Address by Commissioner James E. Newsome before the Committee on Agriculture, U.S. House of Representatives 

November 6, 2003

Thank you Chairman Goodlatte and members of the Committee. I appreciate the opportunity to testify before you today on behalf of the Commission regarding the application filed by U.S. Futures Exchange, L.L.C. (“U.S. Futures Exchange” or “Exchange”) to become a designated contract market, which is commonly referred to as a futures exchange.

As you know, through the Commodity Futures Modernization Act of 2000 (“CFMA”), Congress profoundly altered the manner in which derivatives markets are regulated in the United States by replacing the one-size-fits-all prescriptive rules of the past with broad core principles aimed at promoting responsible innovation and fair competition among exchanges and other market participants. This is an exciting time for the futures business. Due to a number of factors, the industry that we regulate has grown significantly over the past few years. We believe that a primary contributing factor is the modernized regulatory structure established by Congress in the CFMA. This new, flexible approach to regulation has encouraged innovation and the use of cutting-edge technology, and has allowed market participants to implement business plans with much greater ease. It has also resulted in an unprecedented number of new entrants into the marketplace. Since December 2000, when the CFMA was signed into law, the Commodity Futures Trading Commission (“CFTC” or “Commission”) has designated four new exchanges as contract markets and has received three additional applications, including the application filed by U.S. Futures Exchange. Throughout this time the CFTC has been committed to providing a level regulatory playing field for all existing and potential market participants, while being vigilant in its mission to foster markets free of fraud and manipulation, and it will evaluate U.S. Futures Exchange’s application accordingly.

To put things into context, I would first like to outline the legal requirements for contract market designation set forth in the Commodity Exchange Act (“Act”), as amended by the CFMA, and in the Commission’s regulations. I will also outline the substance of U.S. Futures Exchange’s application, including a description of its proposed clearing plans and how it intends to fulfill its self-regulatory responsibilities, and describe the process by which the Commission is evaluating the application. Finally, because questions have been raised concerning the Commission’s authority to address activity occurring abroad that may relate to the Exchange’s operations, I will comment on the Commission’s authority to reach extraterritorial conduct.

Legal Requirements for Contract Market Designation

To become a designated contract market (“DCM”), an applicant must demonstrate to the Commission that it will comply with the conditions set forth in the Act, which consist of eight designation criteria and eighteen core principles, and must provide sufficient assurance that it will continue to comply with those conditions. (The details of the designation criteria and the core principles are attached as an appendix). By statute, the Commission must approve or deny an application for designation within 180 days of its submission, unless the application is materially incomplete, in which case the 180-day period may be stayed. See Section 6(a) of the Act.

By regulation, an application may be considered under a 60-day procedure in appropriate circumstances. See Commission Rule 38.3. Although originally slated for 60-day review, the Commission decided to remove the application from the expedited procedure and is now reviewing it under the 180-day statutory timeframe to ensure that we have an adequate opportunity to fully consider all of the issues.

In order to be complete, an application must include: (1) a copy of the applicant’s rules and any technical manuals, guides, or instructions for users of the market; (2) descriptions of the trading system, test procedures and results, and contingency or disaster recovery plans; (3) descriptions of the applicant’s legal status and governance structure; (4) copies of agreements, including third-party regulatory service agreements, that will enable the applicant to meet the conditions for designation; and (5) to the extent that it is not self-evident, an explanation as to how the application satisfies the conditions for designation.

The Act provides further that an exchange shall have reasonable discretion in establishing the manner in which it achieves compliance with the core principles, and may do so by delegating relevant functions to a registered futures association or another registered entity. In adopting rules implementing the Act, the Commission recognized that some existing exchanges had outsourced certain of these functions to non-registered entities, and determined that such outsourcing is permissible. See 66 Fed. Reg. 42256, 42266 (Aug. 10, 2001). In either case, however, the exchange remains ultimately responsible for assuring compliance.

U.S. Futures Exchange’s Application

U.S. Futures Exchange formally applied for designation as a contract market on September 16, 2003. According to its application, U.S. Futures Exchange is a Delaware limited liability company headquartered in Chicago, and is a wholly owned subsidiary of U.S. Exchange Holdings, Inc., a separately capitalized, wholly owned subsidiary of Eurex Frankfurt A.G. (“Eurex Frankfurt”). Eurex Frankfurt is a wholly owned subsidiary of Eurex Zurich A.G., which is owned in equal parts by Deutsche Börse A.G. and SWX Swiss Exchange. U.S. Futures Exchange will be governed by a Board of Directors elected each year at its annual meeting of shareholders. The Board will appoint a Chairman, and the Chairman may appoint a President, who will serve as Chief Executive Officer of the U.S. DCM.

All trading on the Exchange will be done electronically, through a version of the trading system that Eurex Frankfurt has operated in the U.S. since the year 2000 in a joint venture with the Chicago Board of Trade. The trading system will provide a full audit trail of orders, bids and transactions. Audit trail information will be submitted directly to the National Futures Association (“NFA”), a Commission-registered futures association, which will provide certain self-regulatory services for the Exchange such as conducting surveillance for trade practice violations, market manipulation, price distortions and market congestion. U.S. Futures Exchange staff in Chicago will conduct real-time monitoring of Exchange trading activity. Clearing and settlement services will be provided by The Clearing Corporation (formerly the Board of Trade Clearing Corporation), a derivatives clearing organization (“DCO”) registered with the Commission.

As with all applications for contract market designation, Commission staff is currently reviewing U.S. Futures Exchange’s application to determine whether the operations described and the supporting technical and regulatory services agreements demonstrate that the Exchange meets the eight criteria for designation and the eighteen core principles. With respect to the proposed outsourcing of self-regulatory functions to NFA, in addition to reviewing the terms of the services agreement, prior to designation Commission staff will, among other things, conduct on-site examinations to determine whether appropriate surveillance systems are in place and functional. In the event that the Commission approves the provision of regulatory services by NFA, the Commission will monitor NFA’s performance on an ongoing basis through rule enforcement reviews, as it does for all self-regulatory organizations.

The Commission has published for public comment all portions of the application except for those containing trade secrets or commercial or financial information subject to confidential treatment under the law. In considering whether to approve the application, the Commission will carefully consider all comments received.

Issues Raised

There are two issues that have been raised in various forums, including questions from this Committee, that the current application before the Commission does not address: (1) a proposed clearing link with Eurex Clearing A.G. (“Eurex Clearing”), which is the clearing and settlement arm of Eurex Frankfurt; and (2) proposed incentive programs for attracting business to the Exchange.

Clearing Link

The application currently pending before the Commission does not request approval of trade clearing or settlement arrangements outside the U.S. As mentioned earlier, the clearing component of the application is based upon the proposed clearing services agreement with The Clearing Corporation. Although U.S. Futures Exchange has publicly announced that it intends to offer a clearing link with Eurex Clearing at some point in time, it has not presented the Commission with any cross-border clearing plans. Neither the Act nor the Commission’s regulations require that an application for designation as a contract market include all future clearing plans that may be contemplated, or future plans in general. The application need only include information demonstrating an ability to satisfy the conditions for designation based upon a current business plan. Because we can consider only the proposal contained in the application, the Commission’s review of the clearing component of the application is currently proceeding strictly on the basis of the proposed clearing services agreement with The Clearing Corporation.

Although the Commission does not know the particulars of the Exchange’s future plans for a cross-border clearing link, the Commission can assure the Committee that any proposal that would permit the clearing of U.S. Futures Exchange positions by Eurex Clearing would require that Eurex Clearing first become a U.S. DCO. See Sections 5(b)(5) and 5(d)(11) of the Act and applicable Part 38 Guidance. In accordance with Commission policy, those portions of any application filed by Eurex Clearing to become a DCO that are not subject to a request for confidential treatment under the Freedom of Information Act or Commission regulations would be released to the public for comment.

It is conceivable that a proposal to enable Eurex Clearing to clear U.S. Futures Exchange positions could be considered under other provisions of the Act or regulations, but any such proposal would require affirmative Commission action, which would not be taken without the opportunity for public comment.

Incentive schemes

U.S. Futures Exchange has not presented the Commission with any plans for generating volume on the Exchange. Incentives aimed at generating trading volume on futures exchanges, such as “fee holidays” for new products and reduced fees for market makers, have long been viewed as acceptable by the Commission. Most U.S. exchanges offer such incentives in the normal course of business. Commission staff analysis of these programs focuses primarily on whether the incentive will distort open, competitive and efficient trading in the product by making abusive practices, such as wash trading, economically attractive. In addition to the foregoing review, the Commission would review any marketing plan offered by U.S. Futures Exchange, as it would from any other applicant or registrant, to determine whether its implementation would pose an impermissible conflict of interest between brokers and the fiduciary duties owed to customers. I would like to emphasize that the Commission will not allow U.S. Futures Exchange to offer any incentive program that other U.S. contract markets would not be permitted to offer.

The Commission’s Extraterritorial Enforcement Authority

The fact that U.S. Futures Exchange is owned by a German company has led to questions concerning the CFTC’s authority to prosecute foreign individuals. In recognition of the international nature of commodity futures and option trading, Congress has given the Commission broad powers to take actions against persons suspected of violating the Act wherever such persons may be located, and to serve subpoenas seeking the production of witnesses and documents wherever they may be located. See, e.g., Sections 6(c), 6b and 6c(a) of the Act. In addition, the Commission may prosecute any person located abroad who, directly or indirectly, controls a person who commits a violation of the Act. See Section 13(b) of the Act.

