporting levels set by CFTC regulations. Because a trader may carry futures positions through more than one FCM and because a customer may control more than one account, the Commission routinely collects information that enables its surveillance staff to aggregate information across FCMs and for related accounts.

Using these reports, the Commission’s surveillance staff closely monitors the futures and option market activity of all traders whose positions are large enough to potentially impact the orderly operation of a market. For contracts which at expiration are settled through physical delivery, such as in the energy futures complex, staff carefully analyze the adequacy of potential deliverable supply. In addition, staff monitor futures and cash markets for unusual movements in price relationships, such as cash/futures basis relationships and inter-temporal futures spread relationships, which often provide early indications of a potential problem.

The Commissioners and senior staff are kept apprised of significant market events and potential problems at weekly market surveillance meetings, and on a more frequent basis when needed. At the weekly market surveillance meetings, surveillance staff brief the Commission on broad economic and financial developments and on specific market developments in futures and option markets of particular concern. At least one energy product market is usually discussed and officials from the Energy Information Administration of the Department of Energy periodically attend such meetings.

If indications of attempted manipulation are found, the Enforcement Division investigates and prosecutes alleged violations of the Commodity Exchange Act (the “Act” or “CEA”) or the Commission’s regulations. Subject to such actions are all individuals that are (or should be) registered with the Commission, those who engage in trading on any domestic exchange, and those who improperly market commodity futures or option contracts. The Commission has available to it a variety of administrative sanctions against wrongdoers, including revocation or suspension of registration, prohibitions on futures trading, cease and desist orders, civil monetary penalties, and restitution orders. The Commission may seek federal court injunctions, restraining orders, asset freezes, receiver appointments, and disgorgement orders. If evidence of criminal activity is found, matters may be referred to state authorities or the Justice Department for prosecution of violations of not only the CEA but also state or federal criminal statutes, such as mail fraud, wire fraud, and conspiracy. Over the years, the Commission has brought numerous enforcement actions and imposed sanctions against firms and individual traders for attempting to manipulate prices, including the well-publicized cases against Sumitomo for alleged manipulation of copper prices and against the Hunt brothers for manipulation of the silver markets.

In protecting the financial integrity of the futures markets, the Commission’s two main priorities are to avoid disruptions to the system for clearing and settling contract obligations and to protect the funds that customers entrust to FCMs. Clearinghouses and FCMs are the backbone of the exchange system: together, they protect against the financial difficulties of one trader from becoming a systemic problem for other traders or the market as a whole. Several aspects of the oversight framework help the Commission achieve these goals:

• requiring that market participants post a performance bond, referred to as “margin,” to secure their ability to fulfill obligations;
• requiring participants on the losing side of trades to meet their obligations, in cash, through daily (and sometimes intraday) margin calls;
• requiring that FCMs segregate customer funds from their own funds and protect these customer funds from obligations of the FCM; and
• monitoring the capitalization and financial strength of intermediaries, such as FCMs and clearinghouses.

The Commission works with the exchanges and the National Futures Association (the “NFA”) to closely monitor the financial condition of FCMs. The Commission, the exchanges, and the NFA receive various monthly, quarterly, and annual financial reports from FCMs. The exchanges and the NFA also conduct annual audits and daily financial surveillance of their respective member FCMs. Part of this financial surveillance involves looking at each FCM’s exposure to losses from large customer positions that it carries and one way in which such positions are tracked is through the large trader reporting system. As an oversight regulator, the Commission primarily reviews the audit and financial surveillance work of the exchanges and the NFA but also monitors the health of FCMs directly, as necessary and appropriate. We also periodically review clearinghouse procedures for monitoring risks and protecting customer funds.

As with attempts at manipulation, the Commission’s Enforcement Division investigates and prosecutes FCMs that are alleged to have violated financial and capitalization requirements or to have committed other supervisory and compliance failures in connection with the handling of customer business. Such cases can result in substantial remedial changes in the supervisory structures and systems of FCMs and can influence the way particular firms conduct business. This is an important part of the responsibility of the Commission to ensure that sound practices are followed by FCMs.

Protecting the operational integrity of the futures markets is also accomplished through the efforts of several divisions within the Commission. The Division of Trading and Markets promulgates requirements that mandate appropriate disclosure and customer account reporting, as well as fair sales and trading practices by registrants. Trading and Markets also seeks to maintain appropriate sales practices by screening the fitness of industry professionals and by requiring proficiency testing, continuing education, and supervision of these persons. Extensive recordkeeping of all futures transactions is also required. Trading and Markets also monitors compliance with those requirements and supervises the work of exchanges and the NFA in enforcing the requirements.

And, as with the Commission’s efforts to protect the economic and financial integrity of the futures markets, the Division of Enforcement also plays an important role in deterring behavior that could compromise the operational integrity of the markets. Enforcement investigates a variety of trade and sales practice abuses that affect customers. For example, the Commission brings actions alleging unlawful trade allocations, trading ahead of customer orders, misappropriating customer trades, and non-competitive trading. The Commission also takes actions against unscrupulous commodity professionals who engage in a wide variety of fraudulent sales practices against the public.

