Address by Chairman James E. Newsome before the International Futures Industry Conference in Boca Raton, Florida

March 15, 2002

Thank you for inviting me here today. It is both an honor and a pleasure to address this distinguished gathering. It has been a challenging year since I last spoke here, probably one of the toughest years many of us will ever experience. This morning, I want to talk about several key issues, including the lessons we have learned from September 11^th, the new money laundering rules under the Patriot Act, and the ongoing Enron situation. I would also like to share with you some of my plans for the coming months, and, to describe for you some of the challenges the Commission faces.

I. September 11^th

I want to first commend everyone in this industry who braved the unprecedented challenges and the 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 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, the ingenuity and resourcefulness of technical staffs, and most of all the courage and tenacity of every person at every firm in this industry should give all Americans great confidence in the strength and resilience of our financial system.

Because these terrible events presented an unparalleled opportunity to see contingency plans put into action, the Commission decided to prepare a report on its own and the industry’s responses to the crisis. This report was released on Monday and is available on our website. I want to personally thank each of the exchanges, clearinghouses, and firms who responded to our survey questions, as well as the National Futures Association for their assistance in compiling survey responses. As a result of all your efforts, we have been able to share many invaluable lessons that were learned in the past six months and to identify several key issues in the areas of disaster recovery and business continuity plans.

It is my hope that -- by sharing through this report what we have learned thus far about our own preparedness as a financial regulator and about the preparedness of the exchanges, clearinghouses, and firms we oversee -- we might trigger further discussion among market participants. I believe 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, as we must, for disasters we hope to never face.

With respect to the Patriot Act, I want to assure you that, while the Treasury Department has the lead role in developing regulations to implement the anti-money laundering provisions of the Act, the Commission has and will continue to be consulted and to participate actively in the rulemaking process. Our staff is working closely with Treasury, other regulators, and market participants to ensure that the goals of this legislation are achieved and are achieved in a manner that is fair and equitable across industry sectors.

II. Energy Markets

I have testified before Congress several times on the Enron situation and reported that, although we have no indication at this time of any attempted manipulation of the on-exchange markets in energy-based futures, we will continue to monitor these markets closely and will pursue all appropriate inquiries. I also reported that Commission staff worked closely with affected clearinghouses and clearing FCMs to ensure that, at no time last fall, were the funds of other customers, the financial strength of the FCMs, or the smooth functioning of the clearing process threatened by Enron’s difficulties. And I reported that these markets for energy-based contracts reacted well, with little or no adverse impact on volatility or liquidity.

Obviously, as an oversight regulator, we will continue to look at how and why markets respond the way they do, whether well or poorly, to a situation such as this one. Separately, as a member of the President’s Working Group on Financial Markets, I worked with Secretary O’Neill, Chairman Greenspan, and Chairman Pitt to review for the President potential improvements in accounting, auditing, and disclosure practices by publicly-held companies.

However, some have called for other responses from Congress, particularly for regulation of markets and transactions that are not currently regulated. The changes proposed thus far would rescind significant advances brought about by the Commodity Futures Modernization Act, which was signed only fourteen months ago by President Clinton with the unanimous support of the President’s Working Group and with overwhelming bipartisan support in Congress. While it is prudent for a regulator to periodically review its procedures to ensure that an appropriate level of oversight is exercised, we must recognize that markets, competition, and technology have changed. I continue to believe that rules tailored to the participant, product, and trading facility are more appropriate than the prescriptive regulations of the past.

I agree with recent statements by Chairmen Greenspan and Pitt indicating that a departure from the path of progress set out in the CFMA should be approached with caution, could cause unintended consequences, and would be premature at this point. To date, I have not found credible evidence to justify such changes. A situation of this sort deserves careful consideration of the facts before action is taken. Only after the true nature of the problem has been determined can the Commission responsibly comment on any changes to our jurisdiction or authority. The Commission, other regulators, and various Congressional committees are conducting inquiries and investigations into various aspects of the Enron situation. I can assure you that the Commission will share the findings of its inquiries, as well as any changes we might believe to be appropriate, with the Congress and the public as soon as possible.

A real strength of the principles-based approach of the CFMA is that it gives trading platforms the freedom to choose for themselves the level of regulatory oversight by selecting which products they will trade and who will be permitted to trade them. The CFMA effectively lowered many barriers to entry and has already begun to promote new competition, competition that can benefit the users of all markets. Revoking these important new freedoms, with as yet no credible basis for doing so, would go completely against the will of Congress as expressed less than a year-and-a-half ago. Doing so would create a regulatory regime that could very well stifle market innovation, hinder investment in new technologies, and even cause markets (and market share) to move offshore.

III. Moving Ahead with CFMA Implementation

I stood here last year and told you that my highest priority was prompt implementation of the CFMA. No one could have anticipated the year we were about to have. Certainly intervening events caused many of us to pull attention away from previous plans and intended courses of action. But implementation of the CFMA remains the most important task before this Commission. And notwithstanding the unexpected challenges, solid progress was made last year on security futures products. We are continuing to move toward permitting trading of these new products at the earliest possible date.

As many of you know, the Commission has issued final rules on notice registration, listing standards, self-certification of rules and rule amendments, data reporting, speculative position limits, and dual trading of single-stock futures. Together with the SEC, we have also issued final rules on 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 rules. And, with the SEC, we have published jointly proposed rules on margin, customer funds protection issues, cash settlements, and trading halts. In addition, the NFA has developed numerous rules required by its new capacity as a limited-purpose national securities association.

I have repeatedly instructed Commission staff that I have two primary objectives for any rulemaking: first, no rule should be so prescriptive or burdensome that it effectively precludes an economically viable new product or platform from developing; and second, no rule should create an unfair advantage for one industry sector over another or lead to regulatory arbitrage.

Unfortunately, there remain areas of disagreement over certain issues not yet set forth in final rules, particularly with regard to margin requirements for security futures products. Commission staff believe that reaching agreement on the following four issues regarding a joint margin rule is very important to achieving the objectives I just outlined: commercially reasonable regulatory flexibility and rational regulatory parity. First, long option value should be permitted to margin security futures products. Second, SPAN margining should be permitted to be used for calculating margin for offset positions carried in a futures account. Third, mandatory liquidation should not be required. And fourth, the joint margin rule should not apply to the activities of a domestic BD/FCM engaged in foreign transactions for foreign customers.

Chairman Pitt and I agreed generally last year on how to best address the issues that remain before us. Accordingly, we issued a joint statement on December 21^st, 2001, the first anniversary of the CFMA’s enactment, expressing our commitment to promulgation of 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 of this year. I remain committed to meeting that objective. However, I believe that in the long term issuing the right rules is as important as issuing rules quickly.

To ensure our ability to properly oversee trading in single stock futures and the many other innovative products and platforms I believe will flourish under the CFMA, the Commission recently announced a restructuring plan to make the agency more responsive, more effective, and more efficient. I hope that all of you, not just those of you who work directly with our staff, will notice these benefits in the months to come. The main thrust of the new structure will be that the functions previously performed by Trading & Markets and Economic Analysis will now be performed by two new divisions and one new office: the Division of Market Oversight, the Division of Clearing and Intermediary Oversight, and the Office of Chief Economist. Additionally, the Offices of Public Affairs and of Legislative and Intergovernmental Affairs were combined to form the new Office of External Affairs.

We recently announced the appointments of Pat McCarty as General Counsel, Gregory Mocek as Director of Enforcement, and Alan Sobba as Director of External Affairs. These individuals are here and I hope that you will visit with each of them. We are also interviewing candidates to lead the other divisions.

The Commission continues to face a serious challenge in attracting and retaining the type of highly skilled and experienced staff that is needed to operate effectively with our new responsibilities under the CFMA. The Commission must move from the role of a front-line regulator to a more flexible oversight role. Some might believe that, in this new capacity, the agency will need fewer resources than in the past. In the near term, anyway, just the opposite is true. The CFMA liberated markets and allowed innovation to flourish, creating new financial products and new trading platforms and permitting clearinghouses to respond in kind. I believe we have seen only the beginning of this exciting process.

This growth and innovation in the marketplace will provide real benefits to participants, customers, and the economy as a whole. However, because our fundamental duties have not changed, this growth and innovation will place increasingly greater demands on our resources. With new exchanges and alternate trading platforms, there is no longer a “template” to follow; rather, oversight must now be tailored to fit a variety of markets along a spectrum of regulatory classifications from basic fraud and manipulation protections to full oversight. To continue to fulfill our mission to promote markets free from congestion and manipulation and to protect market participants from fraud and abusive practices, we must have staff with the proper training and with solid experience in the markets we oversee.

All too often, however, we lose good people just as they are coming into their own as economists, commodity lawyers, and trading specialists. Our overall turnover rate is twice the federal average. Among attorneys it is almost 20% annually. In most, if not all, cases the CFTC’s ability to compensate such highly skilled people lags not only far behind that of the private sector, but also well behind that of the other federal financial regulators, where turnover rates are significantly lower. We are now the only federal financial regulator still subject to the pay restrictions of Title V but we are working diligently with Congress to remedy this problem. It is difficult enough to accept the loss of a productive employee to a higher-paying job in the private-sector but it is downright frustrating to lose such an employee to another federal agency because of disparate pay scales.

In conclusion, let me say that I do recognize there are many other issues I have not mentioned today but which the Commission needs to address. For example, we are looking forward to completing the intermediary study called for by the CFMA and are also considering proposals for rule modernization. We have finalized our timeline for the phases of this important project, including individual interviews which we hope to conduct in late March and early April, public hearings planned for late April, circulation of a final report prior to June 21^st, and promulgation of rule amendments as appropriate. As I have said before, modernization of the intermediary rules is a high priority for me. In this, as in every other effort we undertake, your invaluable insights and involvement will be key to its success. I hope that you will partner with us as we move forward in this exciting period for the futures markets. Thank you again.

Testimony of Chairman James E. Newsome before the Subcommittee on Agriculture, Rural Development and Related Agencies, Committee on Appropriations, United States Senate

March 20, 2002

Thank you, Chairman Kohl, 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. I would like also to briefly review the important role of the futures markets in our economy and the role of the CFTC in overseeing those markets – and how that role has changed under the Commodity Futures Modernization Act of 2000.

Background:

Futures based on agricultural products, non-agricultural physicals, and financial items have come to serve the risk management needs of businesses in virtually every sector of the U.S. economy. While farmers and ranchers continue to use futures contracts to safely lock in the prices for their crops and herds months before they come to market, manufacturers now also use futures contracts to plan their raw material costs. Exporters reduce uncertainty over the prices they receive for finished products sold overseas. Mutual fund managers and individual investors use stock index futures to protect against market volatility. And electricity generators use futures contracts to secure stable pricing for their coal and natural gas needs.