To enhance its extraterritorial enforcement powers, the Commission has entered into numerous bilateral information-sharing arrangements (also known as “Memorandums of Understanding” or “MOUs”) with foreign regulators. With respect to Germany in particular, the Commission has enjoyed a long-standing and extensive cooperative relationship with the Bundesanstalt für Finanzdienstleistungsaufsicht (“BaFin”), our German counterpart, and its predecessor agency. The BaFin’s cooperation has been critical to the Commission’s ability to combat violations in a number of instances, by assisting our Division of Enforcement in obtaining trading and bank records, registration histories, complaint and investigation files, and most recently, obtaining the statement of a witness. The Commission fully expects, based upon its past experience with the BaFin, that should circumstances require assistance from Germany in connection with U.S. Futures Exchange’s operations, such assistance will be forthcoming in accordance with the provisions of the MOU.

It should be noted that, to the extent the Commission may encounter difficulty in pursuing violations of the Act or regulations committed by persons who are located abroad, that issue exists today with respect to activity conducted by foreign persons on existing U.S. exchanges. Furthermore, there is no prohibition on foreign persons serving as senior executives or board members of U.S. exchanges, and a number of non-U.S. citizens have done so.

Conclusion:

In closing, I would like to emphasize that U.S. Futures Exchange has applied to become a U.S. exchange that will be subject to the CFTC’s direct regulatory authority. The Commission takes its responsibilities in reviewing applications for contract market designation seriously, and will apply the highest standards of regulatory review prior to approving the application made by U.S. Futures Exchange. We pledge to you that we will review the application, mindful of all comments received, with an eye toward ensuring that all necessary standards are met, and that only sound, ethical business practices are allowed to exist in the U.S. marketplace. I thank you for the invitation to appear today, and will be happy to answer any questions you may have.

Address by Chairman James E. Newsome before the International Practice of Derivatives Market Regulation Seminar, Sponsored by the Center for Strategic Research and the FRI Fund, Moscow, Russia

November 17, 2003

Institution Building and the U.S. Regulatory Experience

Good morning to all of you. It is an honor and a pleasure to address you during this critical time in the development of your model for regulating the financial derivatives markets within the Russian Federation. I understand and commend your interest in enhancing the efficiency of your markets, as well as of the judicial system and laws that support their operation. In particular, I am happy to describe the experience of the United States, and to relate our framework for regulation to the immense success of our markets to date. In today’s rapidly evolving and increasingly integrated markets, regulators and market participants from different jurisdictions have much to share about effective institution building.

Of course, I must begin by stating that each jurisdiction must design its regulatory framework in the context of its own situation, taking into account international standards. And, although there are various models to follow, at the end of the day, the question you must answer is how to develop a regulatory structure that works best within your own system to provide fair, efficient and transparent markets; customer protection; and the reduction of systemic risk.

In structuring a regulatory system, it is important to keep in mind the three component parts of any futures market. The first component is a product, which is a contract based on a reference price (usually made in a cash market) and which, because it is a contract, requires that the law ensure its enforceability. The second component is a trading venue, which, whether floor-based or electronic, operates according to rules of trading and an auction-type pricing model. The third component is a credit enhancement mechanism, which can be a clearinghouse or other form of guarantee arrangement, which assures the financial completion and settlement of the contracts. These three components can be assembled within a single institution, or they can be segmented and provided by different parties, and even from different jurisdictions.

In every case, the success of the market depends upon the legal and operational reliability of these three component parts. The basic objective of the regulatory system is to assure their reliability, most importantly from my perspective, without unduly or unnecessarily restricting how the market operates, or the products that it develops. Success also depends upon a reliable relationship between the cash market and the futures market, and the existence of a two-way demand for the type of risk management being provided—that is, there must be interest in both transferring and assuming the risk that is traded in a marketplace.

To understand how we arrived at our current system of regulation in the U.S., which meets the foregoing objectives through a framework calibrated to the type of market being regulated, some historical background is helpful. Although the futures markets in the U.S. date from the mid-1800s, when a new method for discovering the prices of corn, wheat and soybeans in a centralized marketplace was developed in Chicago, the first comprehensive futures law was not enacted until 1936. At that time, the risk management and price discovery functions of the markets related solely to agricultural commodities, and it was clear that policing the markets for manipulation required the expertise of agricultural economists. Not surprisingly, therefore, regulatory oversight was placed within the Department of Agriculture.

As time passed, however, it became apparent that ensuring market integrity and customer protection depended upon more effective tools for monitoring a marketplace, the importance of which had extended beyond purely agricultural interests. With the deregulation of foreign exchange and interest rates in the U.S., and the expansion of the types of interests in which collective investment vehicles could participate, futures exchanges sought to apply the mechanics of futures trading to new products, including currencies and sovereign debt. In addition, futures markets were flourishing in metals, coffee, sugar and cocoa—and beginning in energy—all of which were outside the contours of the existing federal legislation. The international nature of the cash products on which these contracts were traded, coupled with the international makeup of the market participants, called for ways to effectively cooperate across borders.

In response to these developments, in 1974 Congress created the U.S. Commodity Futures Trading Commission (“CFTC”) as an independent agency of the federal government, structured along the same lines as the Securities and Exchange Commission. It gave the agency jurisdiction over contracts for future delivery in “all services, rights and interests” in which contracts for future delivery were traded, or could be traded in the future, as well as powers to regulate intermediaries and enhanced powers to deal in an international arena. Congress also vested the agency with emergency authority, subject to limited judicial review, to address conditions that could prevent the markets from reflecting supply and demand, which in turn created a strong incentive for the markets to police themselves. Unlike securities regulation, which focused on disclosure necessary to capital formation, futures regulation focused on the market integrity necessary for effective risk transfer.

The law that was developed in 1974, and later expanded, served the markets well for more than ten years, and the volume of trading and types of participants and products grew. By the early 1990s, however, signs were emerging that the law, which required that all contracts with futurity be traded on registered exchanges, no longer made sense in a world where counterparties wanted to shift more tailored risks over-the-counter, through swaps and structured debt. Uncertainty arose as to whether such over-the-counter transactions might be viewed as illegal off-exchange futures contracts. This uncertainty was exacerbated as over-the-counter activity moved to electronic trading platforms that were difficult to distinguish from the centralized trading pits of traditional exchanges. It was clear that the regulatory structure, which consisted of very prescriptive rules originally designed for contracts based on domestic agricultural products, traded in a floor-based environment, had become outmoded.

By the late 1990s, a consensus developed that the law needed a complete overhaul. The result was the Commodity Futures Modernization Act of 2000 (“CFMA”). This legislation replaced the prescriptive rules with broad core principles, which gave the CFTC the flexibility it needed to tailor regulation to the type of market, product and participant, and to keep better pace with change. It also permitted a framework that could be more readily harmonized across multiple markets and jurisdictions than very specific rules.

Although regulators around the globe were consolidating the regulation of multiple types of financial institutions (banking, insurance, and securities, including derivatives) within a single regulatory authority, or slicing and dicing regulation so that one regulator addressed financial integrity and another customer protection, in 2000 the U.S. preserved its model of oversight by an independent expert agency devoted solely to derivatives trading. No changes were made to the overall structure of expert financial services regulators. This was partly a product of history, but it was also a way to ensure that the implementation of the CFMA receive the priority that it deserved. In a larger vehicle addressing financial regulation as a whole, those needs could have been overwhelmed by other more pressing priorities. The decision may also have reflected the size of the U.S. market. For example, it is important to note that even after long awaited reforms that removed the Glass-Steagall Act prohibitions on combining the banking and investment banking functions, there remain three federal banking authorities (the Federal Reserve Board, the Comptroller of the Currency, and the Federal Deposit Insurance Corporation), and the multiple state banking commissions.

You have asked that I discuss the value of a particular regulatory structure in the context of what you are planning within Russia. The international consensus is that an effective regulatory structure should be built upon the following fundamental principles:

• regulation should be suited to the market in which it is developed;
• regulation should serve the purposes of promoting a fair, efficient and transparent market, customer protection, and the avoidance of systemic risk;
• the regulator should have sufficient powers and resources to perform its functions;
• the regulator should be independent from improper interference in the performance of its duties and have clear, transparent, and equitable procedures and practices for performing its responsibilities;
• the regulator should consult with market participants and the public; and
• the regulator should assure swift, sure and equitable enforcement of the rules.

Importantly, regulators must also be able to cooperate in an increasingly global marketplace to combat fraud and market abuse. I am happy to say that we have preliminary arrangements in place to share certain information with our Russian regulatory colleagues and that our experience with cooperative enforcement efforts in Russia has been excellent. On two separate occasions your regulated entities have responded on an urgent basis, within the parameters of your existing law, to requests to assist us in combating fraud.

As I’ve noted, because the regulation of futures markets in the U.S. has concentrated largely on the integrity of the markets rather than on disclosure principles common to securities markets, it relies on the expertise of economists, who can address whether pricing disparities are caused by malfeasance or are just anomalies, and futures trading specialists, who understand the mechanics of trading, just as much as it relies on the skills of lawyers. The CFTC, as a unitary regulatory authority, not only can target its regulation precisely to the types of products traded, but also to the types of users of the markets. It can take account of the fact that, unlike the securities markets—which have 170 million customers, thousands of issuers, and where 50 % of families participate in mutual funds—the principle users of the futures markets continue to be professional traders, sophisticated individuals, and commercial interests.

