OCTOBER 20-24, 1997


It is a pleasure to welcome you to the seventh annual CFTC Training Seminar on Regulation of Derivative Products, Markets and Financial Intermediaries. We have tried to design this seminar to share with you what we have learned in more than 20 years of trying to foster market integrity and customer protection in U.S. futures markets.

By providing risk shifting and price discovery functions, futures markets serve an important economic function that complements capital formation. Risk shifting provides a means for customers to hedge against future fluctuations in prices, while price discovery facilitates transactions in the underlying cash markets.

In order properly to perform these functions, derivatives markets must operate in an orderly, fair and efficient manner. If futures and option products are susceptible to manipulation as a result of poor product design or inadequate surveillance and monitoring, traders will lose confidence in the integrity of the marketplace. Market participants are also entitled to a trading environment that ensures fairness and minimizes the potential for default and systemic risk. An appropriate regulatory structure therefore is essential for a market to function well.

International regulators agree that the proper goals of regulation are market integrity and customer protection, but they also acknowledge that different methods may be used to achieve these goals. The U.S. system which we will be explaining to you during the seminar has permitted our markets and firms to operate soundly and has ensured a high degree of customer protection while at the same time fostering innovation that has enabled our markets to remain competitive. As you learn more about our regulatory system, we encourage you to reflect on those aspects of the U.S. regulatory approach that would be useful in your own country, taking into account the resources which you have available, as well as other factors particular to your markets, culture and legal system.

In 1974, by an Act of Congress, the CFTC was created as an independent regulatory agency of the U.S. government and was given exclusive authority to regulate futures and commodity options trading in the U.S. The U.S. system of futures regulation addresses:

-- the fitness, competency and sales practices of commodity professionals engaging in trading for customers, providing trading advice or handling funds;

-- the surveillance and supervision of markets to prevent market abuses and to foster financial integrity; and

-- the exercise of enforcement powers to insure compliance with the law.

At the CFTC, we have been examining our regulations to modernize and to streamline them. For example, we recently created a "fast track" process for CFTC approval of new contracts on an expedited basis. Moreover, in June of this year, we allowed futures brokers to use electronic media in communicating with their customers. You will hear more about these and other regulatory reform efforts in the days ahead.

Cooperation by national regulators in an increasingly international financial environment is not an option; it is a necessity. To emphasize the CFTC's commitment to assuring that our regulatory regime stays abreast of global change, in July of this year the Commission established an Office of International Affairs, which is coordinating this week's training seminar. We hope that the office will enhance the CFTC's ability to meet the challenges posed by the globalization of financial markets in three important ways:

to respond quickly to market crises that have global systemic implications;

to remain an effective supervisor in a global marketplace where no one regulator has all of the information or resources to regulate its markets or its firms; and

to eliminate unnecessary impediments to global business while preserving core protections for markets and customers.

The failure of Barings Plc., followed in quick succession by the dramatic losses incurred by the Sumitomo Corporation's copper trading, are two recent events underscoring the complexity of financial supervision in a global marketplace. Markets today are linked through fungible products and common or related market participants with the consequence that events which occur in one market can and frequently do cause regulatory concern in multiple jurisdictions.

Following Barings, international regulators tried to enhance the resilience of the financial marketplace against shocks or stress caused by such market-wide events. Barings led to the Windsor Declaration, relating to international cooperation in emergencies and protection of customer funds and assets in the event of cross-border default. It also led to the March 1996 Declaration on Cooperation and Supervision for sharing large exposure information, which to date has been signed by 20 regulators world-wide, and its companion agreement, which to date has been executed by 62 international exchanges and clearinghouses.

Similarly, following Sumitomo, the CFTC and the U.K.'s Securities and Investments Board, along with the relevant Japanese authorities, MITI and MAFF, co-sponsored an international regulators conference in November 1996 on physical delivery markets in international commodities. The London conference focused on the special problems that physical delivery markets pose for contract design, market surveillance and international information sharing and resulted in the issuance of the London Communiqué, setting forth an ambitious work program to address regulatory issues raised by the Sumitomo losses.

The London Communiqué's work program is on track for its scheduled completion date in a few days at a final meeting in Tokyo. In anticipation of that meeting, the participants have been developing "best practices" standards for contract design, market surveillance and information sharing. These "best practice" standards will establish regulatory benchmarks that can help each national regulator assess its own standards and practices.

The CFTC is also working in other international forums, such as IOSCO, on issues of common concern to regulators and self-regulators around the world. One major initiative involves the development of further guidance on implementing information sharing agreements, including identification of the types of information which may need to be shared in a particular type of market emergency. Market emergencies being explored include a firm financial crisis, such as Barings, a major market move caused by supply and demand factors, such as the 1987 market crash, and price distortions or unusual volatility in a particular market, such as the Sumitomo situation. Advance understanding of the information needed will facilitate sharing of information when such an event occurs.

Another major initiative of IOSCO in which we are participating is identifying the core elements of an effective regulatory system. With the rapid growth of futures trading around the world and the many linkages among markets and systems, agreement by regulators on the fundamentals of regulation is a top priority.

Notwithstanding the progress we have made in the area of international cooperation, global harmonization of financial regulation will not be reached anytime soon. Luckily, different regulatory approaches have led to successful regulatory results. Indeed, regulatory diversity within the framework of internationally accepted standards may enhance regulatory innovation and improve supervision.

In conclusion, I hope that you will find this seminar's discussions about the U.S. regulatory system relevant to the issues which you are currently facing in your own countries. I hope you will find the seminar instructive and thought-provoking and that you will share with us your experiences in important regulatory areas. Moreover, I hope this seminar provides an opportunity to get to know some of your fellow regulators in other countries. Those relationships will provide the foundation for increased cooperation in the years to come. Thank you.