Although the primary purpose of futures markets is risk management, it should be noted that many futures markets play another important role in the economy, that of price discovery. Many investors and businesses 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.

Congress created the Commission in 1974 as an independent agency and charged it with deterring and preventing price manipulation and other disruptions to market integrity, ensuring the financial integrity of transactions to avoid systemic risk, promoting responsible innovation and fair competition in these markets, and protecting all market participants against fraudulent or other abusive sales practices and from misuse of customer assets. The CFTC has traditionally had three operational divisions: Economic Analysis (DEA), Trading and Markets (T&M), and Enforcement (DOE). DEA has helped the Commission -- through market surveillance, market analysis, and market research -- to fulfill its responsibility to promote competitive markets free of manipulation or congestion. T&M has developed, implemented, and interpreted regulations that protect customers, prevent trading and sales practice abuses, and assure the financial integrity of firms that hold customer funds. DOE has investigated and prosecuted alleged violations of the Commodity Exchange Act and the Commission’s rules.

Recently, to ensure its ability to properly oversee trading in single stock futures and the many other innovative products and platforms that I believe will flourish under the CFMA, we restructured our staff to make the agency more responsive, more effective, and more efficient. The main thrust of the new structure will be that functions previously performed by T&M and DEA will now be performed by two new divisions and one new office: the Division of Market Oversight, the Division of Clearing and Intermediary Oversight, and the Office of Chief Economist. Additionally, the Offices of Public Affairs and of Legislative and Intergovernmental Affairs were combined to form the new Office of External Affairs.

How the CFTC Performs Its Mission:

In seeking to fulfill its mission, 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 manipulation or congestion. 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 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 manipulation and congestion 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, futures commission merchants (FCMs), and foreign brokers electronically file daily reports with the Commission. These reports show all trader 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 contracts in the energy complex, staff carefully analyzes the adequacy of potential deliverable supply. In addition, staff monitors 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 market events and potential problems at weekly surveillance meetings and more frequently when needed. At these meetings, surveillance staff briefs the Commission on broad economic and financial developments and on specific market developments in futures and option markets of particular concern.

If indications of attempted manipulation are found, DOE investigates and prosecutes alleged violations of the Act or regulations. Subject to such actions are all individuals who 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 not only of the Commodity Exchange Act but also of 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 becoming a systemic problem for other traders. Several aspects of the oversight framework help the Commission achieve these goals with respect to traders: (1) requiring that market participants post margin to secure their ability to fulfill obligations; (2) requiring participants on the losing side of trades to meet their obligations, in cash, through daily (sometimes intraday) margin calls; and (3) requiring FCMs to segregate customer funds from their own funds.

The Commission also works with the exchanges and the National Futures Association (NFA) to closely monitor the financial condition of the FCMs themselves, who must provide the Commission, exchanges, and NFA with various monthly, quarterly, and annual financial reports. The exchanges and 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. As an oversight regulator, the Commission reviews the audit and financial surveillance work of the exchanges and NFA but also monitors the health of FCMs directly, as appropriate. We also periodically review clearinghouse procedures for monitoring risks and protecting customer funds.

As with attempts at manipulation, DOE investigates and prosecutes FCMs alleged to have violated financial and capitalization requirements or to have committed other supervisory or 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 fulfilling the Commission’s responsibility for ensuring that sound practices are followed by FCMs.

Protecting the operational integrity of the futures markets is also accomplished through the efforts of several divisions. T&M has promulgated requirements that mandate appropriate disclosure and customer account reporting, as well as fair sales and trading practices by registrants. T&M has sought 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. T&M has also monitored compliance with those requirements and supervised the work of the exchanges and NFA in enforcing the requirements.

As with the Commission’s efforts to protect the economic and financial integrity of the futures markets, DOE also plays an important role in deterring behavior that could compromise the operational integrity of the markets by investigating 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. We also take action against unscrupulous commodity professionals who engage in a wide variety of fraudulent sales practices against the public.

September 11^th and Enron:

The Commission began last year with a full plate of tasks relating to implementation of the Commodity Futures Modernization Act, but two unforeseen events would increase its workload even more: the World Trade Center attacks and the Enron bankruptcy. The New York Regional Office of the Commission was located on the 37^th floor of 1 World Trade Center. Thankfully, all of our employees escaped without major physical injury. Using backup systems and with help from staff of the Chicago Regional Office and D.C. headquarters, we provided ongoing surveillance of futures markets in the hours and days immediately following the tragedy.

Two of the four largest commodity futures exchanges regulated by the CFTC were based in Lower Manhattan: the New York Board of Trade and the New York Mercantile Exchange. Both were drastically impacted on September 11^th and trading did not resume on either exchange for several days. Other futures exchanges, in Chicago and elsewhere, were also impacted by events in New York, particularly by the closing of the stock markets, and experienced temporary interruptions in trading. However, in its preparedness and by its responses to this unprecedented disaster, the futures industry demonstrated foresight, resilience, and determination. Steady leadership, thoughtful contingency plans, prudent investments in redundant facilities and backup systems, the ingenuity of technical staffs, and the courage and tenacity of everyone in the industry, made possible a remarkably fast and effective resumption of trading, restoring for the U.S. economy rapid access to risk-management and price-discovery tools uniquely provided by the futures industry. The Commission, in coordination with local authorities, other federal financial regulators in the President’s Working Group on Financial Markets, the Congress, and the White House, strove to assist the industry in restoring operation of these important markets.

The Commission has been working steadily for the last six months to fully reestablish its permanent presence in New York City. At the end of April, the Commission will move into permanent space in Lower Manhattan from our temporary quarters in Jersey City, New Jersey. The Commission and its staff are particularly appreciative and grateful for the assistance of this Subcommittee in securing the supplemental funding we needed to recover and to prepare adequately for the future. The Commission has completed a detailed report on both its own and the industry’s efforts to recover from the attacks and to prepare, as we all must, for future disasters we hope never to face. A copy of that report is attached hereto.

The Commission also found itself with new challenges following initial disclosures of Enron’s financial difficulties last autumn. Because Enron was a large trader of energy-based contracts traded on NYMEX, its on-exchange activity had been monitored by our market surveillance staff for some time. 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, the futures markets reacted well, with little or no adverse impact on price volatility or liquidity.

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, T&M staff worked closely with the NYMEX clearinghouse and the affected FCMs to monitor and 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. 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. I believe this episode was a success for the system of financial controls in on-exchange futures markets. There were no disruptions to clearance and settlement system. Enron met all its obligations. No customer lost funds entrusted to any FCM. Obviously, as an oversight regulator, we will continue to look at how and why markets respond the way they do, whether well or poorly, to a situation such as this one.

As the facts surrounding Enron's collapse have unfolded over the last several months, the Commission has made a variety of inquiries both to Enron and other federal agencies investigating Enron to determine whether Enron's conduct may have violated the Commodity Exchange Act. We are obtaining information from Enron and other sources to determine how it conducted its trading business and whether it functioned within the bounds of applicable exclusions and exemptions under the Act. The Commission is also working with the SEC, FERC, and the Justice Department to ensure that we keep each other apprised of relevant information developed in our respective investigations.

Separately, as a member of the President's Working Group on Financial Markets, I have worked with Secretary O'Neill, Chairman Greenspan, and Chairman Pitt to review for the President potential improvements in accounting, auditing, and disclosure practices by publicly-held companies.

Implementation of the Commodity Futures Modernization Act:

Certainly events last year caused many of us to pull attention away from previous plans and intended courses of action. But implementation of the CFMA remains the most important task before this Commission. And notwithstanding the unexpected challenges, solid progress was made last year on security futures products. We are continuing to move toward permitting trading of these new products at the earliest possible date.

As many of you know, we have issued final rules on notice registration, listing standards, self-certification of rules and rule amendments, data reporting, speculative position limits, and dual trading of single-stock futures. Together with the SEC, we have also issued final rules on determining if an index is a narrow-based index subject to joint regulation or a broad-based index subject only to our rules. With the SEC, we have published proposed rules on margin, customer funds protection issues, cash settlements, and trading halts. The NFA has developed numerous rules required by its new capacity as a limited-purpose national securities association.

Chairman Pitt and I agreed generally last year on how to best address the issues that remain before us and we issued a joint statement on December 21^st, 2001, the first anniversary of the CFMA’s enactment, expressing our commitment to promulgation of 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 of this year. I remain committed to meeting that objective but I believe that in the long term issuing the right rules is as important as issuing rules quickly.

We are also looking forward to completing the intermediary study called for by the CFMA and are considering proposals for rule modernization. We have finalized our timeline for the phases of this important project, including individual interviews which we hope to conduct in late March and early April, public hearings planned for late April, circulation of a final report prior to June 21^st, and promulgation of rule amendments as appropriate.

Budget Request for FY 2003:

The President’s FY 2003 budget request for the CFTC is $82.8 million. That sum represents an increase of $9.1 million (or 12 %) over the FY 2002 regular appropriation. Of that $9.1 million, approximately $5.9 million is required to maintain the current level of services and operations. The remaining $3.2 million is being requested for an additional 27 staff years over the current base of 510 FTEs, which is the lowest staffing level since FY 1988.

Overview of Funding Levels and Operational Effects:

The Commission’s top budget priorities are to dedicate resources to fully implement the CFMA and to invest in the technology improvements needed to increase the Commission’s ability to continue fulfilling its mission in the face of the rapid technological change that is sweeping the futures industry.

Our request for 27 additional positions should improve our ability to keep pace with the rapid growth in volume, innovative products and transactions, new trading systems, evolving market practices, technological advances, and market globalization. The largest staff increase – an increase of ten – will go to information technology because the effective use of information technology is critical to our ability to fulfill our mission. It is critical that our information technology capacity stay on par with industry practices so that we can provide the timely and accurate information in a relevant format to our investigators, analysts, and attorneys.

The budget also calls for an increase in two staff years for the Enforcement program. This staff growth will be augmented by supplemental anti-terrorism funds intended to allow us to significantly upgrade our litigation, case, and document imaging and management systems through implementation of the “E-law” project. This system will enable staff to image all documents received or created during investigations and litigation. Those imaged documents -- as well as all on-line annotations, notes, work products, and case information relevant to each matter (such as names and phone numbers for witnesses, counsel, and staff at other agencies involved in the matter, etc.) -- will be available to Commission staff despite any destruction of the paper documents, as happened in New York. We expect this system to increase productivity in DOE as well as to assist the Office of General Counsel and the Office of Proceedings.