That being said, futures are big business. More than one billion contracts traded hands in 2002, and more than one billion in funds and many trillions in risk pass through the U.S. system daily. This means that, whatever the design or regulatory model, the U.S. watchdog should not be diverted by too many conflicting demands. Recent history demonstrates that, though the costs and benefits of public confidence in the markets are difficult to measure, the costs of its potential loss are painfully apparent.

Of course, in a vibrant system changes can be expected to occur and one cannot predict with certainty that the design and structure governing who actually regulates what within the U.S. system will remain as unchanged for the next 60 years as it has for the past 60 years. I believe, however, that the existence of multiple expert agencies has contributed to a regulatory structure that is more tailored to the differences among markets, and that such agencies are continually challenged to change with the markets rather than to languish in bureaucratic fiefdoms, or solely to respond to disaster.

Therefore, although I commend to you a review of a good sampling of different approaches—the twin peaks approach of the Netherlands, Australia and France, and the single regulatory authority approach of the U.K., Mexico and Brazil, and perhaps some of those that are in between—it is important to keep in mind that what matters is not so much the structure of regulation, as its result.

Remarks by Chairman James E. Newsome Before the USFE Designation Hearing on the Approval of U.S. Futures Exchange, Application for Contract Market Designation, Washington, DC 

February 4, 2004

Philosophy since arriving at the CFTC

• I became a Commissioner at the CFTC in July of 1998. I brought to my job certain principles I believed were important to doing the job well.

• I believed you must go out and get an understanding of business issues from the people that were actually involved in the business.

• I believed hiring a good staff was vital.

• I believed it was important to develop relationships with market participants and customers in the industry that you can trust, and then LISTEN to them if you want to develop sound regulatory policy.

• I believed you should NEVER think that you are more knowledgeable than those people, although it’s ok to challenge them at times.

• I believed that in tough situations, you must be willing to listen to all sides, consider all arguments, but in the end, you must make decisions and stand behind them.

• Most importantly, I believed you must ALWAYS keep your word.

• These principles have guided me in my decision-making over the 5 and ½ years of service as both a Commissioner, and more recently, as Chairman of this Commission.

Regulatory experiences under the CFMA

• Since the passage of the CFMA in December 2000, I have been focused on the Commission’s implementation of that groundbreaking legislation in the way it was intended by the Congress. In an oversight hearing last year, our authorizing Committee in the House gave the Commission what I believed to be a positive grade for our implementation of the Act.

• Implementation was challenging in some respects because the new law required the Commission to retire most of its rigid, cookie-cutter rules and adopt more flexible approaches to compliance with the Act.

• Flexibility is always more challenging than prescriptive rules, since the former requires one to think more creatively and make decisions accordingly. Of course, the decisions that come out of this structure are also open to more criticism since they are based on interpretations, which can differ from that of some commenters.

• While it has been challenging, I remain a supporter of this more flexible approach because it has resulted in fewer regulatory restrictions on innovation, technological progress, and competition in the futures industry. I firmly believe all of these things are good for the U.S. position in and the general operation of the marketplace.

• Given the inherent subjectivity that goes along with flexibility, we have been careful to not disadvantage one group over another in our review of new rules and applications and have worked hard to develop regulatory policy that yields a level playing field.

• This has become especially important as new players enter the field.

• USFE is a good example since it is a new, formidable player.


Things that were important to me in considering this application

• It was important to me that we accomplished several goals in our review of this application.

• One, that we first ensured that the application demonstrated to our satisfaction that the core principles for contract market designation were successfully met.

• Two, that the public was able to comment on all parts of the application that were not commercially sensitive.

• Third, that the Commission consider all comments, respond to each of them, and be able to defend our decisions.

• Fourth, that we felt comfortable going forward with the designation. By this, I mean primarily that the applicant had a clear understanding of what was expected from a regulatory standpoint.

• I needed to have comfort that the applicant was willing to cooperate with the Commission in establishing a positive working relationship as it begins operations in the U.S. market under our regulatory oversight. The new, flexible structure inspired by the CFMA depends on solid working relationships between the Commission and those we oversee.

• And finally, I believed that once all legitimate issues were appropriately addressed, the Commission should act quickly on the application.

Difficulty in considering application

• It’s no secret to probably anyone here that there were bumps in the road during the consideration of this application and that those public disagreements lengthened and expanded the Commission’s review of this application.

• This was the first time the Commission reviewed an application under such detailed scrutiny by the public and the Congress. There were several industry participants, who at times even became emotionally charged (and from both sides of the issue I might add) in constant contact with the Commission either orally or through multiple comment letters expressing their views. Because of the unprecedented high level of interest, this may be the most thorough review ever undertaken by the Commission.

• Also, the Commission and the applicant had limited experience in dealing with each other, which led to differences of opinion at times, most notably over the Commission’s regulatory authority.

• These public disagreements led to, among other things, questions from Capitol Hill to me asking if I had reversed by opinion since testifying before the House Agriculture Committee earlier where I was asked to outline the Commission’s authority related to consideration of the USFE application. Obviously, I have not.


Why I am comfortable with designation now

• However, these issues are behind us now. I believe that we have achieved a level regulatory playing field through our analysis of this application, meaning there will be no REGULATORY advantages or disadvantages when USFE enters the United States.

• As for whether or not USFE will be successful in this marketplace, only market users will have an opportunity to decide that, not the regulator. I have stated many times that this is the way it should be.

• Given today’s staff presentation and multiple other briefings conducted during the last several weeks leading up to this meeting, I believe the core principles for contract market designation are indeed satisfied.

• I am also proud of how the Commission’s process of considering this application has been transparent from the beginning. Our decision to hold two public comment periods and a public meeting to formally consider the application also signifies that.

• I am satisfied that we have fairly considered and adequately addressed all questions raised throughout the process, including those received during the comment period, during our Congressional hearing, and through follow-up letters from interested members. I also am confident that our decisions are both defensible and consistent with the framework of the CFMA.

• I am comfortable that USFE now understands our regulatory expectations and I look forward to continuing the development of this relationship. I believe it’s now headed in the right direction.

• Lastly, I believe it’s important to point out that the Commission is acting on this application as expeditiously as we possibly could have. That has been important to me. I do not believe the government should determine winners and losers through artificial barriers or regulatory delays.

• I’ve been disturbed by recent reports suggesting that we were stalling the approval process. I can assure the public that this is far from the truth. Our staff has worked tirelessly, late at night and on weekends, and even through recent inclement weather.

• It’s worth mentioning that even with all of the interest in this particular application, we are still considering approval roughly six weeks prior to the end of the 180-day statutory timeframe.

Address by Chairman James E. Newsome at the Winter Meeting of the American Bar Association, Committee on Futures and Derivatives Instruments, Key West, Florida

February 13, 2004

It is good to be back in Key West for this annual winter meeting. As always, I am impressed by the quality of the panel discussions at this meeting and look forward to the rest of the conference.

There have been a number of developments in the futures industry over the past year that I would like to comment on today—developments that I believe were possible due to the flexibility afforded by the Commodity Futures Modernization Act of 2000 (“CFMA”), and the resulting competitive forces that it was designed to foster. I would also like to review some of the things we have accomplished at the Commission, and describe a few of the initiatives that we have underway.

The event that has taken up the majority of our time is the designation as a contract market of the U.S. Futures Exchange, LLC (“USFE”), also known as Eurex US. Although USFE is not the first US contract market with a predominantly foreign ownership structure, it was the first one to announce an intent to establish a transatlantic clearing link for transactions entered into on a designated contract market. This announcement raised a lot of consternation in certain quarters, primarily because plans for a clearing link were not included in the application. However, after considering all of the issues arising out of the application, which were debated and discussed in a Congressional hearing, two public comment periods, and through follow-up questions from Congress, the Commission determined that approval of the link was not necessary in order to approve the application for designation.

As I stated in my remarks last week when voting on the application, the flexibility inherent in the CFMA—while bringing great benefits to the marketplace—can be challenging because the statute lends itself to varying interpretations, even concerning the Commission’s authority. This was illustrated by the strongly held views of the commenters on the USFE application and the applicant itself, both of which were at times contrary to the views of the Commission. In the end though, it is the Commission’s responsibility to interpret the Act as intended by Congress and to assure that all activity in the US marketplace is subject to appropriate oversight.

The undertakings incorporated in the order approving USFE reflect these objectives by making it clear that neither USFE nor The Clearing Corporation (“CCorp”), USFE’s current clearing services provider, can implement any part of a global clearing link without prior Commission approval or permission. Furthermore, they ensure that if CCorp believes that some aspect of a link is appropriate for certification, it must consult with the Commission to determine whether we agree. The new regulatory structure of the CFMA depends on solid working relationships between the Commission and its registrants. I am confident that USFE and CCorp understand our regulatory expectations and will abide by them. I am also confident that the Commission has done its job to ensure that as USFE establishes itself in the US marketplace, it does so on a level regulatory playing field.

USFE, which opened for business on Sunday night trading US Treasury futures and options, is now poised to compete head-to-head with the CBOT, which in turn has signaled its intent to list and trade futures contracts based on debt instruments issued by the German Federal Government—the bund, the bobl and the schatz. It is my hope that the competition provided by this new entrant in the US marketplace will promote responsible innovation and serve the public interest in the manner intended by the CFMA. And, as a strong believer in the benefits of both domestic and global competition, I look forward to working through the regulatory issues that would permit Eurex and CCorp to forge the clearing link that they envision.

