"Proposed Changes to the Commodity Exchange Act"



National Cotton Council of America Board Meeting

June 3, 1997

I am pleased to be here today to speak to members of this very important sector of our agricultural community. For many years the Commission has benefited from the participation of the National Cotton Council on our Agricultural Advisory Committee, and I welcome the opportunity to discuss issues related to our futures markets with such a distinguished group of market participants.

I would like to address the proposed legislation currently pending in Congress to amend the Commodity Exchange Act, the law governing futures and option trading. These bills -- if adopted -- could have a significant impact on our futures exchange markets. Our futures markets have changed over the years, and it is an appropriate time to reexamine the Commodity Exchange Act to determine whether it continues to be effective and efficient in regulating our futures markets. The CFTC is committed to working with Congress, the futures industry and market participants to craft legislation that modernizes the Act while protecting the public interest and providing market participants with strong, safe and transparent futures markets.

Both the House and Senate bills include a provision exempting so-called professional markets from nearly all provisions of the Commodity Exchange Act. Federal oversight of the futures exchanges could be eliminated as long as exchange trading was limited to entities with a net worth of $1 million. The exchanges estimate that approximately 90 percent of their current trading volume is on behalf of such entities. Therefore, it is likely that simple exchange rule changes could convert many markets into professional markets subject to no meaningful federal oversight.

The deregulation of exchange trading possible under the professional markets exemption would greatly restrict federal power to protect against manipulation, fraud, financial instability and other dangers. While the bills preserve CFTC jurisdiction to bring fraud and manipulation cases after the fact, that limited authority might provide only an illusion of protection. The Commission would be stripped of many of its regulatory tools designed to prevent those abuses from occurring and to detect them when they do occur.

For example, there would be no Commission surveillance of the professional markets and no federal standards for their self- regulation. These markets would not be subject to such federal requirements as large trader reporting, exchange recordkeeping, speculative position limits, competitive trading, open pricing, and audit trail.

Commodity professionals trading exclusively on exempted markets would no longer be subject to registration, fitness and sales practice standards. Statutory and regulatory standards relating to the financial integrity of the markets and their participants would be eliminated. These standards include segregation of customer funds, net capital requirements, financial reporting, margining of accounts and special bankruptcy protections. In sum, the bills could eliminate seventy years of government protection of the integrity of our markets.

The bill pending in the Senate, unlike the House bill, would not permit deregulation of futures markets in certain domestic agricultural products, including cotton, presumably on the grounds that it would be too dangerous to do so. The Commission believes that futures markets in other products -- energy, metals, tropical agricultural products, and financial instruments -- deserve the very same level of regulatory protection as agricultural products.

Moreover, the Commission is extremely concerned about whether it would be able effectively to regulate and to protect markets in agricultural products that would trade side-by-side on the same exchange with totally unregulated markets. For example, the Commission seriously questions whether the funds related to regulated and unregulated trading should be handled by the same clearinghouse. Significant public policy concerns would be raised by subjecting funds relating to the regulated market to the risks of trading in the unregulated markets.

The Commission also is concerned about the impact of unregulated markets on the liquidity of the regulated agricultural markets. The unregulated markets might siphon off speculative trading from the regulated agricultural markets, thus reducing their liquidity and usefulness. These same concerns were expressed by a coalition of agricultural interests -- including the National Cotton Council -- which opposed the professional markets provision in testimony before the House Agriculture Subcommittee in April.

The Commission recognizes that sophisticated institutional traders do not require the same degree of protection as unsophisticated and inexperienced individuals and is committed to the elimination of unnecessary regulatory burdens. It also will continue to examine its regulatory framework to determine whether there are areas in which our regulations could be streamlined or modernized.

The U.S. has had more than 70 years of successful futures market regulation -- regulation that has produced the most competitive, most dynamic and most innovative futures markets in the world. The Commission believes that a strong regulatory regime is crucial if these markets are to continue to serve their critical price discovery and hedging functions. It is committed to working with the industry, market users and Congress to keep our markets strong and fair.