In FY 2003, the Market Surveillance, Analysis, and Research program will gain five positions. This 7% increase should allow us to keep pace with the growth in new types of exchanges and products, such as single-stock futures, as well as provide the proper level of surveillance, exchange oversight, contract design review, and market and product studies. However, it is difficult to be sure that resource levels are adequate because so much is not known at this time about the direction of the markets. If, for example, growth in the industry outpaces the resources available to oversee the industry, several risks are introduced, including the increased possibility of undetected price manipulations and abusive trading practices. A key goal of the Commission is to ensure that its regulatory policies reflect industry developments and do not to impede beneficial market innovation. But because these markets and the products traded on them are increasingly complex, it will be difficult to meet this goal without the proper level of staff resources.

The T&M programs which will become part of our new Market Oversight and Clearing and Intermediary Oversight will together gain four positions, or 4 % of staff, in FY 2003. These functions play important roles in developing regulatory reform initiatives are key to full implementation of the CFMA. In FY 2003, in addition to providing guidance to the public and industry professionals concerning compliance with the CEA, the programs will continue to review Commission rules to determine if they should be streamlined further in light of technological and market developments, to provide guidance to foster innovative transactions and electronic trading systems, and to monitor the risks to regulated industry participants by unregulated derivatives activities as well as the risks posed to registrants by their unregistered affiliates. In addition, these programs help maintain U.S. leadership in setting internationally acceptable standards for the regulation of markets and trading. Again, however, we cannot say with certainly that this increase will be sufficient because the pace of industry transition is uncertain. It is the Commission’s objective to be equipped to respond as quickly as desired to these critical challenges and their associated interested parties.

Finally, the Office of the General Counsel is slated for an increase of one FTE to ensure it is able to provide for the timely review of contract market designation applications, rule changes, and proposed enforcement actions; to provide for thorough and timely review and analysis of legislation and proposed legislation affecting the Commission and in defending the Commission in appellate and other litigation; and to assist the Commission in the performance of its adjudicatory functions.

Employee Attrition and Pay Parity:

The Commission continues to face a serious challenge in attracting and retaining the type of highly skilled and experienced staff that is needed to operate effectively with our new responsibilities under the CFMA. The Commission must move from the role of a front-line regulator to a more flexible oversight role. Some might believe that, in this new capacity, the agency will need fewer resources than in the past. In the near term, anyway, just the opposite is true. The CFMA liberated markets and allowed innovation to flourish, creating new financial products and new trading platforms and permitting clearinghouses to respond in kind. I believe we have seen only the beginning of this exciting process.

This growth and innovation in the marketplace will provide real benefits to participants, customers, and the economy as a whole. However, because our fundamental duties have not changed, this growth and innovation will place increasingly greater demands on our resources. With new exchanges and alternate trading platforms, there is no longer a “template” to follow; rather, oversight must now be tailored to fit a variety of markets along a spectrum of regulatory classifications from basic fraud and manipulation protections to full oversight. To continue to fulfill our mission to promote markets free from congestion and manipulation and to protect market participants from fraud and abusive practices, we must have staff with the proper training and with solid experience in the markets we oversee.

All too often, however, we lose good people just as they are coming into their own as economists, commodity lawyers, and trading specialists. Our overall turnover rate is twice the federal average. Among attorneys it is almost 20% annually and we have seen the average tenure of a new attorney decrease from five years to three years. In most, if not all, cases our ability to compensate skilled people lags not only far behind that of the private sector, but also well behind that of the other federal financial regulators, where turnover rates are significantly lower. We are now the only federal financial regulator still subject to the pay restrictions of Title V. The SEC recently was exempted from Title V but their recruitment and retention problems, according to the statistics, are less serious than our own. It is difficult enough to accept the loss of a productive employee to a higher-paying job in the private-sector but it is downright frustrating to lose such an employee to another federal agency because of disparate pay scales. Therefore, Mr. Chairman, I respectfully request this Committee’s support for removing the Commission from Title V pay restrictions so we may successfully hire and retain the dedicated staff we need to accomplish the important mission that we have in front of us.

Thank you for the opportunity to present our mission, responsibilities, and resource needs. I would be happy to provide answers to any questions you may have.

Remarks of Chairman James E. Newsome before the before the International Derivatives Conference, London, England

June 18, 2002

I’m honored to be here this morning and look forward to an interesting conference. Certainly, we’ll be tackling some very timely subjects as we discuss security futures, energy markets, anti-money laundering, and other issues.

First, thank you for your thoughts, prayers, and assistance in response to the September 11^th tragedy. The resilience of the financial sector was impressive and the responses of market participants made me quite proud to be associated with such professionals.

With respect to security futures, the Commission was very pleased last week to officially recognize OneChicago as a designated contract market for these products. Market participants will now have the choice of yet another platform on which to trade these important new products. All that is needed now is for the regulatory structure to be completed and, in that regard, I am pleased to report continued progress.

In recent weeks, the CFTC and SEC have adopted final rules on customer protection and recordkeeping requirements and have also issued orders permitting the trading of security futures based on exchange-traded funds, trust-issued-receipts, and closed-end funds. However, we have yet to reach final agreement on the exact contours of a joint margin rule. Though I would have preferred to have reached this agreement last December, I said then and still believe, that it is as important to issue the correct rules, as it is to issue rules quickly.

Throughout the last 18 months, as our respective staffs have labored to reach agreement, I stressed to our staff my two primary objectives for this and every rulemaking: first, that no rule should be so prescriptive or burdensome that it effectively precludes an economically viable new product from trading and, second, that no rule should create an unfair advantage for one set of market participants over another. I believe we will be successful in both respects. Chairman Pitt and I have been in close contact recently and I can assure you that we are both extremely anxious to address all remaining issues at the earliest possible date. I look forward to the commencement of actual trading in security futures and am eager to see how and by whom these new products will be utilized.

I am also pleased that the CFTC and the SEC were successful in recently “grandfathering” -- or permanently excluding from the definition of “narrow-based security index” -- 42 non-U.S. security index futures that had received no-action relief from the CFTC prior to passage of the Commodity Futures Modernization Act. Providing increased legal certainty and helping to avoid market disruptions in situations like this are the kind of goals that I believe financial regulators should pursue more often.

While a great deal of our focus has been on completing rules for security futures, we have also been busy implementing other important provisions of the CFMA. For example, Commission staff has been hard at work on the study of intermediaries that is mandated by the CFMA, and has been a priority of mine. Staff have traveled extensively and met with numerous FCMs, IBs, pool operators, and trading advisors to hear their thoughts on the current oversight structure and their suggestions for improvement. And less than two weeks ago, the Commission held a public meeting to solicit the input of key representatives of the FCM, CPO, and CTA communities. By the end of this week, we will submit to the Congress our final report and recommendations.

I believe that market participants can then look forward to the same degree of improvement and rule modernization that exchanges and clearinghouses enjoyed in last year’s rulemakings. More broadly, I expect the CFTC to look at every aspect of our oversight, whether mandated by the CFMA or not. No rule should be immune to scrutiny, particularly those that are overly prescriptive or technologically obsolete or that no longer serve a legitimate public policy goal.

Turning to energy markets, I want to first assure you that the CFTC is utilizing every available resource to discover what has happened and whether and how it may have affected the commodity markets. We are coordinating our efforts with those of other federal regulators and sharing information in an unprecedented manner. Those of you who have heard me speak before know that my regulatory philosophy has two prongs: to provide sufficient flexibility to permit innovation in legitimate endeavors but, also, to vigorously investigate and prosecute those who choose to operate beyond the rules.

You should also know that I long have been a consistent proponent of the much-needed regulatory reforms and increased legal certainty ultimately brought about by the CFMA. Chairman Greenspan has told Congress there appears to have been nothing unique to the derivatives markets in what Enron and others are alleged to have done. I agree with that observation, and with that of Chairman Pitt, who has said that it would be premature to undertake legislative changes before all the facts have been gathered and evaluated. I believe that any departure from the path of progress set out in the CFMA should be approached with extreme caution.

Only after we have uncovered the facts, analyzed the evidence, and identified the true nature and causes of the problem could we responsibly recommend that Congress consider changes in our jurisdiction or authority. I can assure you that the Commission will share its findings, as well as any recommendations that we may conclude are appropriate, at the earliest possible date. At the end of the day, we must ensure that we have a regulatory structure that protects both market integrity and market participants, while at the same time allowing innovation, flexibility, and growth.

A real strength of the CFMA’s principles-based approach is that it permits trading facilities to decide for themselves the level of regulatory oversight to which they wish to be subjected by adjusting the nature of the products they trade and by selecting which types of participants will be permitted access. The CFMA effectively lowered many barriers to entry and has already begun to promote new competition, although perhaps not as quickly as some had anticipated, that can benefit all market users. Revoking these important new freedoms, with as yet no credible basis for doing so, would go completely against the will of Congress as expressed only a year and a half ago. Doing so would create a regulatory regime that could very well stifle market innovation, hinder investment in new technologies, and deny market participants the benefits thereof.

On the clearing front, the CFTC now has enhanced authority over free-standing clearing arrangements and we are currently examining how to most appropriately exercise this authority. We have already reviewed two clearing arrangements operated within non-U.S. jurisdictions, consistent with our open view toward market access issues.

On the issue of enhanced money laundering prohibitions, the Commission has been very active in cooperating with other U.S. regulators to implement the Patriot Act provisions and has participated internationally in the Financial Action Task Force and IOSCO to bring to the table differences between securities, derivatives, and banking business. We are pleased that you share our interest in not multiplying a series of different or duplicative requirements where simpler and more cooperative solutions can serve all of our goals in this area. Getting this right is especially important to cross-border transactions.

Thank you for the opportunity to be here and address this conference. I will be happy to respond to any questions you may have.

Remarks of Chairman James E. Newsome before the Committee on Agriculture, Nutrition, and Forestry, United States Senate

July 10, 2002

Thank you, Chairman Harkin, Ranking Member Lugar, and Members of the Committee for the opportunity to testify before you today. I would like to provide you with updates on several important topics, including the Commission’s progress in working with the SEC to permit the trading of security futures and in implementing the important anti-money laundering provisions of the Patriot Act. First, however, I would like to directly address certain issues regarding U.S. energy markets.

As you know, the Commission is an independent federal regulatory agency, whose mission is to oversee the futures and options markets in the United States. We take very seriously our mission to ensure that these platforms provide safe, sound and transparent markets for risk management and price discovery for a variety of commodities, including agricultural, financial, metal and energy products.