An equally important and groundbreaking clearing link was forged in 2003 between the CBOT and the CME. The phased transition of CBOT positions to the CME clearinghouse went smoothly and the link became fully operational on January 2. I expect that significant capital efficiencies will result from the portfolio margining made possible by the link, to the benefit of many market participants.

I would like to turn now to some of the other issues that have been keeping us fully engaged at the Commission. When I was here last year I told you that we were well underway with efforts to modernize regulations governing intermediaries, and I am happy to report progress in this area. We have completed a number of rule amendments pertaining to commodity pool operators (“CPOs”) and commodity trading advisors (“CTAs”). For example, otherwise-regulated entities such as banks, insurance companies, and mutual funds seeking to use the futures markets for their risk management needs now no longer have artificial constraints on their trading activities. In addition, an exemption now available allows a number of other pooled investment vehicles to pursue their risk management goals in the futures markets without being subjected to additional regulation. Under this new rule, almost a thousand “newcomers” have notified us of their interest in using the futures markets, while only several dozen former registrants have sought to “deregister” under the rule. Because those who utilize the exemption remain subject to the Commission’s special call, anti-fraud, and anti-manipulation authority, I am confident that this revision will in no way impair the Commission’s ability to accomplish all aspects of its mission.

The Commission also adopted a core principle for the presentation of partially funded client accounts by CTAs. This permits CTAs to present the performance of partially funded accounts in a manner that is balanced and not in violation of the Commission's antifraud provisions, which provides the flexibility needed to respond to evolving industry developments and practices, while continuing to ensure customer protection. The National Futures Association (“NFA”) has submitted rules on the presentation of partially funded accounts that it intends to make effective on May 1, 2004.

Most recently, we announced rule amendments allowing futures commission merchants (“FCMs”) and derivatives clearing organizations to enter into repurchase agreements and collateral management programs using customer-deposited securities, which should allow for more efficient use of capital. We will also continue to review our requirements in this area and consider suggestions for further refinements.

As the Commission continues moving forward with regulatory initiatives that further the spirit and purpose of the CFMA, to replace obsolete prescriptive requirements with principles-based oversight that allows for innovation and new competition, let me assure you that we are also evolving our supervisory methods to keep pace with the change we anticipate. Risk-based examination cycles and risk-focused reviews provide good examples of this. Similar to the approach of other federal financial regulators and certain overseas financial supervisors, the Commission has begun to enhance its oversight of exchanges, clearinghouses, and other self-regulatory organizations (“SROs”) with risk-based examination cycles and risk-focused reviews. Both the scheduling and scope of the CFTC’s supervisory reviews will now be based on careful analysis of the underlying risks to which an institution is exposed and the controls which it has in place to address those risks. This approach promises to better utilize staff resources and to help ensure even greater financial integrity and risk management within the firms and clearinghouses that are the backbone of the futures clearing system.

As I have stated before, in my opinion, the creativity afforded by the CFMA must be accompanied by strong enforcement as a deterrent to misconduct, and our Division of Enforcement had an exceptionally busy year, bringing 50 % more enforcement matters in fiscal year 2003 as it brought in the previous fiscal year (64 vs. 41). During 2003, an enormous amount of the Division's staff time and other resources were devoted to investigating energy matters and charging wrongdoers in that area. Over the thirteen-month period beginning December 2002, that work resulted in the filing of two litigation matters against Enron and American Electric Power, and 13 settlements with an aggregate 17 companies involving the payment of civil monetary penalties totaling $180 million. All in all, the Division has wrapped up nearly all the energy investigations of companies it began in 2002, and is looking now at a few remaining companies, as well as the employees at all the companies who were responsible for the wrongful conduct.

The Division also continues to be pro-active in the forex area. Since the CFMA confirmed the Commission's jurisdiction over foreign currency operators selling off-exchange futures and options to retail customers, the Commission has brought 56 forex actions, nearly 40% of them in fiscal 2003. Through the Division's efforts to date, the Commission has obtained awards of nearly $96 million in civil penalties and $60 million in restitution.

One group of forex cases deserves special mention. Last year, the New York Regional Office worked closely with criminal authorities conducting an undercover investigation of complex, interconnected forex activities. Dubbed "Operation Wooden Nickel," the investigation resulted in the Commission filing six cases simultaneously against a total of 31 entities and individuals in November 2003, all involving fraud in the solicitation and sale of foreign currency contracts. At the same time, criminal prosecutors charged 47 individuals with various crimes related to their participation in the forex trading. The Securities and Exchange Commission also filed a case arising from this effort. I want to highlight this investigation as a model of civil and criminal cooperative enforcement and commend everyone involved.

Finally, I would like to talk about self-regulation, an issue that is critical to market integrity. Last May I announced that, given the CFMA’s added emphasis on self-regulation and the changes taking place in the market brought about by demutualization and increased competition, it was time for the Commission to review the roles, responsibilities and capabilities of the industry’s SROs. This was not because of any perceived existing problems, but simply because I believe it is prudent for an oversight agency to periodically ask whether the policies, practices and systems that are in place to ensure market integrity continue to serve their purposes as well as they can. Over the summer and fall, a team comprised of staff from our Divisions of Market Oversight and Clearing and Intermediary Oversight solicited a wide variety of views through interviews with participants in all areas of the marketplace, including FCMs, CPOs, and key exchange, clearinghouse, and NFA personnel responsible for their respective SRO functions. Although our review is ongoing, we made two recommendations last week.

First, the staff learned that one area of concern was the extent to which SROs protect the confidentiality of information gathered during audits and investigations of market participants. The staff concluded that SROs take this obligation seriously, and found SRO staff to be professional, ethical and well respected. The staff also found, however, that some SROs are better than others at making this obligation clear through training manuals, written procedures and ethics guidelines. The first recommendation, therefore, is to encourage every SRO to review its policies and procedures, employee training efforts, and day-to-day practices to ensure that adequate safeguards are in place to prevent the inappropriate use of confidential information obtained during self-regulatory activities. SROs are also encouraged to publicize these safeguards so that market participants continue to have full faith in the integrity of the self-regulatory process.

An integral part of the SRO system is the cooperative arrangement among SROs, operated under the auspices of the Joint Audit Committee, through which each FCM is assigned to a designated SRO (“DSRO”) for purposes of monitoring compliance with financial integrity, financial reporting, sales practice, recordkeeping, and anti-money laundering requirements. Commission Rule 1.52 expressly provides for such cooperation among SROs, recognizing that such a system of assigning each FCM to a single DSRO for examination purposes helps to avoid redundant burdens on FCMs, makes more effective use of SRO resources, and fosters important information sharing across markets. The rule reserves for the Commission a role in approving and monitoring this system to ensure that it remains appropriate to the public interest and that it works to strengthen customer protections. In accordance with the staff’s second recommendation, therefore, the Commission will begin a review of the DSRO system, including its cooperative agreements and programs.

Finally, in view of the fact that an SRO’s governing body can significantly influence key aspects of self-regulation, the Commission’s continuing review will include consideration of governance issues at SROs. In furtherance of this effort, the Commission will solicit written comments on the topic of SRO governance from members of the public. We will also listen with interest to the views of a number of our foreign counterparts at the International Regulators’ Meeting to be held on March 17 in Boca Raton, which will focus on a discussion of these issues from an international perspective.

In closing, I would like to publicly thank the staff of the CFTC for their tireless efforts since the passage of the CFMA, in particular, my personal staff as well as the current leadership team we have assembled at the Commission, many of whom are here today. Their dedication to public service and the oversight of the futures industry has been outstanding, and has led to a complete restructuring of rules, regulations, and even the Commission itself.

Additionally, I would like to thank each of you for being the most active participants with the Commission in discussing issues. I can assure you that your valuable insights and suggestions are key to keeping the Commission fully informed. Thank you again for the invitation to be here with you.

Address by Chairman James E. Newsome before the National Energy Marketers Association Washington, DC

April 1, 2004

Introduction

I am glad to be with you again for your annual meeting. A lot can happen in just a year. When I spoke to you last year, I spent most of my time giving you a feel for our agency, the Commodity Futures Trading Commission (“CFTC” or “Commission”), and how we go about doing our job. I also spoke about some of our then current efforts in the energy enforcement area. This year, I would like to concentrate on some of the lessons we’ve learned from the recent challenges in this industry, how we have thus far successfully met those challenges, and what this means going forward.

General Futures Industry Perspective

First, before we get started, I would like to give you some statistics I recently compiled while preparing for a speech I gave a couple of weeks ago at the Futures Industry Association’s annual conference. A look at the U.S. numbers over the last few years shows that market volume and the number of exchanges have both nearly doubled, while global volume has grown even faster. The number of clearing organizations has also doubled. Alliances between exchanges and clearing houses have shifted, and even over-the-counter (“OTC”) business is now being cleared. Electronic trading has soared from less than 10% of the total volume in 1998, to almost 50% of the total last year, with expectations that the upward trend will continue.

New contract filings have increased more than 500% during this time period, and the regulatory delay in listing the products after filing has dropped from an average of almost 70 days in 1998, to one day for 99% of the new contracts last year due to the certification procedures introduced in 2000. Commission review periods are not the only thing trending downward. Trading fees are lower too.

You may wonder why I’m giving you these statistics and if so, I can understand why. However, I think it is important to look behind those numbers. For an industry that has been around for over 150 years, the growth over the past few years has been amazing.

I believe that many things have contributed to this trend, including the fact that entities are more certain than before—legally—about the kind of regulatory treatment they will receive if they operate in the U.S. futures markets. Also, the significantly shorter time the Commission takes to review applications, contracts, and rules has led to lower costs associated with getting a license to operate and make changes to an existing business. New and traditional exchanges alike have embraced technology, have created strategic alliances, and have utilized the new regulatory framework to create efficiencies and products desirable for customers.