The CFTC’s Role in the Energy Markets and Our Response to the Enron Situation:

The Commission oversees on-exchange trading of energy-related futures and options contracts based on such things as crude oil, natural gas, heating oil, propane, gasoline, and coal. Several U.S. exchanges are designated to trade energy product futures and options, but the overwhelming majority of on-exchange transactions are executed on New York Mercantile Exchange (the “NYMEX”), where contracts in each of the products I mentioned are actively traded. The CFTC does not regulate trading of energy products on spot (cash) markets or forward markets, which are excluded from our jurisdiction by the CEA.

Because Enron was a large trader of energy-based contracts traded on the NYMEX, its on-exchange activity has been monitored by our market surveillance over the years. At this time, we have no indication that manipulation of any on-exchange futures market was attempted by Enron. However, the rapid financial deterioration of Enron last year presented an additional concern for the Commission: Could Enron’s on-exchange futures positions be closed out without causing sudden price volatility or unduly reducing liquidity? In fact, Enron was but one of many significant participants in these large and liquid markets and the markets proved to be quite resilient. When its financial difficulties became known and Enron voluntarily closed out its positions, energy futures markets showed remarkably little reaction. The prices of energy-based futures did not spike nor did liquidity dry up.

As would the financial difficulties of any large futures customer, Enron’s difficulties also raised concerns about the ability of the FCMs that carried Enron’s on-exchange futures positions to successfully close out those positions if Enron were to fail to meet margin calls. When Enron’s financial troubles became known last fall, staff from our Division of Trading and Markets worked closely with the NYMEX clearinghouse and the affected FCMs to monitor and to manage the closing out of these positions. By appropriately adjusting margin requirements, the clearinghouse was able to ensure that adequate Enron funds remained on deposit at the FCMs, which both provided additional security for the FCMs and their customers and gave Enron a strong incentive to reduce its positions as quickly as possible.

The closing out of Enron’s on-exchange positions was accomplished quickly and smoothly so that, by the time of Enron’s bankruptcy filing, the risks to which FCMs were exposed, as measured by standard margin requirements, had dropped by 80% from only a week earlier. By mid-December, all of Enron’s positions on the regulated exchanges had been liquidated. (Enron also owned a small subsidiary FCM, Enron Trading Services, that carried no positions for other customers and only a very small portion of Enron’s own on-exchange positions. At all times, ETS had regulatory capital several times the required level. Also by mid-December, ETS had transferred its customers to other FCMs.) I believe that this episode was a success for the system of financial controls in the on-exchange futures markets. There were no disruptions to the system of clearance and settlement. Enron met all its obligations. No customer lost any funds entrusted to any FCM.

How the Commodity Futures Modernization Act Changed Things:

The Commodity Futures Modernization Act of 2000 (the “CFMA”) was signed into law by President Clinton on December 21, 2000. It amended the Commodity Exchange Act to, among other things, provide legal certainty for over-the-counter derivatives products. For contracts based on energy products and certain other non-agricultural and non-financial commodities, the CFMA added a new Section 2(h) to the Act that exempted two types of markets from much of the CFTC’s oversight.

The first type is bilateral, principal-to-principal trading between two eligible contract participants, a category that includes sophisticated entities such as regulated banks and well-capitalized companies or individuals (for example, those with assets of at least $10 million), among others. The second type is electronic multilateral trading among eligible commercial entities, such as eligible contract participants that can also demonstrate an ability to either make or take delivery of the underlying commodity (called “eligible commercial entities”) or dealers that regularly provide hedging services to those entities.

Suggestions on Moving Forward:

As an oversight regulator, we will continue to look at how and why the markets within our statutory jurisdiction respond the way they do, whether well or poorly, to situations such as the failure of a significant participant. Separately, as a member of the President’s Working Group on Financial Markets, the CFTC is working with the SEC, the Treasury Department, and the Federal Reserve Board to review for the President possible improvements in accounting, auditing, and disclosure practices with respect to publicly-held companies. And, within the Commission, we recently proposed a reorganization plan that will consolidate our market oversight functions into one division to help improve already excellent programs in market and financial surveillance.

The Enron situation has led some to call for further responses from Congress and regulators, even for re-regulation of markets that were provided legal certainty by the Commodity Futures Modernization Act. While I agree that it is prudent for a regulator to constantly review its policies and procedures to ensure that an appropriate level of oversight is exercised, I also believe that a situation of this magnitude deserves careful consideration before a regulator seeks to take action. I believe that regulators should make sure that the true problem has been identified before remedies are pursued.

I supported passage of the CFMA because I sincerely believed that a one-size-fits-all approach to regulation was outdated, particularly in light of important advances in technology within the financial services industry. Rules tailored to the participant, the product, and the trading facility seemed to me to be a more appropriate approach than the prescriptive regulations of the past. To date, I have seen no evidence to the contrary in my agency’s initial analysis of the Enron situation. The CFMA was enacted after a number of hearings conducted by our House and Senate oversight committees in the context of reauthorizing the Commission. Many issues relating to evolving markets received a full airing and important changes to the law were agreed upon as a result. I believe that any departure from the path of progress represented by this important piece of legislation should be approached with extreme caution.

We will continue to monitor the markets within our jurisdiction and to utilize all authorities given to us by the Congress to aggressively pursue violations of the Commodity Exchange Act. We stand ready to work with this Subcommittee, the Congress, other regulators, and market participants. Thank you for the invitation to appear before your Committee. I will be happy to answer any questions you may have.