The energy markets are among the largest and most dynamic in the United States. Hundreds of billions of dollars in energy products - which would include electricity, natural gas, crude oil, and gasoline - are traded each year in the United States – both on-exchange and in the over-the-counter (OTC) Markets. The Commission regulates the on-exchange futures and options energy markets, which provide significant risk management and price discovery functions for both retail and institutional investors. Energy products are primarily traded on the New York Mercantile Exchange, which is registered with the Commission.

There is also significant trading in energy products in the OTC markets. As a general matter, the Commodity Futures Modernization Act of 2000 (CFMA) provided legal certainty for OTC trading in exempt commodities – such as energy products. In addition, the CFMA promoted the growth of electronic trading systems for these commodities. The level of Commission involvement in the OTC markets was tailored to the nature of the participants and commodities. The OTC markets in energy products are generally restricted to very large institutional investors. The CFMA authorized the Commission to investigate and prosecute fraud and manipulation in exempt commodity markets, with some limited exceptions. EnronOnline operated an electronic trading platform, which accounted for a sizable percentage of the OTC energy product market. It was not registered with the CFTC.

We are all well aware of the tragedies that occurred last fall surrounding the collapse of Enron. For instance, there have been numerous stories in the press regarding allegations of manipulations in energy markets. I would like to take a few minutes today to talk about these issues as they relate to the jurisdiction of the CFTC, and let you know what it is that we are doing to fulfill our obligations and responsibilities in these areas.

Currently, we are in the process of pursuing a comprehensive, detailed investigation of allegations raised by the Enron collapse, and we will aggressively continue such investigative efforts to detect and deter any illegal conduct in the markets we oversee.

Albert Einstein once said, “If you have seven days to solve a problem, spend six of them defining it.” From the beginning of the discussions on these energy issues, my position has been that we need to find the “facts” first, before proposing or supporting a “solution.” My position has not changed.

Allegations have been made that Enron and others manipulated the West Coast and California energy markets. These are serious allegations. Not only are they serious, they are jurisdictionally complex, potentially involving multiple regulatory authorities coordinating their differing jurisdictions. We are working actively with other authorities, cooperatively and aggressively, to pursue any and all allegations that are within our jurisdiction.

I have put the full resources of our Commission behind this investigation in order to make the appropriate determinations regarding whether or not illegal activity within our jurisdiction occurred. If indeed that proves to be the case, we will prosecute the wrongdoers to the fullest extent possible. I commit to keep you informed of our progress as we pursue this complex and wide-ranging investigation and I ask for your patience while we do so.

Looking beyond our energy investigations, I am happy to report that trading volumes show that the commodity futures and options markets continue to grow in their importance as providers of unique risk management tools and as a means of price discovery. Last year represented another record year for U.S. futures volume, up 60% over the prior year. Indeed, trading quadrupled over the last ten years. Remarkably, September 11^th had no sustained impact on volume, which was already surging by September. In fact, September volume was almost normal, even on the New York exchanges, which I attribute to the foresight, resourcefulness, and tenacity of everyone at the New York Board of Trade, the New York Mercantile Exchange, and the hundreds of firms trading there who got these markets back up and running even before the stock markets resumed trading.

I am also happy to report substantial progress by the Commission in implementing the Commodity Futures Modernization Act. A great deal of rule modernization work was accomplished last year to implement those provisions of the new law regarding exchanges and clearinghouses. But that was only the first step.

Security Futures:

I can now report that the Commission has adopted all final rules, including margin rules, necessary to permit domestic trading in security futures without further delay. I expect that the SEC will act on the margin rules very shortly. This has been a challenging process. Each agency has its own unique oversight tradition, applicable to the very different needs of the capital formation markets and the risk allocation markets under our respective jurisdictions. But I believe that the structure agreed upon, though perhaps not ideal from any single perspective, is fair and workable. I also believe that it faithfully adheres to Congress’ intent. I appreciate the guidance and assistance that this Committee and its staff provided and I am looking forward to completing the foreign participation aspect in the very near future. I hope that you share my great interest in seeing how and by whom these important new risk management products will be utilized.

Intermediaries Study:

Of course, permitting the trading of security futures was only one aspect of the CFMA. The CFMA also mandated a review of rules affecting futures commission merchants and other types of intermediaries that play such important roles in the futures markets. Although the events of last fall changed everyone’s priorities for a time, the Commission has completed its study of intermediary rules -- following months of soliciting public input through interviews, written comments, and a public meeting -- and submitted that study to Congress. We will soon host several roundtables on related issues and I look forward to working with this important segment of the futures industry to develop appropriate rule revisions and potential legislative recommendations.

September 11^th Responses:

In the wake of September 11^th, the Commission and other financial regulators were charged implementing important anti-money-laundering provisions of the Patriot Act. We have worked closely with the Treasury Department, other regulators, and the futures industry to fulfill this national responsibility. The Commission has already approved a rule on customer identification requirements that has been sent to Treasury for its joint approval. We are finalizing another rule on suspicious activity reports from futures commission merchants and introducing brokers, which we plan to share with Treasury later this week.

Implementing relevant provisions of the Patriot Act was just one of the challenges and new responsibilities that faced the Commission in the wake of the attacks. As you know, our New York Regional Office was located on the 37^th floor of 1 World Trade Center. Thankfully, all of our employees escaped without major physical injury. Using backup systems and with help from staff of the Chicago Regional Office and D.C. headquarters, we provided ongoing surveillance of the markets in the hours and days immediately following the attack. The Commission worked steadily to fully reestablish its permanent presence in New York City and earlier this year moved back into permanent space in Lower Manhattan from temporary quarters in Jersey City, New Jersey. The Commission and its staff are particularly appreciative and grateful for the assistance of Congress in securing the supplemental funding we needed to recover.

Two of the four largest commodity futures exchanges regulated by the CFTC were also based in Lower Manhattan: the New York Board of Trade and the New York Mercantile Exchange. Both were drastically impacted on September 11^th and trading did not resume on either exchange for several days. Other futures exchanges, in Chicago and elsewhere, were impacted by events in New York, particularly by the closing of the stock markets, and experienced temporary interruptions in trading.

But in its preparedness and by its responses to this unprecedented disaster, the futures industry demonstrated foresight, resilience, and determination. Steady leadership, thoughtful contingency plans, prudent investments in redundant facilities and backup systems, the ingenuity of technical staffs, and the courage and tenacity of everyone in the industry, made possible a remarkably fast and effective resumption of trading, restoring for the U.S. economy rapid access to risk management and price discovery tools uniquely provided by the futures industry. The Commission, in coordination with local authorities, other federal regulators within the President’s Working Group on Financial Markets, the Congress, and the White House, strove to assist the industry in restoring operation of these important markets. In order to memorialize the lessons learned and to spark discussion within the industry on how to better prepare for future disasters we hope never to face, the Commission completed a detailed report on both its own and the industry’s efforts to recover from the attacks.

Internal Challenges:

As busy as this Commission has been with our efforts to fully implement the CFMA, and with unforeseen challenges like September 11^th and Enron, we have also been hard at work transforming the CFTC into what I believe everyone will come to recognize as a more efficient, responsive, and effective oversight regulator that is well structured to properly oversee trading in the many innovative products and platforms that I believe will flourish under the CFMA. On July 1^st, we officially replaced the Division of Economic Analysis and the Division of Trading and Markets with the Division of Market Oversight and the Division of Clearing and Intermediary Oversight. We have also added a new Office of the Chief Economist. The Offices of Public Affairs and Legislative and Intergovernmental Affairs have been combined to form the new Office of External Affairs. Each new leadership position is now filled by an experienced professional.

However, we continue to face a serious challenge in attracting and retaining the type of highly skilled and experienced staff needed to operate effectively with our new regulatory mandate under the CFMA. With that mandate, the Commission is moving from the role of a front-line regulator to a more flexible oversight role. Some might believe that, in this new capacity, the agency will need fewer resources than in the past. Just the opposite is true. The CFMA has opened the way for innovation that is creating new financial products and new trading platforms and also permitting the clearing system to respond in kind. I believe we have seen only the beginning of this exciting process.

Although this growth and innovation in the marketplace promises to provide real benefits to market participants and the economy as a whole, it also places increasingly greater demands on the resources of the Commission because our primary responsibilities have not changed. With new exchanges and alternate trading platforms, there is no longer a “template” to follow; rather, oversight must be tailored to fit a variety of markets along a spectrum of regulatory classifications from basic fraud and manipulation protections to full oversight. To continue to fulfill our mission to promote markets that are free from congestion or manipulation and to protect market participants from fraud and abusive practices, we must have staff with the proper training and with solid experience in 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. Our turnover rate is more than twice the federal average. In most, if not all, cases the CFTC’s ability to compensate such highly skilled people lags not only far behind that of the private sector, but also well behind that of the other federal financial regulators, where turnover rates are significantly lower. Until recently, we were the only financial regulator still subject to the pay restrictions of Title V. While we are immensely grateful to the House and Senate for working so hard to successfully provide the Commission with a pay parity provision in the farm bill and we hope you will provide funding to fully implement this provision.

I thank you for the opportunity to testify today and will be happy to answer any questions you may have.

Remarks of Acting Chairman James E. Newsome at the FIA Conference in London

June 18, 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.

Which brings me to the subject of today's remarks: the CFTC's long tradition of responsiveness to innovation and growth in cross-border business. Global markets are not new to the Commission.

As many of you may be aware, Congress established the CFTC as an independent regulator for futures markets and related intermediaries at least partly in response to global developments beginning to be seen even then: the markets for grain futures and gold options and the emergence of futures markets in other global commodities such as cocoa, coffee, and foreign currency. From the outset, therefore, the CFTC's powers have reflected the reality that futures trading is a global business.

There were not many futures markets outside the United States in 1974. But this quickly changed in the 1980s as futures markets began to develop in many other nations, some of which entered into linked trading and clearing with CFTC-regulated domestic markets.

In 1982, the U.S. Congress, recognizing the growing participation by U.S. residents in foreign markets and the increased participation by residents of other countries on U.S. markets, expanded the CFTC's authority over the offer and sale of foreign futures in the U.S. and made it easier for the CFTC to work cooperatively with financial regulators overseas.

It must be noted, however, that, in granting the CFTC broader authority to protect U.S. customers trading in non-U.S. markets, Congress made clear that this authority was not to be used to impose the CFTC's own design on those overseas markets.