This modernized regulatory environment, coupled with market demand, has yielded more platforms, more choices, and more competition. What it has not produced is the overriding success of the newcomers or the demise of the traditional industry leaders. Allowing new participants to enter the marketplace and compete has never been and should never be a guarantee of success.

I believe that as the regulator, the Commission is merely one of the facilitators of competition through our commitment to a sound, reasonable regulatory structure. People in this room and elsewhere will decide how and where to do their business.

Impact on Energy Business

If you look at the energy piece of the derivatives business, you see similar patterns of growth, innovation, and competition. Over the past several years, the number of on-exchange energy-related products offered by the New York Mercantile Exchange (“NYMEX”), and the volume of trading in those products have both significantly increased. The clearing of OTC energy transactions by the NYMEX Clearing House has also rapidly grown since it first introduced this service in 2002. This arrangement brings an important tool for mitigating counter-party credit risk and a new element of stability to this crucial sector of the economy.

The new category of exempt commercial markets, on which energy products may be traded electronically by eligible commercial entities, is also up and running. The Commission has been notified by nine entities so far of their intent to operate exempt commercial markets, including the InterContinental Exchange, for which the London Clearing House offers clearing services, and the Natural Gas Exchange.

I believe that our less prescriptive, flexible, oversight program has played a major role in each one of these initiatives. I even question whether any of them would be in place without the existing regulatory structure.

Enforcement Initiatives

The elimination of prescriptive rules does not mean that the CFTC has reduced its regulatory role. Rather, it means we’ve refocused our efforts. I firmly believe that most market participants are well intentioned and want to operate fairly in the marketplace, which is why I supported the more flexible approach. However, that policy shift created an even greater need for strong, aggressive enforcement action when people step out of line. Otherwise, the system fails.

When I spoke to you last year, the Commission was in the middle of its energy cases and had collected about $25 million in settlements from a couple of companies, and had filed charges against another. Since then, the amount collected in settlements has grown to almost $200 million. I recently announced that of the energy investigations the Commission has opened, 97% have been completed. I believe this is good news and I look forward to a brighter future for this important segment of the marketplace.

While I am not proud of the fact that we had to take these actions, I am proud of the way we have done our job, especially when there was much debate over whether the Commission even had authority in this area. Almost $200 million later, those who said we did not no longer have an argument, which confirms how important it is to gather the facts before reacting, either through administrative rulemakings or legislative action. I believed then and remain convinced now that the case has not been made for more regulation in the OTC energy markets.

Going Forward

Going forward, we stand ready to work with this industry, Congress, and other interested stakeholders as we continue to seek the right regulatory role in this marketplace. Something I spent a good bit of time talking about a couple of weeks ago is the upcoming reauthorization process for the CFTC, which is sure to begin soon. For those of you who are unfamiliar with this process, our agency is authorized by the U.S. Congress every five years. This means that Congress has an opportunity to grade the CFTC periodically and consider changes to our regulatory model. The modernized structure I have spoken about today came from the last reauthorization in the year 2000.

Given the tremendous growth this industry has experienced since enactment of that law, along with the successes achieved by the CFTC for that time period, I believe that any proposed changes to the law should be carefully considered. No changes should be made without a full and fair debate. This is your opportunity to weigh in with Congress, if you like, on what we’ve been doing, or to let Congress know if you think some things need to be changed.

While the past couple of years have been challenging in this industry, I believe that we have at least learned how important it is for the facts to be in before we change the law, and I believe that perspective will add monumental value to the upcoming reauthorization. Thank you again for the invitation to speak. I have enjoyed being with you today.

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

May 13, 2004

Thank you Chairman Cochran, Ranking Member Harkin, and Members of the Committee for the opportunity to testify before you today on behalf of the Commodity Futures Trading Commission (“CFTC” or “Commission”). Before I get started, I would like to acknowledge my colleagues, Commissioners Walt Lukken and Sharon Brown-Hruska, and thank them for their continued support, leadership and hard work, as well as Barbara Holum, who retired from the CFTC last year after serving ten dedicated years as a Commissioner.

The purpose of this hearing is to update you on regulatory issues before the Commission. But, as background, I would first like to describe how the Commission operates. And to put things into context, I would like to provide you with an overview of our progress in implementing the Commodity Futures Modernization Act of 2000 (“CFMA”), which significantly amended the Commodity Exchange Act (“CEA”), and describe how the markets have evolved in response to that landmark legislation.

Background

Congress created the Commission in 1974 to oversee the nation’s commodity futures markets. The Commission’s mission is twofold: to foster transparent, competitive, and financially sound markets that operate free from manipulation or distortion, and to protect users of those markets from fraud and other abusive practices. Integral to accomplishing its mission are the Commission’s two regulatory units devoted to overseeing the day-to-day operations of the markets: (1) the Division of Market Oversight (“DMO”), which is comprised primarily of economists and attorneys who conduct ongoing market surveillance to detect and prevent price distortion and manipulation, process applications from new exchanges, review new contracts and exchange rules for compliance with the CEA, conduct periodic reviews to assess the effectiveness of exchange compliance programs, and monitor the markets for possible trading abuses; and (2) the Division of Clearing and Intermediary Oversight (“DCIO”), which employs auditors, attorneys, and other staff who monitor the financial and operational integrity of clearinghouses and intermediaries to ensure that customer funds are protected and that safeguards are in place to prevent the financial problems of a single entity from posing systemic risk. Also crucial is the Commission’s Division of Enforcement (“Enforcement”), which investigates potential violations of the CEA and prosecutes them when they are found.

Historically, futures contracts were traded primarily on agricultural commodities. These contracts gave farmers, ranchers, distributors, and users of everything from corn to cattle an efficient and effective set of tools to handle the price volatility often experienced in agricultural markets. As time passed, however, the risk management benefits of the futures markets became apparent to other sectors of the economy, and exchanges sought to apply the mechanics of futures trading to new products, such as currencies, sovereign debt, metals, and energy. Manufacturers now use futures contracts to fix their raw material costs and reduce uncertainty over the prices they receive for finished products sold overseas. Mutual fund managers can now use stock index futures to protect against market volatility and to effectively put a floor on portfolio losses, and electric power generators can use futures contracts to secure stable pricing for their coal and natural gas needs. Today, while agricultural contracts are traded as actively as ever and continue to grow in volume (the Chicago Board of Trade reported record numbers in its agricultural futures and options complex for the month of April, up 53.6 percent over last April), the vast majority of trading is in financial products. Our most recent statistics show that approximately 9% of futures and options trading is in the agricultural sector, while 54% is in interest rate products such as three-month Eurodollars and ten-year U.S. Treasury Notes, 24% is in equity index products, for example, the S&P 500, 9% is in the energy sector, such as crude oil and natural gas, 3% is in currencies, and 2% is in metals.

Although I have described the primary purpose of the futures markets as a mechanism for risk management, many futures markets play another important role in the economy—that of price discovery. Businesses and investors that may not be direct participants in a particular futures market may nonetheless refer to the quoted prices of certain 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 exist outside the quoted futures prices, but it is also true in other sectors, including many energy markets.

How the CFTC Performs Its Mission

In seeking to fulfill its mission, 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 (for example, an artificial price situation not intentionally caused by market participants). 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, proper disclosures are made to customers, and fraudulent sales practices are not tolerated. The Commission pursues these goals through a multi-pronged approach to market oversight.

Economic Integrity

The Commission protects against manipulation and congestion by working with exchanges and potential exchanges through reviewing exchange rules and proposed rule changes prior to trading, and applications for designation. Once trading begins in a new or revised contract, the Commission acts through direct market surveillance and by overseeing the surveillance efforts of the exchanges themselves. The heart of the Commission’s direct market surveillance program is the 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 effect the orderly operation of a market. For contracts that are settled through physical delivery at expiration—such as energy contracts—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 potential problems.

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, the Commission’s Enforcement staff investigates and prosecutes alleged violations of the CEA or Commission regulations. 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, the Commission may refer matters to state authorities or the Justice Department for prosecution of violations. Those authorities may bring cases under the CEA, or under state or federal criminal statutes such as those prohibiting mail fraud, wire fraud, and conspiracy. Over the years, the Commission has brought numerous enforcement actions and has imposed sanctions against firms and individual traders for manipulating or 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. Over the past year-and-a-half, the Commission has filed 16 enforcement actions against 20 major energy companies and two individuals resulting from our investigations in the energy sector, and has collected almost $200 million in civil monetary penalties to date.

Financial Integrity

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 work to prevent the financial difficulties of one trader from becoming a systemic problem to other traders. Several aspects of the financial integrity framework help the Commission to 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, which must provide the Commission, exchanges, and the NFA with various monthly, quarterly, and annual financial reports. The exchanges and the NFA also conduct periodic 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 the large customer positions they carry. As an oversight regulator, the Commission reviews the audit and financial surveillance work of the exchanges and the NFA, but also monitors the health of FCMs directly, as appropriate. The Commission also periodically reviews clearinghouse procedures for monitoring risks and protecting customer funds.

As with attempts at manipulation, the Commission’s enforcement staff 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.