Congress expressly cautioned the CFTC that it should exercise its authority only while “taking into account the customs and practices of foreign boards of trade ... and recognizing that differences may exist between the practices of foreign boards of trade and their U.S. counterparts.”

Congress also made it clear that it did not intend for the CFTC either to use its authority to impose an approval process on the contracts or rules of foreign boards of trade or to issue any rule that would place the solicitation or acceptance of orders in the United States for bona fide foreign futures contracts at a comparative disadvantage with similar solicitation and acceptance of orders for domestic futures contracts.

Thus, long before the Internet challenged us to think about where exactly a particular market is located, the commercial nature and the global scope of the commodity futures markets challenged regulators to adapt themselves to markets with one or more key components either located outside the U.S. or dependant upon conditions in foreign markets.

Accordingly, the CFTC has worked earnestly toward developing cooperative oversight arrangements to permit, among other things, cross-border industry ventures (such as clearing through mutual offset and cross-access to linked markets) and reliance on foreign authorization processes (for such things as admitting brokers that sell certain offshore products to U.S. customers and permitting foreign terminals to be accessed from within the U.S.)

Each of these solutions to important industry developments required the CFTC to undertake effective cooperative partnerships with one or more foreign regulators. Much effort went into analyzing the harmonization of relevant laws, the amenability of certain activities to meaningful enforcement and dispute resolution capabilities in different jurisdictions, the accessibility of records, and the appropriate levels of information-sharing among regulators.

Not surprisingly, these arrangements were sometimes concluded only after difficult negotiations. The continuing success of future arrangements will depend on the willingness of the relevant regulators to continue to cooperate with one another. But the bridges that were built in the process have proved to be quite durable and have also produced unforeseen benefits, such as greater cooperative responsiveness to market problems that span jurisdictions, such as Barings and Sumitomo.

Today, almost 50 markets outside the U.S. report trading volume to the FIA. Large trader reports filed with the CFTC for March of this year revealed that 42% of the traders in agricultural commodities that were required to report and 38% of those in financial instruments were foreign based.

During the first three months of this year, approximately 200 of the largest U.S. FCMs held more than $7 billion in secured amounts in respect of foreign trades versus approximately $55 billion that they had segregated in respect of U.S. contracts.

Neither of the foregoing examples includes OTC transactions, in which global open interest currently exceeds $80 trillion. I expect these trends to continue, driven by the business needs of those who utilize the futures and options markets. For instance, the CFTC recognizes that as collective investment vehicles such as pension funds are permitted to invest in a broader range of asset classes, fund managers will have greater need of hedging tools that address their global, as well as domestic, risk exposures.

The CFTC's attentiveness to the needs of the market participant wanting to implement an effective cross-border trading strategy, or to assist its clients with all of their global portfolio needs, continues as strongly as ever today. In May, no-action relief was granted for three different broad-based index contracts traded on foreign exchanges to be offered and sold in the U.S. Just last week, no-action relief was granted for two more foreign contracts.

The U.S. Congress has also been attentive to the needs of those who rely on cross-border transactions to accomplish their business objectives. As it undertook a massive, and in my opinion much needed, overhaul of U.S. futures law, the Congress did not overlook the increasing globalization of this industry.

The landmark legislation that was signed into law in December, entitled the Commodity Futures Modernization Act or CFMA, provides legal certainty for over-the-counter derivative markets, deregulates the futures markets, and lifts the ban on single-stock futures. The Act also removes many of the prescriptive requirements that would have made harmonization across borders challenging to say the least.

Prompt implementation of the new Act is my highest priority. The CFMA, quite appropriately in my view, establishes deadlines for accomplishing numerous tasks, both individually and in cooperation with other federal financial regulators.

I welcome the challenge of working both individually and collectively with other regulators to carry out the intent of Congress. In fact, implementation efforts at the CFTC are well under way. Various rules intended to implement the Act have already been published for public comment.

For example, joint rules were recently proposed by the CFTC and the SEC, clarifying that futures on foreign broad-based indices, like those on domestic broad-based indices, will be under the sole jurisdiction of the CFTC.

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 out in the near future and I want to thank you in advance for your responsiveness and continued interest.

As for the CFTC's long tradition of cooperating productively with overseas authorities, Congress included in the CFMA a provision making clear that the CFTC is to continue this tradition of working with foreign authorities and international organizations to facilitate cross-border transactions through the removal or loosening of unnecessary legal or practical obstacles, to develop internationally accepted standards of best practice, and to enhance international supervisory cooperation.

I do not take this charge lightly, and will continue to pursue regulatory solutions that not only ensure that market integrity is maintained, but that also make sense for the business environment of the future by taking into account global partnerships, technological advancements, and international business innovations.

Remarks of Chairman James E. Newsome As Submitted to the 9th Asia-Pacific Derivatives Exhibition, Singapore

September 17, 2002

Thank you so much for the opportunity to be with you today. I would like to especially recognize my good friend Tom Kloet, whom I met shortly after arriving at the Commission just over five years ago. I have a great deal of respect for Tom, as he is someone that I know and trust. Today, I would like to share with you a few observations on the remarkable events of the past year and to update you on our current efforts at the CFTC.

As did each of you, I’m sure, I found myself thinking quite a bit last week about the friends and colleagues we lost in New York and Washington last year as a result of the horrific events of September 11, 2001. It also occurred to me again just how impressive the derivatives industry’s response to that unprecedented situation really was. As I’ve noted before, the remarkable resilience, ingenuity, and courage of leadership and staff at the New York futures exchanges enabled those markets to resume operations even before the stock markets reopened. That was a critically important accomplishment because, like many other derivatives markets, key New York futures markets are relied upon by businesses throughout the economy and across the globe for price discovery and risk management. I believe that having the key benchmark crude oil contracts already up and running, for example, contributed to the relative stability of the stock markets when they reopened.

This is really just one example of how the risk management tools and price discovery functions uniquely provided by derivatives markets can contribute to more stable financial markets. Innovation in risk management tools and strategies has continued at a rapid pace since passage of the Commodity Futures Modernization Act less than two years ago. That much-needed law permitted the development of a whole new class of derivatives, single stock futures that may benefit the risk management efforts of mutual fund managers, pension funds, and other stock investors. As Chairman Greenspan and other key commentators have noted, the increasingly widespread use of derivatives has made U.S. financial markets more resilient, mitigated the effect of exogenous shocks, and perhaps even enhanced economic growth and productivity.

I am very pleased to see these same benefits accruing for markets around the world, as advances in technology, the easing of exclusionary regulations and other artificial barriers are allowing access to risk management strategies by more and more markets. Today, almost fifty markets outside the U.S. report trading volume to the Futures Industry Association. Close to half of the traders in both agricultural products and financial futures are foreign based. During the first quarter of this year, the largest U.S. Futures Commission Merchants held almost $8 billion in secured funds in respect of foreign trades, an increasingly significant amount when compared to the approximately $50 billion held in respect of U.S. contracts. And that does not include OTC transactions, in which the gross market value of global activity reached almost $4 trillion by the end of last year, representing an annual growth rate of almost 25% from the year before.

As derivatives markets continue to grow in global importance, two tasks become ever more important for financial regulators in every jurisdiction: to provide flexible oversight that encourages innovation and efficiency among legitimate market participants and, at the same time, to vigorously prosecute those who threaten market integrity with attempts at fraud or manipulation.

Because I believe so strongly in the benefits provided by the derivatives markets, I was particularly alarmed by some of the allegations that emerged in the wake of Enron’s failure. Let me first say that I support each of President Bush’s initiatives on improving corporate disclosure and accountability, beginning with the important recommendations he made in March on enhancing disclosures and strengthening auditor independence to better protect investors, creditors, and counterparties. I was proud to have been selected to serve on the President’s Corporate Fraud Task Force. Let me also say that I commend Chairman Pitt for all that the SEC has done this year to address the problem of accounting fraud so that investors are not again harmed as they were by the long-hidden problems recently uncovered at Enron, WorldCom, and other companies.

To the extent that any of Enron’s derivatives activities, as opposed to its accounting practices, were alleged to have been improper, let me assure you that the Commission, in close cooperation with the Department of Justice and the Federal Energy Regulatory Commission, is continuing to investigate every such allegation. The CFTC has a long and proud record of effectively prosecuting various attempts at fraud and market manipulation. We have at our disposal both considerable statutory authority and extensive staff experience to fulfill our mission to protect market integrity and market participants.

These capabilities have been further enhanced by the Commission’s long tradition of working earnestly with regulators in other jurisdictions to develop cooperative oversight arrangements. These cooperative efforts require regulators to consider such things as the degree of harmonization among relevant laws, the amenability of different activities to meaningful enforcement, the dispute resolution capabilities of different jurisdictions, the accessibility of records, and the appropriate levels of information sharing among regulators. Such cooperation can allow regulators to successfully provide appropriate oversight to protect market integrity while also encouraging growth, innovation, and efficiency in cross-border ventures.

Cooperation is a very high priority for me. The Commission’s concern for the business necessities of market participants that hope to implement effective cross-border trading strategies or are trying to assist their clients with global portfolio needs is as strong today as ever. The United States Congress included in the Commodity Futures Modernization Act a provision making clear its intent that the Commission is to continue its tradition of working with foreign authorities and international organizations in order to encourage cross-border transactions, remove unnecessary legal obstacles, develop internationally accepted standards of best practice, enhance supervisory cooperation, and encourage continued improvement in information-sharing arrangements. As an example of our efforts in this regard, the Commission in January, having determined to rely upon the appropriateness of the relevant foreign regulatory regime, issued its first order permitting a foreign clearinghouse to clear and settle trades by U.S. persons on a foreign platform. This follows the spirit of an existing CFTC program, under which foreign persons may solicit U.S. persons for foreign futures and options without having to register with the Commission, so long as they are subject to a comparable regulatory regime. As with every aspect of the CFMA, I expect to continue to closely follow the intent of Congress.

Indeed, the Commission has strived mightily over the past twenty months to follow Congress’ intent that the CFMA be implemented promptly so that market participants would enjoy rapid access to innovative new products like single-stock futures. I could not be more pleased with our efforts, which most recently have culminated with final joint CFTC and SEC rules for domestic trading of security futures becoming effective just last Friday. I am excited to see how and by whom these new risk management tools will be utilized and look forward to working with the SEC and others on greater foreign access to these products.

I am also excited about another effort currently underway at the Commission to look into providing to clearinghouses and intermediary firms the type of beneficial rule modernizations that the Commission was able to provide to exchanges last year. We kicked off this effort over the summer by delivering a comprehensive report to Congress on intermediaries, conducting an open meeting of the Commission on this topic, and by hosting an industry roundtable. However, we have plenty of work ahead of us in this important endeavor, including more roundtables this fall to discuss such things as fungibility and common clearing. As always, your thoughts and input during this process will be invaluable and greatly appreciated.

These are some of the Commission’s current interests. I would like to express my sincere appreciation for the invitation to address you today and want to extend an offer to all of you to come visit us in the United States. Thank you for your time and attention.

Remarks of Chairman James E. Newsome before the Friends of Finance Executive Speaker Series, The University of Tulsa

October 10, 2002

Thank you, Mr. Hobbs, for that introduction. I could not be more pleased to have been invited here today. These are both challenging and exciting times in the derivatives industry and I am honored to be at the Commodity Futures Trading Commission at this point in the history of the financial markets. I would like to visit with you today about some of the things happening in these dynamic markets as well the role I see for the Commission.

Let me begin by confessing that I first accepted a position as a CFTC Commissioner in 1998 with more than a little trepidation. My own educational background is in animal science and agricultural economics and much of my experience before coming to the Commission was in the cattle industry. While futures and options on agricultural commodities were then, and still are, being traded as actively as ever, their volume has been dwarfed in comparison to the huge trading volumes in interest rates, stock indices, and currencies. When I was confirmed at the Commission, financial instruments comprised almost two-thirds of contracts traded, while ag contracts made up 15%. Last year, the financials increased to 70% of volume, ag volume was 12%, and energy and metals contracts primarily made up the remainder.

None of which is to say that ag markets do not continue to play a critically important role in the U.S. economy. Instead, other sectors of the economy are now benefiting from many of the strategies and techniques pioneered by producers, distributors, and users of agricultural commodities. While the stock markets provide an effective means of capital formation, the commodity futures and option markets provide investors and firms in virtually every sector of the economy with the means to manage exposure to price risks. Manufacturers can use futures contracts to fix their raw material costs. Exporters can reduce uncertainty over the price they’ll receive for finished goods overseas and investors can hedge against market volatility. This year futures and option volume has increased over 30% and is on pace to exceed one billion contracts. This increase in demand indicates the need for risk management tools, and, I believe, a greater understanding and comfort with the use of futures and option contracts as those tools.

However, the importance of the price discovery role played by many futures markets should not be understated. This is particularly true in many agricultural markets but also holds in other sectors, including many energy markets and can have great significance. For example, I believe the fact that the New York Mercantile Exchange was able to get its benchmark crude oil markets back on line very quickly and demonstrate stability in the energy markets following the terrorist attacks contributed significantly to the relative stability of the stock markets when they subsequently resumed trading.

As I came to the Commission, it wasn’t just new types of underlying commodities that I saw coming rapidly to the futures markets, but also new platforms and trading technologies. While open outcry trading in Chicago and New York continues to be an important component of trading activity, I could see that electronic trading was growing at a tremendous pace. This and other market changes were beginning to bring new participants to the marketplace, increase efficiency and liquidity, enhance customer service, and even lower many economic barriers to effective cross-border activity.

Yet it also quickly became apparent to me that certain aspects of the regulatory regime were not facilitating this process, were even stifling innovation and progress. Fortunately, help was soon to be on the way in the form of the Commodity Futures Modernization Act that was signed into law in December 2000.

I should say at this point that I have a relatively simple regulatory philosophy that can really be boiled down to two principles: For the legitimate efforts of market participants who through innovation and fair competition bring to the marketplace greater liquidity, more useful risk management tools, better use of technology, more efficient pricing, and enhanced customer service, I believe in providing the most flexible and responsive regulatory regime possible. For those who attempt fraud or manipulation in our marketplaces, however, I can promise prompt investigations and aggressive exercise of our broad authority under the Commodity Exchange Act.

As to rules, I do not subscribe to the idea of regulation for regulation's sake alone. The temptation to resort to prescriptive regulations that take a static view of markets and technology has traditionally been hard to resist for some regulators. But I believe the key to success for an oversight agency such as ours that is witnessing great 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 afforded the Commission the opportunity to do so, with principles-based rules that provide for varying levels of sophistication among market participants and differences in the nature of the contracts being traded, that take into consideration the costs as well as benefits of compliance, that allow business to be conducted without unnecessary restrictions, that reflect a common sense approach to regulation, and are they type of rules that are most often best able to achieve public policy goals.

I believe that Congress exhibited vision and determination in passing the CFMA, a landmark piece of legislation that is responsive to market changes. Its passage represented tremendous progress. The alternative to prescriptive regulations is a rational set of principles and I believe that the CFMA’s principles-based approach could not have come at a better time. The new oversight approach called for by the CFMA empowers the Commission to 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. Market innovations that provide real value for participants and customers are now free to develop as quickly as technology permits and customer demand requires.

The CFTC has worked hard to implement the new Act. In the twenty months since passage of the CFMA, the Commission has succeeded in modernizing the rules governing exchanges and other trading platforms. We have also succeeded in developing joint rules with the Securities and Exchange Commission to permit the trading of futures on single stocks and narrow-based stock indices, contracts that were denied to market participants for almost twenty years prior to the CFMA. I am excited about the upcoming launch of trading in these important new risk management tools and curious to see how and by whom they will be utilized.

The CFMA provided for far more than just single-stock futures and rule modernization for exchanges. The Act’s full implementation remains my highest priority as we continue working on such things as rule modernization for intermediaries and foreign as well as domestic security futures.

With respect to the situation in the energy markets, let me begin by giving you an overview of the Commission’s mission and how we pursue it. The Commission perceives its mission to be twofold: to foster competitive and financially sound markets, and, to protect market users and the public from fraud, manipulation, and abusive practices. In seeking to fulfill that mission, the Commission focuses on issues of market integrity. We seek to protect the economic integrity of the markets so that they may operate free from manipulation. We seek to protect the financial integrity of the markets so that the insolvency of a single participant does not become a systemic problem affecting other market participants. We seek to protect the operational integrity of the markets so that transactions are executed fairly, proper disclosures are made to existing and prospective customers.

The CFTC is an enforcement agency with almost half our staff working in the Enforcement Division. If any indication of fraud or manipulation is found, the Commission will investigate and prosecute violations of the Commodity Exchange Act or our regulations. We have available a variety of administrative sanctions, such as bans on future trading, civil monetary penalties, and restitution orders. The Commission may seek federal court injunctions, asset freezes, and disgorgement orders. If evidence of criminal activity is found, matters can and will be referred to state authorities or the Justice Department for violations of criminal statutes, such as mail fraud, wire fraud, and conspiracy. Typically, the Commission has over a hundred investigations open at any particular time. Over the years, the Commission has brought numerous enforcement actions and imposed sanctions for attempts to manipulate prices. The Sumitomo copper case and Hunt brothers silver case are well-known examples.

The Commission oversees the on-exchange trading of energy-related futures and option 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 energy transactions are executed on New York Mercantile Exchange. The CFTC does not regulate the trading of energy products on the cash or forward markets, which are excluded from our jurisdiction under the Commodity Exchange Act. Additionally, while the Commission does not have regulatory oversight responsibility for over-the-counter energy markets, we do have anti-fraud and anti-manipulation authority.

The rapid financial deterioration of Enron last year presented a concern about the markets: Could on-exchange futures markets be protected from price volatility or reduced liquidity if large positions were suddenly unwound? Enron was but one of many participants in what are very large and liquid markets and when its financial difficulties became known, 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. The difficulties of any large market participant also raise concerns about the ability of intermediaries carrying that trader’s positions to successfully manage those positions if the trader fails to meet margin calls. The Commission worked closely with the NYMEX clearinghouse last fall to ensure that the winding down of certain large positions was accomplished quickly and smoothly. I believe that this episode was a success for the system of financial controls at the exchanges. There were no disruptions to the system of clearance and settlement. Each trader met its obligations. No customer lost funds entrusted to any intermediary.

In 1999, the President’s Working Group on Financial Markets released a report entitled “Over-the-Counter Derivatives and the Commodity Exchange Act.” This 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 CFMA.

I have testified before Congress several times on the Enron situation. The Commission has opened investigations into certain alleged events in the energy markets and these investigations are ongoing. We have worked closely during this process with the Federal Energy Regulatory Commission, the SEC, and the Justice Department. In addition to leading to formal action against wrongdoers, these investigations may reveal facts that cause us to revisit our rules or even to suggest legislative changes. Until such time, however, I believe that the prudent and proper course is to focus on the investigations and work to determine the factual evidence. Only then can I make responsible recommendations to Congress regarding potential changes in regulations for OTC energy markets. In the meantime, we have recently approved the clearing of OTC energy contracts to facilitate credit stability. You will hear more with regard to our investigations in the weeks to come.

The last twelve months have been quite eventful, however, for everyone in the financial sector. More than at perhaps any other time in its history, the Commission has been involved in joint efforts with other financial regulators. Recently, I was asked to participate on the President’s Corporate Fraud Task Force, which is an effort among independent agencies, U.S. Attorney offices, and the Justice Department to coordinate investigations and enforcement activities. Earlier this year, as one of the four members of the President’s Working Group on Financial Markets, I had the opportunity to work 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. I applaud the President for issuing his “Ten-Point Plan to Improve Corporate Responsibility and Protect America’s Shareholders.” The President’s important recommendations on enhancing disclosures by publicly-held companies and strengthening auditor independence should provide valuable protections for investors, creditors, and counterparties.

The Commission has also been actively involved in cooperative efforts, particularly with the Treasury Department, to implement the anti-money laundering provisions of the Patriot Act, and in doing so have strived to put into place practical, workable, and effective measures. In an era where financial regulators must now be concerned not only with marketplace misbehavior by domestic participants but also with attempts by external enemies to use our markets to fund or conceal their activities, and where we must watch not only for wrongdoing in the trading pit but also in the boardroom, such joint efforts in law enforcement are regrettably very necessary and the CFTC will cooperate fully in them.

In conclusion, as you can see, the Commission has been very busy. As we move forward to address problem areas from a policy perspective, we must do so in a well reasoned, methodical fashion using only factual information. Markets have been damaged and investors and customers injured. As regulators, we must address real market deficiencies and not perceived problems, we must avoid overly broad regulations that could potentially do more harm than good.

Remarks of Chairman James E. Newsome before the Electric Power Supply Association, Washington, DC

October 23, 2002

Thank you, Mike, for that introduction. I was pleased to be invited here today. These are both challenging and exciting times for the derivatives markets and I am honored to be at the Commodity Futures Trading Commission at this point in history. I would like to share with you today some of the things I have noted about the marketplace and the role I see for the CFTC.