Operational Integrity

Protecting the operational integrity of the futures markets is also accomplished through the requirements that mandate appropriate disclosure and customer account reporting, as well as fair sales and trading practices by registrants. Commission oversight helps to maintain appropriate sales practices by requiring fitness screening of industry professionals, proficiency testing, continuing education, and supervision of these persons. Extensive recordkeeping of all futures transactions is also required. Commission staff reviews compliance with those requirements and other requirements. Finally, the Commission oversees the self-regulatory programs of the exchanges and the NFA through regular reviews.

As with the Commission’s efforts to protect the economic and financial integrity of the futures markets, the Commission’s Enforcement staff 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 funds, and non-competitive trading. The Commission also takes action against unscrupulous commodity professionals who engage in a wide variety of fraudulent sales practices against the public.

Changes in the Futures Markets, Pre and Post-CFMA

Many changes have occurred in the futures markets over the last twenty-five years. As I mentioned earlier, when the CFTC was founded the vast majority of futures trading was based on agricultural commodities, but evolved over time to include a wide variety of products, with financial products predominating today. As these developments occurred, the locations, hours and methods of futures trading also expanded. In the early days of the Commission, trading was largely confined to the U.S. and was done by open outcry during limited daytime hours in exchange trading pits designated by the CFTC as contract markets. Today, trading occurs on traditional exchanges by open outcry and electronically, at new, all-electronic exchanges, and off-exchange entirely. The markets have also become global in nature, with large numbers of foreign traders participating in U.S. markets and vice versa, and with linkages between U.S. exchanges and foreign counterparts operating around the clock.

In recognition of the growing importance of the futures markets to the domestic and global economies, and the need to lift restraints on the ability of exchanges to keep pace with rapidly developing technological advances and to respond quickly to demands for new products, in 2000, under the leadership of this Committee, Congress rejected the one-size-fits-all approach to regulation by passing the CFMA. The CFMA amended the CEA to establish a structure in which markets can choose to operate under varying levels of Commission oversight, depending on the products traded, the type of system in which they are traded, and the sophistication of the market participants. Under this new regulatory framework, exchanges are subject to broad core principles governing operational integrity rather than prescriptive rules. In addition, Congress:

• granted exchanges the ability to list new products and amend contract rules by certifying that they comply with the CEA, rather than having to seek the prior approval of the Commission;
• unbundled the clearing function from the trade execution function and granted the Commission explicit authority over derivatives clearing organizations (“DCOs”), which were authorized to clear both on-exchange and over-the-counter (“OTC”) transactions;
• provided legal certainty for OTC transactions;
• legalized security futures products (“SFPs”); and
• clarified the CFTC’s jurisdiction over retail foreign currency trading.

Over the approximately three-and-a-half years since the CFMA was signed into law, the Commission has concentrated its efforts on redesigning its regulatory programs to achieve the objectives of the statute. Our first task was to modernize the rules regarding trading facilities, both traditional and the new exempt commercial markets and exempt boards of trade permitted by the CFMA, and to establish guidance for new applicants and existing exchanges on how to comply with the core principles. We also studied, through hearings, roundtables, and the solicitation of public comment, our regulations relating to FCMs, commodity pool operators (“CPOs”) and other futures market intermediaries, to identify areas where improvements could be made and where matters could be delegated to the NFA. We devoted much of last year implementing a number of modernizations in this area ranging from registration relief for operators of certain pooled investment vehicles that restrict participation to sufficiently well sophisticated persons, to affording FCMs greater operational flexibility so that they can provide their customers with more efficient trade executions.

In both of these endeavors the Commission’s goal was to streamline and eliminate regulations where appropriate, while keeping important market integrity and customer protections in place. It was hoped that these reforms would, among other things, encourage innovation by existing exchanges and market participants and lower the regulatory costs for new entry into the markets, which in turn would result in a heightened level of competition that would benefit the marketplace as a whole. The indications thus far are that this is exactly what has happened.

Some numbers will illustrate my point. In the few, short years since passage of the CFMA, the Commission has approved eight new exchanges as designated contract markets and has accepted the registrations of seven DCOs, some of which were existing clearinghouses serving other financial market sectors, and several that were entirely new organizations not previously affiliated with any particular trading facility. In addition, the Commission has received notices from thirteen new ventures of their intent to operate exempt markets, three as exempt boards of trade and ten as exempt commercial markets.

Domestic futures and options volume has almost doubled over the last few years, and reached over one billion contracts traded in 2003. New contract filings have increased more than 500% during this time period, and the regulatory delay in listing the products after filing has dropped from an average of almost 70 days in 1998, to one day for 99% of the new contracts listed last year due to the certification procedures now available to exchanges.

While the number of FCMs has stayed relatively stable—203 at the end of fiscal year 2000 versus 205 at the end of fiscal year 2003—as noted above the amount of contracts and dollar volume traded by FCMs has increased dramatically in the last several years. During the same timeframe, the number of CFTC-registered CPOs and the commodity pools they sponsor, operate, or advise, has grown significantly. At the end of fiscal year 2000, there were 1,624 registered CPOs operating 1,953 commodity pools. These numbers grew to 2,059 CPOs operating 3,244 commodity pools at the end of fiscal year 2003. In 2003, commodity pools held approximately $450 billion in net assets.

Alliances between exchanges and clearinghouses have shifted leading to market-driven clearing links and common clearing platforms, which provide capital savings through efficiencies such as portfolio margining. Certain OTC business is also now cleared, adding an important element of safety and soundness to this important sector of the economy. New and traditional exchanges alike have embraced technology, and electronic trading has soared from less than 10% of the total volume in 1998, to almost 50% of the total last year, with expectations that this upward trend will continue.

The interest of foreign entities willing to invest in U.S. markets has also risen. Two U.S. designated contract markets are directly or indirectly owned by European exchanges. A U.K. clearinghouse was approved to clear transactions executed on one of the new U.S. exempt commercial markets, and just this week, the Commission expanded its designation to allow it to clear transactions executed on U.S. designated contract markets. In addition, a U.S. clearinghouse has a request pending that, if approved, would allow U.S. customers to clear, through its clearing members, futures and options traded on a German exchange.

This modernized regulatory environment, coupled with market demand, has yielded more platforms, more choices, and more competition than ever before, which has fostered capital efficiencies through new strategic alliances and has resulted in enhanced customer service and lower transactional fees.

Enforcement Efforts

Another benefit to the markets and to the public that resulted from the CFMA was the clarification of the Commission’s jurisdiction with respect to retail foreign currency (“forex”) transactions. Prior to the CFMA, the Commission’s authority to shut down foreign currency bucket shops had been called into question due to differing court opinions interpreting the scope of the Treasury Amendment, a provision of the CEA which excluded the inter-bank foreign currency market from the Commission’s jurisdiction. Recognizing that this had created a gap in the law, Congress granted to the CFTC explicit authority to prosecute illegal, off-exchange forex futures and options offerings to the retail public. Following this important clarification in the law, the Commission launched an intensive enforcement initiative to root out and prosecute unscrupulous operators of fraudulent forex bucket shops. The Commission also approved rules adopted by the NFA last year that require their forex dealer members to take responsibility for the activities of any unregulated solicitors they may deal with. The Commission continues to work with the NFA to identify ways in which our supervision of forex activity may be improved.

Since passage of the CFMA, the Commission has filed 61 enforcement actions in the forex area, and has been awarded civil monetary penalties totaling over $100 million, as well as restitution and disgorgement judgments totaling more than $62 million. Many of these cases have resulted in additional criminal charges through the cooperative efforts of our Division of Enforcement and state and federal criminal authorities.

The Commission has also aggressively pursued those who manipulated or attempted to manipulate the energy futures markets. Since 2002, the Commission has opened dozens of investigations in this area, which, as I mentioned earlier, has resulted in 16 actions filed and almost $200 million in civil monetary penalties collected to date. I am happy to report that 97% of the energy investigations we opened in 2002 have been resolved.

Security Futures Products

Another notable aspect of the CFMA was the legalization of security futures products (“SFPs”), which are futures contracts based on individual stocks or narrow stock indices. The legislation defined SFPs as both futures and securities and directed the CFTC and the Securities and Exchange Commission (“SEC”) to share oversight responsibility for their trading under a primary regulator and notice regulator regime intended to avoid duplicative or overly burdensome requirements on market participants. Futures based on broad-based stock indices, which have been permitted since 1982, remain under the exclusive jurisdiction of the CFTC.

Although the two agencies were able to jointly formulate rules that allowed SFPs to begin trading in a timely manner, the products have not been as successful as some had predicted. I believe that this is due in part to the lack of a risk-based portfolio margining regime for SFPs similar to that used in other futures markets. Another issue that remains outstanding is the promulgation of joint rules to permit the trading of foreign SFPs. It is my hope that we can reach agreement with the SEC on these and other issues in the near future

Ongoing Initiatives

While the major work of implementing the CFMA is done, the Commission continually looks for ways to further the spirit and purposes behind the legislation, to lift regulatory burdens where they no longer serve a legitimate purpose, and to replace obsolete, prescriptive requirements with principles-based oversight that allows for innovation and fair competition. One area in which we are focusing is to modernize our oversight of exchanges, clearinghouses, and other self-regulatory organizations with risk-based examination cycles and risk-focused reviews. Similar to the approach of other federal financial regulators and certain overseas financial supervisors, both the scheduling and scope of the CFTC’s supervisory reviews will now be based on careful analysis of the underlying risks to which an institution is exposed and the controls it has in place to address those risks. This approach promises to better utilize staff resources and to facilitate even greater financial integrity and risk management within the firms and clearinghouses that are the backbone of the futures clearing system.