Derivatives generally continue to grow in their contributions and importance to the U.S. and global economy. Futures and option volume has increased over 30% this year and is on pace to exceed one billion contracts. This increase in demand indicates the need for risk management tools, and, I believe, a greater understanding and comfort with the use of futures and option contracts as those tools. Swaps volume has also grown tremendously, up a hundred-fold since 1987, with gross notional values of over $100 trillion. I agree with Chairman Greenspan’s observations that growth in the derivatives markets has contributed to a more flexible and efficient financial system and that derivatives can propel growth, increase resilience, and maintain stability.

When I came to the Commission four years ago, I saw new platforms and trading technologies coming rapidly to the futures markets and I could see that electronic trading was growing at a tremendous pace. These changes were beginning to bring new participants to the marketplace, increase efficiency and liquidity, enhance customer service, and even lower many economic barriers to effective cross-border activity. Yet it also quickly became apparent to me that certain aspects of the regulatory regime were not facilitating this process, and were even stifling innovation and progress. Fortunately, help was soon to be on the way in the form of the Commodity Futures Modernization Act.

I should say at this point that I have a relatively simple regulatory philosophy that can be boiled down to two principles. For the legitimate efforts of market participants who through innovation and fair competition bring to the marketplace greater liquidity, more useful risk management tools, better use of technology, more efficient pricing, and enhanced customer service, believe in providing the most flexible and responsive regulatory regime possible. For those who choose not to play by the rules and who attempt fraud or manipulation, however, I can promise prompt investigations and aggressive exercise of our authority under the Commodity Exchange Act. The derivatives markets are too important to the countless investors, producers, distributors, and users of commodities that rely upon these markets for their risk management needs -- certainly, too important for the growth and stability of the economy as a whole -- to tolerate misbehavior that threatens the efficiency and reliability of these markets or that undermines trust in their integrity.

As to rules, I do not subscribe to the idea of regulation for regulation's sake alone. The temptation to resort to prescriptive regulations that take a static view of markets and technology has traditionally been hard to resist for some regulators. But I believe the key to success for an oversight agency such as ours that is witnessing great 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 afforded the Commission the opportunity to do so through its targeted flexibility.

Specifically, the Act instituted principles-based rules that allow rules to be tailored to the sophistication of market participants, the nature of the contracts being traded, and the manner in which they are traded. This framework appropriately takes into consideration the costs and benefits of compliance, allows business to be conducted without unnecessary restrictions, and reflects a common sense approach to regulatory oversight. I believe that Congress exhibited vision and determination in passing the CFMA, a landmark piece of legislation that is responsive to market changes. Its passage represented tremendous progress, progress that was both necessary and timely.

The new oversight approach called for by the CFMA empowers the Commission to accomplish important public policy goals, without stifling innovation driven by new technologies and the evolving needs of market participants. Innovations that provide real value for participants can now develop as quickly as technology permits.

The CFTC has worked hard to implement the new Act. Since passage of the CFMA, the Commission has successfully modernized the rules for exchanges and other trading platforms. We have also succeeded in developing joint rules with the SEC to permit the trading of futures on single stocks and narrow-based stock indices, contracts that were prohibited for almost twenty years prior to the CFMA. I am excited about the upcoming launch of trading in these new risk management tools and curious to see how and by whom they will be utilized.

However, the CFMA provided for far more than just single-stock futures and rule modernization for exchanges. The Act’s full implementation remains my highest priority as we continue working on such things as rule modernization for intermediaries and foreign as well as domestic security futures.

Events in the energy markets have presented the Commission with a number of challenges. First, as the financial condition of Enron rapidly deteriorated last year, there was immediate concern over whether the futures exchanges could be protected from price volatility or reduced liquidity if large positions had to be suddenly unwound. Although Enron was a large participant, it turned out that these large and liquid markets were able to cope well with the situation. The markets for energy-related futures were not roiled and prices did not spike nor did liquidity dry up.

The difficulties of any large market participant also raise concerns about the ability of intermediaries carrying that trader’s positions to successfully manage those positions if the trader fails to meet margin calls. The Commission worked closely with the clearinghouse to ensure that the winding down of certain large positions was accomplished quickly and smoothly. I believe that this episode was a success for the system of financial controls in place. There were no disruptions to the system of clearance and settlement. Each trader met its obligations. No customer lost funds entrusted to any intermediary.

Once the winding down of on-exchange positions had been successfully accomplished, the focus of many commentators turned to the issue of off-exchange oversight. In 1999, the President’s Working Group on Financial Markets released a report entitled “Over-the-Counter Derivatives and the Commodity Exchange Act.” This report recommended changes to the Commodity Exchange Act to, among other things, create legal certainty for off-exchange derivatives transactions. Congress codified many of these recommendations in the CFMA, which was signed into law in December 2000, but certain provisions of the new law drew new attention as the problems at Enron emerged.

I have been called to testify before the Congress several times on the Enron situation. We have also monitored -- and been asked to provide technical expertise on -- proposed legislative changes. However, because the Commission has opened investigations into certain alleged events in the energy markets which may reveal facts that cause us to revisit our rules or suggest legislative changes, I believe the proper course is to focus on those investigations. Only when the facts are determined can I responsibly consider offering any recommendations to Congress regarding potential changes in regulations for OTC energy markets.

Although I am keenly aware of the challenges facing users of OTC risk management tools, I would like to note some of the positive changes I have seen in the energy derivatives markets. Earlier this year, the Commission approved the clearing of a number of OTC energy contracts by a regulated clearinghouse, which may help to mitigate credit and counterparty risk concerns, and even enhance the credibility of these markets. I have also noted EPSA’s initiative in adopting a new code of ethics. I understand compliance with this code, along with annual certifications, is now a condition of membership. You are to be commended for this effort.

There are other indications of movement toward incorporating codes of conduct in transaction documents, improving systems to better detect wash trades, and establishing dedicated compliance functions. I applaud such initiatives and encourage all market participants, especially system providers, to continue to pursue these and other efforts to restore confidence in the use of risk management mechanisms in the energy sector. I believe that market responses, coupled with appropriate regulatory responses arrived at only after careful consideration of the facts, are critical to restore confidence in the marketplace.

The last twelve months have been quite eventful for everyone in the financial sector. More than at perhaps any other time in its history, the Commission has been involved in joint efforts with other regulators. Earlier this year, as one of the four members of the President’s Working Group on Financial Markets, I had the opportunity to work with Secretary O’Neill, Chairman Greenspan, and Chairman Pitt to review for President Bush possible improvements in accounting, auditing, and disclosure practices with respect to publicly-held companies. I applaud the President for issuing his “Ten-Point Plan to Improve Corporate Responsibility and Protect America’s Shareholders.” These important recommendations on enhancing disclosures by publicly-held companies and strengthening auditor independence should provide valuable protections for investors, creditors, and counterparties.

The Commission has also been actively involved in cooperative efforts to implement the anti-money laundering provisions of the Patriot Act, and in doing so have strived to put in place practical, workable, and effective measures. Recently, I was asked to participate on the President’s Corporate Fraud Task Force. In an era where regulators must now be concerned not only with misbehavior by domestic market participants, but also with attempts by external enemies to use our markets to fund or conceal their activities, and where we must watch not only for wrongdoing in the trading pit but also in the boardroom, such joint efforts in law enforcement are regrettably very necessary and the CFTC is cooperating fully in them.

As we move forward to address policy concerns, we must do so in a well reasoned, methodical fashion and rely on verified facts, not conjecture or speculation. Markets have been damaged and market participants injured or disadvantaged. As regulators, we must address real market deficiencies and not perceived problems and we must avoid overly broad regulations that could potentially do more harm than good.

Remarks of Chairman James E. Newsome before the CFTC-FERC Technical Conference on Credit Issues and Potential Solutions in Energy Markets, Washington, DC

February 5, 2003

On behalf of the Commodity Futures Trading Commission, I am pleased to welcome you to this joint conference on potential solutions to credit issues in energy markets. I would like to thank my colleague at the Federal Energy Regulatory Commission, Pat Wood, and his fellow Commissioners for the invitation to co-host this important conference and for extending such a warm welcome to my fellow CFTC Commissioners, Barbara Holum, Walt Lukken, and Sharon Brown-Hruska.

The CFTC’s mission is twofold: (1) to foster competitive and financially sound futures markets; and (2) to protect market users and the public from fraud, manipulation, and abusive practices. The CFTC strives to protect the integrity of the commodity futures and options markets in three respects. First is the economic integrity of the markets, so that they may operate free from manipulation and serve their important role as risk management mechanisms and as means of price discovery. Second, is the operational integrity of our markets so that transactions are executed fairly and proper disclosures are made to customers. And, third but certainly not last, is the financial integrity of the markets, so that the insolvency of a single participant does not become a systemic problem. On the front lines in defense against such problems are the futures clearinghouses and the clearing members of the futures exchanges. By serving as a centralized counterparty the clearinghouse serves an invaluable role in mitigating credit risks for market participants.

The CFTC is in the midst of implementing a new regulatory framework for the oversight of futures clearinghouses, pursuant to the Commodity Futures Modernization Act, which became law in December 2000. Among other changes to traditional futures law, the Commodity Exchange Act now permits a derivatives clearing organization to clear both on-exchange and OTC contracts. This important change followed a recommendation by the President’s Working Group on Financial Markets – which consists of the Treasury Secretary and the Chairmen of the Fed, SEC, and CFTC – that legislation be considered in the area of clearing systems for OTC derivatives. The PWG noted that the clearing of OTC derivatives had “the potential to reduce counterparty risks ... through risk management techniques [such as] mutualizing risks, facilitating offset, and netting.” The PWG found that OTC clearing systems could serve “a valuable function in reducing systemic risk by preventing the failure of a single market participant from having a disproportionate effect on the overall market.”

I am keenly aware of the challenges facing those who desire to use OTC energy derivatives for their risk management needs, including the challenging issue of counterparty credit risk. Thus, I am very interested in hearing what today’s panelists have to say about the potential benefits of – as well as challenges raised by – the clearing of OTC energy derivatives. As part of today’s discussion, CFTC staff will provide an overview of how we regulate DCOs and their clearing processes. Jane Kang Thorpe, Director of the Division of Clearing and Intermediary Oversight, will moderate panel discussions on clearing services and providers. I look forward to what is sure to be a productive program.