In addition, in keeping with the CFMA’s directive that the public interests embodied in the futures markets be served through a system of effective self-regulation of trading facilities, clearing systems, market participants, and market professionals under the Commission’s oversight, I announced last year that the Commission would review the roles, responsibilities and capabilities of the industry’s self-regulatory organizations (“SROs”). This was not because of any particular concern or perceived problem, but because I thought it was the prudent thing to do given the CFMA’s emphasis on self-regulation, and the structural changes occurring in the industry such as the move by exchanges towards demutualization. Since the initiation of the SRO study, Commission staff has interviewed more than 100 individuals representing FCMs, exchanges, and DCOs. Staff has also interviewed industry executives, academics, consultants and individuals associated with securities-side entities.

Based on these interviews, we identified two issues for immediate attention: (1) ensuring the confidentiality of certain information obtained by SROs in the course of their self-regulatory activities; and (2) examining the cooperative regulatory agreement by which SROs coordinate compliance examinations of FCMs. As part of that review, the Commission recently issued a request for comment on proposed amendments to that agreement. The Commission is also moving forward with a second phase of the study, which will focus on governance issues. A request for comment soliciting views on a number of issues in that area will go out soon.

Conclusion

By moving front-line accountability for how markets operate and what they trade to the marketplace, the CEA, as amended by the CFMA, permits regulatory resources to be refocused on strong oversight, risk-based inspection, and swift and sure enforcement. It has been an exciting time to be at the Commission as the industry has evolved over the last few years to incorporate new technologies into their business models and meet the challenges of competition. In my opinion, the new regulatory framework brought about by enactment of the CFMA has been a success. I would hope, therefore, that as the time for reauthorization approaches, any legislative amendments that may be considered be approached cautiously and pursued only after a full debate by all interested parties. The Commission looks forward to working with the Committee on this upcoming project.

I would like to close by expressing how proud I am of the dedicated men and women at the Commission who have worked tirelessly over the last three-and-a-half years to reshape our regulatory framework to achieve the goals expressed by Congress and to timely process the many new exchange and clearinghouse applications we have received. We have worked very hard to get things right. Thank you for the opportunity to testify. I will be happy to answer any questions you may have.

Opening Statement of Commissioner Brian D. Quintenz before the CFTC Technology Advisory Committee

February 26, 2020

Good morning and welcome to our fifth meeting of the Technology Advisory Committee (TAC or Committee).  Before we begin, I would like extend a warm welcome to all of our guest presenters, as well as express my gratitude to all of the Committee and subcommittee members for so generously giving their time to participate today.

We have a lot of ground to cover.  The TAC will hear presentations on wide-ranging and timely topics, including audit trail requirements, stablecoins, specific applications of ISDA’s common domain model, the latest in cryptocurrency insurance and custody best practices, and updates regarding cryptocurrency self-regulatory efforts.  At the end of the meeting, the cybersecurity subcommittee will present its recommendation that the CFTC join with other organizations in making a statement of support for the Financial Services Sector Coordinating Council (FSSCC) Cybersecurity Profile.  The TAC will then discuss and vote on this recommendation.

FIA on Audit Trail

Audit trail requirements are designed to provide the Commission with the information necessary to reconstruct how a transaction was executed after-the-fact.  These records are critical to the Commission’s ability to conduct surveillance inquiries and investigations in order to protect customers and ensure market integrity.[1]  However, the Commission’s current audit trail requirements are in some respects redundant, placing similar recordkeeping and review obligations on futures commission merchants, exchanges, and exchange members.[2]  The overlapping requirements impose significant costs on market participants and exchanges, which must each store and maintain massive amounts of duplicative transactional data.  To address these issues, the FIA formed an Audit Trail Working Group.  The panel before us today will present the Working Group’s recommendations to the TAC regarding how current audit trail requirements can be streamlined and made more cost-effective.

Stablecoins

Our second panel will present on stablecoins.  Although the definition of a “stablecoin” is still evolving, they are commonly thought of as a class of virtual currencies that seek to offer price stability against another asset, frequently by being “backed” by that asset in reserve, like fiat currency(ies) or certain physical commodities (e.g., precious metals).  In the furtherance of providing such correlated value, stablecoins have the potential, through tokenization, to function as viable, liquid mediums of exchange and serve as powerful enablers of smart contracts. Stablecoins are early in maturation and our panel will discuss several developing stablecoins.

First, we will hear from Mr. Charles Cascarilla, CEO and Co-Founder of Paxos.  Mr. Cascarilla will discuss two of Paxos’ current stablecoin projects:  the Paxos Standard, or PAX, which is a digital dollar, backed 1:1 with the U.S. dollar; and PAX Gold, which is a digital dollar backed by gold.

We will also hear from Mr. Eddie Wen, Global Head of Digital Markets, about the JPM Coin currently under development.  JPM Coin is designed to be a digital representation of U.S. dollars held in designated accounts at JP Morgan Chase that can be used for instantaneous payment transfers on the blockchain between institutional JPM clients.

Mr. Steven Becker, President and Chief Operating Officer of the MakerDAO Foundation, will provide an overview of decentralized finance or DeFi, including some of the benefits and misconceptions associated with decentralized protocols, as well as MakerDAO’s Dai stablecoin.

Finally, Mr. Tomasso Mancini-Griffoli, Deputy Division Chief in the Monetary and Capital Markets Department of the IMF, will provide an overview of some of the public policy considerations implicated by stablecoins:  financial stability, monetary policy control, privacy, competition, efficiency, consumer protection, and financial integrity.

ISDA Demonstration of the Common Domain Model

Next, Ian Sloyan, Director of Market Infrastructure and Technology at ISDA, will present on some applications of the ISDA common domain model or CDM.  Mr. Sloyan will demonstrate via a live run how a swap trade could be reported using ISDA CDM to satisfy the regulatory requirements of CFTC parts 43 and 45 reporting.  By providing market participants with an openly available digital code that they can then implement in their own reporting engines and technology platforms, CDM aims to increase the consistency and integrity of reporting.  Mr. Sloyan will also present on how the CDM is being applied to improve efficiencies in collateral management, by reducing collateral legal documentation and eligibility schedules into digital form.

Crypto Insurance and Custody

Our fourth panel will discuss how insurance underwriting standards are driving best practices for cryptocurrency custody.  First, we will hear from Mr. James Knox, Managing Director and Technology & Communications Industry Regional Practice Leader for Aon.  Mr. Knox will explain how the need to secure affordable insurance policies for digital assets is leading to an understanding among insurers, intermediaries, and platforms about cryptocurrency custody best practices.  We will also hear from Mr. Itay Malinger, Co-Founder and CEO of Curv, who will discuss some of the current challenges associated with cryptocurrency custody.  Mr. Malinger will discuss how multi-party computations – or the ability of multiple parties to jointly perform mathematical computations without any party revealing confidential information to the others – may assist firms in developing custody solutions.

Crypto Self-Regulatory Organizations (SRO)

The presenters on our fifth panel will provide updates on their efforts to create SRO-like governance structures for the digital asset and cryptocurrency trading marketplace.  Given the lack of federal market regulatory oversight in the digital asset trading environment, I have long called for and been a vocal proponent of a private sector, multi-platform-based solution to furthering market integrity through an SRO-like organization.  Today we will hear from three groups which have made substantial progress in advancing this concept and dialogue:  the Virtual Commodity Association represented by their president, Mr. Yusuf Hussain, Global Digital Finance represented by their board member Mr. Jeff Bandman, and the Association for Digital Asset Markets represented by their founding board member Mr. Brad Vopni.  Each group has their own membership and focus, and I am excited to hear about their progress, goals, and on-going challenges in promoting market integrity in the digital asset trading environment.

TAC Vote on Cybersecurity Subcommittee Recommendation

Finally, the cybersecurity subcommittee will present a recommendation for the consideration of the full TAC that the CFTC should issue a statement of support for the FSSCC Cybersecurity Profile.  If the recommendation is adopted by the TAC and addressed by the agency, this would put the CFTC in the company of several other federal agencies, which have also issued statements of support.

Conclusion

Before I conclude my remarks, I would also like to recognize Meghan Tente, Jorge Herrada, John Coughlan, Scott Sloan, and Phil Raimondi for their tireless efforts to make this meeting a success.  As always, I would like to express my deep appreciation for Richard Gorelick, the TAC Chair, for his leadership, expertise, and willingness to give so generously of his time to this Committee’s work.

With that, I would now like to recognize my fellow Commissioners to make any opening remarks. 

-CFTC- 

Statement of Commissioner Brian D. Quintenz before the Open Commission Meeting on February 20, 2020

Open Meeting on Proposed Rule: Amendments to the Real-Time Public Reporting Requirements (Part 43); Proposed Rule: Amendments to the Swap Data Recordkeeping and Reporting Requirements (Part 45); and Reopening of Comment Period: Certain Swap Data Repository and Data Reporting Requirements (Part 49 Verification)

February 20, 2020

Good morning.  I am pleased to support the data proposals before the Commission today.  These proposed amendments to part 45 regulatory reporting and part 43 real-time reporting hopefully represent the beginning of the end of this agency’s longstanding efforts to collect and utilize accurate, reliable swap data to further its regulatory mandates.

There is frequently a trade-off between being first and being right. That is especially true when it comes to regulation and specifically true when it comes to the CFTC’s historical approach to uncleared swap data reporting. Although the CFTC was the first regulator in the world to implement swap data reporting requirements, it did so only in a partial, non-descriptive, and non-technical fashion, which has led to the fact that, even today, the Commission has great difficulty aggregating and analyzing data for uncleared swaps across swap data repositories (SDRs). 

However, I’m very pleased that over the past few years, the CFTC continued to lead global efforts to reach international consensus on reporting requirements so that derivatives regulators can finally get a clear picture of the uncleared landscape.

I wish we could have arrived at this stage sooner.  Nevertheless, I would like to recognize the diligent efforts of DMO staff to finally get us over the finish line.  The proposals before us today seek to provide the Commission with the homogeneous data it needs to readily analyze swap data for both cleared and uncleared swaps, across jurisdictions.  The proposals would eliminate unnecessary reporting fields, implement internationally agreed to “critical data elements,” or CDE fields, and revisit aspects of our current reporting regimes that can be further perfected.  

It is important to note the differentiation between the poor usability of current uncleared swaps data and the significant usability of swaps data produced by clearinghouses for cleared swaps trades.  In fact, the swap data for cleared swap transactions is regularly used by the Commission to monitor risk in real time at the client portfolio level.

Part 45 Regulatory Reporting

The proposal would provide reporting counterparties with a longer time to report trades accurately to an SDR by moving to a “T+1” reporting timeframe for swap dealer (SD) and derivatives clearing organization (DCO) reporting parties, and a “T+2” reporting timeframe for non-SD/DCO reporting counterparties.  I support providing additional time for market participants to meet their regulatory reporting obligations.  A later regulatory reporting deadline should help counterparties report the trade correctly the first time, instead of reporting an erroneous trade that then needs to be corrected later.  This proposed change would also more closely harmonize the CFTC’s and ESMA’s reporting deadlines.

The proposal would also implement a number of CDE fields consistently with the detailed technical standards put forth by CPMI-IOSCO.[1]  Importantly, the proposal would remove the current “catch-all” reporting requirement to report “any other term(s) of the swap matched or affirmed” by the counterparties.  It would also require, for the first time, certain reporting counterparties to report valuation, margin, and collateral information daily to the Commission.  Significantly, in order to alleviate burdens on small reporting counterparties, non-SD/MSP reporting counterparties would not be subject to these new requirements.  With respect to swaps on physical commodities, the proposal seeks input from market participants about how certain data elements should be reported, including quantity unit of measure and price unit of measure.  The CDE technical guidance did not harmonize many fields that are relevant to the physical commodity asset class.  I know DMO will continue to play an active role through CPMI-IOSCO’s CDE governance process to ensure that additional guidance and specificity are provided regarding the data elements for this asset class.  I hope that commenters use this as an opportunity to help inform the additional steps that must be taken at the international level to ensure the effective reporting of commodity swaps.

The technical specification describing each of these data elements is being put out for public comment and I urge market participants to comment on all of the proposed elements.  To the extent the CFTC can adopt basic data elements that are identical to other jurisdictions’ elements, global aggregation and measurement of risk, including counterparty credit risk, can become a reality.  However, the goal of global data harmonization, in my opinion, should also be balanced against the burdens and practical realities facing reporting counterparties.  This proposal tries to strike an appropriate balance and I look forward to hearing from commenters on this point.

Part 43 Real-Time Reporting

The real-time reporting proposal generally maintains the “as soon as technologically practicable” reporting standard for most trades, but would adjust the delay for public dissemination of block transactions.  The proposal also updates the block size thresholds and cap sizes and makes adjustments to the block swap categories. 

With respect to the timing requirement for reporting block trades, the proposal would establish a time delay of 48 hours after execution of the trade.  The Commodity Exchange Act (CEA) specifically directs the Commission to ensure that real-time public reporting requirements for swap transactions (i) do not identify the participants; (ii) specify the criteria for what constitutes a block trade and the appropriate time delay for reporting such block trades, and (iii) take into account whether public disclosure will materially reduce market liquidity.[2]  Several commenters requested that the Commission reconsider the current delays for block trades under CFTC regulations, citing concerns about market liquidity, counterparty confidentiality, or the pricing of block trades.[3]  Taking into account the CEA’s directives and commenters’ concerns, the proposal seeks to recalibrate the balance among price transparency, price discovery, and market liquidity.  I am very interested to hear from commenters about whether or not the Commission struck the right balance in this proposal, and, if another time delay is more appropriate for particular asset classes of trades, I hope commenters will include their suggestions. 

Conclusion

In the past, the leadership of the CFTC has likened the construction of a swap data reporting system to the building of a transcontinental railroad—a monumental infrastructure project, requiring considerable time and resources. However, in my opinion the best way to build a functioning intercontinental railroad is not to let every state decide how wide they want to make the tracks—the approach the agency tried when it rushed out its uncleared swap reporting framework almost eight years ago.  Subsequent progress on this issue has always been stymied by transitioning away from that view—away from the lack of specificity and consistency in how reporting counterparties should report basic data elements.  Today, as a result of the decisive leadership and hard work of this agency, I am optimistic that we have finally turned the corner towards complete visibility into the global swaps market landscape.  I look forward to hearing feedback from market participants and SDRs about how our proposals can be further improved.  

-CFTC- 

Statements of Concurrence by Commissioner Rostin Behnam Regarding Proposed Rules on Real-Time Public Reporting and Swap Data Recordkeeping

February 20, 2020

Real-Time Public Reporting Requirements (Part 43)

I respectfully concur in the Commission’s proposal to amend certain real-time public reporting requirements.  I support the Commission’s ongoing review of its swap reporting rules; however, I think it is very important that we not lose sight of why we have these rules in the first place.  Prior to the 2008 financial crisis, swaps were largely exempt from regulation and traded exclusively over-the-counter.[1]  Lack of transparency in the over-the-counter swaps market contributed to the financial crisis because both regulators and market participants lacked the visibility necessary to identify and assess swaps market exposures and counterparty relationships and counterparty credit risk.[2]  In the aftermath of the financial crisis, Congress enacted the Dodd-Frank Wall Street Reform and Consumer Protection Act in 2010 (Dodd-Frank Act).[3]  The Dodd-Frank Act largely incorporated the international financial reform initiatives for over-the-counter derivatives laid out at the 2009 G20 Pittsburgh Summit, which sought to improve transparency, mitigate systemic risk, and protect against market abuse.[4]  With respect to data reporting, the policy initiative developed by the G20 focused on establishing a consistent and standardized global data set across jurisdictions in order to support regulatory efforts to timely identify systemic risk.  The critical need and importance of this policy goal given the consequences of the financial crisis cannot be understated.

Among many critically important statutory changes, which have shed light on the over-the-counter derivatives markets, Title VII of the Dodd-Frank Act amended the Commodity Exchange Act and added a new term to the Act:  “real-time public reporting.”[5]  The Act defines that term to mean reporting “data relating to swap transaction, including price and volume, as soon as technologically practicable after the time at which the swap transaction has been executed.”[6]

As we consider amending these rules, I think it is important that we keep in mind the Dodd-Frank Act’s emphasis on transparency, and what transpired to necessitate that emphasis.  While most of today’s proposal encourages and supports the transparency required by the Act, I am concerned about the proposed amendments that would significantly extend the time delays for public dissemination of block trades.  Currently, the time delay for public dissemination of block trades executed pursuant to the rules of a SEF or DCM is 15 minutes.[7]  Today’s proposal would extend the time delay to 48 hours for all block trades.  I look forward to hearing from commenters as to whether this significant reduction in real-time transparency is justified, and whether there are potential risks to market structure efficiency that may reward some participants at the expense of others.

Amendments to the Swap Data Recordkeeping and Reporting Requirements (Parts 45, 46, and 49)

I respectfully concur in the Commission’s proposal to amend certain swap data and recordkeeping and reporting requirements.  The proposed amendments reflect a multi-year effort to streamline, simplify, and internationally harmonize the requirements associated with reporting swaps.  As a whole, the proposed amendments should improve data quality by eliminating duplication, removing alternative or adjunct reporting options, and utilizing universal data elements and identifiers.  Along those lines, I am especially pleased that the Commission is proposing to require consistent application of rules across SDRs for the validation of both part 43 and part 45 data submitted by reporting counterparties.  I believe the proposed amendments to part 49 set forth a practical approach to ensuring SDRs can meet the statutory requirement to confirm the accuracy of swap data set forth in CEA section 21(c)[8] without incurring unreasonable burdens.

I am also pleased that the Commission is considering requiring reporting counterparties to indicate whether a specific swap:  (1) was entered into for dealing purposes (as opposed to hedging, investing, or proprietary trading); and/or (2) needs not be considered in determining whether a person is a swap dealer or need not be counted towards a person’s de minimis threshold as described in paragraph (4) of the “swap dealer” definition in regulation 1.3 pursuant to one of the exclusions or exceptions in the swap dealer definition.  In the past, the Commission staff has identified the lack of these fields as limiting constraints on the usefulness of SDR data to identify which swaps should be counted towards a person’s de minimis threshold, and the ability to precisely assess the current de minimis threshold or the impact of potential changes to current exclusions.[9]  As I have noted, where Congress has dictated that the Commission be the primary regulator for certain swap dealing activities, it should utilize resources efficiently to accomplish its duties.[10]  It seems that the Commission’s ongoing surveillance for compliance with the swap dealer registration requirements would be greatly enhanced by data fields identifying the relationship of a particular swap to its participant’s business or purpose—even where the data might only be reasonably available via the reporting counterparty.  Moreover, it would afford the Commission greater insight into the use and usefulness of current exclusions and exceptions, as well as provide important data to support further consideration of relief.  I look forward to hearing from commenters on this question.