Address by Chairman James E. Newsome before the 28th Annual International Futures Industry Conference, Boca Raton, Florida

March 13, 2003

Thank you for that kind introduction. It is an honor to again address this distinguished group. Quite a bit has happened in the industry since I spoke here last year and there have been significant changes within the Commission as well. Commissioner Tom Erickson took the reins at the new Washington office of an important agricultural market participant and we welcomed two new Commissioners, Walt Lukken and Sharon Brown Hruska, who bring impressive skills and abilities. In fact, I am excited about the expanded roles that I have asked my fellow Commissioners to undertake as we move forward, in addition to their traditional roles.

Commissioner Barbara Holum chairs our Global Markets Advisory Committee and will soon be holding a Committee meeting to continue discussions on various issues, including the Commission’s policy on foreign exchanges doing business in the U.S. Commissioner Sharon Brown-Hruska will be lending much-needed assistance in monitoring and evaluating legislative proposals and issues that relate to the energy markets. Commissioner Walt Lukken has agreed to take a lead role in working with the Securities and Exchange Commission to complete our full implementation of the Commodity Futures Modernization Act. The insights that Walt gained through his involvement in that landmark legislation while he was on the Hill will be invaluable to this important effort.

Today, I would like to mention some of the most recent things we’ve done in the area of rule modernization, particularly some changes that will affect intermediaries. Additionally, I’d like to talk a bit about security futures, our ongoing enforcement efforts, particularly in the energy sector, and mention one or two other issues that may be of interest.

Rule Modernization for Intermediaries

Let me begin by expressing how pleased I am to be able to announce that a number of key rule modernization proposals have been approved by the Commission for publication in the Federal Register. Some of these initiatives represent solutions to challenging issues that have been outstanding for years. They involve changes to CFTC rules affecting not only FCMs, commodity pool operators, and commodity trading advisors, but also mutual funds, insurance companies, and banks.

Last year, the Commission held a very productive roundtable discussion with market participants to discuss rule modernization for intermediaries. We now have a variety of proposals that I believe are responsive to concerns expressed at the roundtable. For example, we have proposed substantial changes to our rules on bunched orders. These changes will simplify the process, increase its availability, and clarify the respective responsibilities of FCMs and account managers. All customers and a greater number of account managers would be eligible, potentially confusing and overly burdensome certification requirements would be removed, and the revised recordkeeping requirements would make clear that the account managers will be held responsible for the fairness of allocations.

Another area in which CFTC requirements have long needed modernization was the restriction on an FCM’s ability to hold customer funds in offshore locations or in foreign currencies. This unnecessarily impeded firms in their pursuit of overseas customers who want to trade on U.S. markets. Staff worked very hard to come up with a solution, one that I was pleased to see adopted recently by the Commission as a final rule. I have long been an advocate of lowering unnecessary barriers to cross-border transactions and I believe this new rule does just that while continuing to ensure the protection of customer funds in the event of an insolvency.

Registered commodity pool operators will also find relevant rule modernizations in the Federal Register, such as our proposals to reduce duplicative disclosure and financial reporting requirements among master/feeder funds and to permit electronic distribution of account statements. For registered commodity trading advisors, we are proposing to modernize the rules governing the disclosure of past performance data. In fact, we have also requested comment on whether a regulatory core principle may be appropriate in lieu of specific rules. As some of you know, this subject is one with which the Commission struggled for many years and I am grateful both to our staff who have worked so hard on this proposal and to the market participants who have been generous with their insights and patience.

The CFTC has for some time provided a more flexible set of requirements for operators and advisors of pools that limit participation to sophisticated persons. We are now proposing to provide a new exemption for operators and advisors of pools that limit participation to highly sophisticated persons. And we are proposing that the operator or advisor of a pool that permits participation by persons who may not meet quite as high a standard of sophistication, but that limits its futures activity to a de minimus level, should also be eligible for an exemption. We are seeking comment on the appropriate level of investor sophistication and de minimus activity. Such exemptions may encourage greater use of futures by entities that have been reluctant to do so under rules where registration requirements could be triggered by a single futures contract.

Finally, we are proposing to lift the restrictions on the ability of otherwise-regulated institutions - such as banks, mutual funds, and insurance companies - to make greater use of futures. These institutions may have substantial risk management needs. The futures markets, now more than ever, offer tools to meet those needs. Because such entities are regulated by other authorities, they may not need to be constrained in their use of those risk management tools or to be required to subject themselves to additional regulation in order to do so.

More Effective Oversight

Rule modernization is not the only change on the horizon. We are also looking at how we approach our oversight responsibilities with an eye toward making improvements wherever they promise increased effectiveness and better use of taxpayer resources. We announced last month that we have authorized the National Futures Association to review annual financial reports filed by CPOs. We have been pleased with successful delegations to NFA of other functions. The latest will not only improves efficiency but also provide our staff with prompt electronic access to information that can puts them into an even better position to effectively oversee compliance.

Another change in our approach to oversight holds particular promise in my view. Risk-based auditing has been very successful for banking regulators and is now well accepted by the financial institutions themselves. Under a fully-implemented risk-based auditing approach, Commission staff will focus their resources on those areas that can pose the greatest risks to the safety of customer funds or the financial integrity of the FCMs. This move from a strictly compliance-based audit approach to a risk-based approach can better focus the resources of both the Commission and the self-regulatory organizations for maximum effectiveness. We recently initiated the first such examinations and the process appears to be working very smoothly so far.

The ability of the Commission to work productively with, and confidently rely upon, this industry’s self-regulatory organizations has been integral to the success of these markets. And successful they certainly have been, as futures trading volumes once again shattered records last year, serving the needs of businesses and investors throughout the economy. I remain optimistic that, even as the structure of the industry changes with developments such as demutualization and increasing competition, the Commission will continue to be able to work with market participants to ensure that the principles of objectivity, confidentiality, and consistency prevail and that the self-regulatory system can be protected from misuse or neglect.

Enforcement Matters

There is a major aspect of our regulatory approach that will not be changing. I remain firmly committed to bringing our investigative and enforcement capabilities fully to bear on those who would attempt to compromise the integrity, efficiency, or reliability of the futures markets. That determination, on the part of everyone at the CFTC, has only been strengthened by recent events.

In December, the Commission ordered a $5 million civil monetary penalty against Dynegy and West Coast Power in connection with false reporting and attempted manipulation. Our Division of Enforcement is actively engaged in other investigations in the energy sector and some will undoubtedly result in further charges, such as those announced yesterday against Enron. In the course of these investigations, we have cooperated with the Federal Energy Regulatory Commission, the SEC, and the Justice Department, and will continue to do so. The cases are complex and require substantial time and resources to develop, but it is my firm goal to identify the wrongdoers, and, just as importantly, to exonerate those not involved, as expeditiously as possible so that these markets can work toward restoring the confidence of market participants.

As I have stated before, our effort to modernize rules to allow greater flexibility and innovation in legitimate business endeavors goes hand-in-hand with our determination to use strong enforcement as a deterrent to unethical and illegal activities. My confidence in our ability to continue to effectively police against wrongdoing in our marketplaces -- even as those marketplaces evolve with new technologies, new products and players, and a new and less prescriptive regulatory framework -- is based on a successful track record. A good example is what we have accomplished recently with regard to illegal foreign currency operations. In less than two years, our enforcement team has initiated more than two dozen formal actions.

Energy Conference

On a more positive note, I want to point out that investigations and enforcement cases are not the only ways in which we are cooperating with other federal regulators. A couple of weeks ago, we jointly hosted with the Federal Energy Regulatory Commission a conference to discuss possible solutions to credit risk problems in the energy sector. Because I am keenly aware of the challenges facing those who need the risk management tools offered by OTC energy derivatives, I was very interested in hearing what the panelists had to say. As a follow-up to some of the things we heard at that conference, Chairman Wood and I have written jointly to appropriate House and Senate committees to express our support for previously proposed amendments to certain portions of the bankruptcy code. These changes could alleviate credit risk concerns in energy markets by ensuring the enforceability of acceleration and netting clauses and other contractual safeguards in the event of counterparty’s insolvency.

Clearing and Market Structure

Let me take a moment to address a topic that is of great interest to many of you; that is, certain issues related to the traditional structure of the futures industry in terms of execution, settlement, and clearing functions. I recognize that some of the most well-respected people in this business hold very different views about the optimal industry structure. I also recognize that any decisions reached in this regard could have profound economic consequences within the industry. At this stage, I would continue to point out that the Congress, the President’s Working Group, market participants, and we at the Commission have worked hard to clarify the types of situations in which the CFTC should take a lead role or proactive stance, and those in which it should not. My own view remains that the issue of how best to structure institutions and relationships in the marketplace is fundamentally a business decision. Ideally, disagreements over such decisions should be resolved by those in the market because, I believe, that will result in far better outcomes than could be imposed by a regulator or a court. I am grateful for the cooperative spirit expressed by the market participants that have met several times thus far and am encouraged by those who have agreed to meet again to discuss technical issues surrounding this debate. The results of that discussion might help to inform the Commission should it decide to hold a hearing at some future date as we continue to define our role in the debate.

Security Futures

Let me finish my remarks today by noting that a great many people deserve praise for their tireless efforts to bring about the launch of trading in domestic security futures last year, including key CFTC staff and many of the market participants here today. But that achievement was by no means the end of our efforts. Chairman Donaldson and I enjoyed a very productive meeting last week and I look forward to working with him as our two agencies cooperate to resolve some issues that are still outstanding, such as how we handle foreign access. Last week, our staff exchanged comments on an inter-agency agreement to coordinate our respective oversight responsibilities in a manner consistent with Congress’ mandate under the CFMA that we avoid placing unnecessary and duplicative regulatory burdens on dual registrants.

I recently visited both OneChicago and NasdaqLiffe to view firsthand their operations and to discuss any areas of regulatory concern. Not surprisingly, I am sometimes asked for my views on the growth thus far in trading activity. Prior to last year’s launch, I refrained from making forecasts of how popular these products would be because I felt that it was my role as a regulator to make sure that success would not be decided by regulators but by market participants in a marketplace made as free as possible from unnecessary, duplicative, or unduly restrictive regulations. Having said that, I would point out that other products in our markets have faced some initial skepticism and yet turned out to be quite successful. While I recognize that it may not be exactly an apples-to-apples comparison, I would note, for example, that average monthly volumes in the each of security futures offered by OneChicago and NasdaqLiffe on Microsoft have, during the first four months, exceeded the volumes in the T-bond, Eurodollar, and crude oil contracts during corresponding periods when they were introduced. And the total volume of security futures trading at each exchange has been significantly greater than the volume of stock option trading during the corresponding launch months on the Chicago Board Options Exchange.

Thank you for allowing me to update you on our efforts at the CFTC .