"Streamlining and Modernizing Futures Regulation

in a Changing World"






September 19, 1997

I am honored to be here today to deliver the keynote address at this important symposium on derivatives and risk management. The materials on this symposium describe it as the "first forum focused on educating corporate and municipal leaders, directors and their representatives" in the growing field of derivatives law. I applaud the symposium's goals and wish you success.

The Commodity Futures Trading Commission (CFTC) was created by Congress in 1974 as an independent federal agency with the mandate to regulate U.S. futures and option markets. The Commodity Exchange Act (CEA) grants the Commission exclusive jurisdiction over futures and commodity options, whether they are traded on- or off-exchange, and authorizes the Commission to enforce the federal commodities laws with respect to such instruments. Using powers granted to the Commission by Congress in 1992, the Commission has exempted certain over-the-counter transactions, primarily between sophisticated traders from many of the provisions of the CEA. The Commission has retained fraud and manipulation prohibitions with respect to this market and watches the market carefully.

Derivatives markets have undergone substantial transformation in the last two decades. The nature of derivatives instruments has changed significantly, and the expansion of electronic technology offers previously unimagined opportunities, including instantaneous, around-the-globe, 24-hour-a-day trading.

Since its creation, the CFTC has witnessed a rapid evolution of the U.S. futures markets. On the futures exchanges, we have seen an explosion of trading in financial products such as foreign currency, stock index and interest rate futures, leaving the once-dominant trading in agricultural products only a small part of exchange trading today. We have witnessed enormous growth in the use of privately negotiated, customized and often extremely complex off-exchange derivatives contracts, again primarily in the financial sector. We also have seen the establishment of numerous new foreign futures exchanges, creating a truly global marketplace.

We are also beginning to see the impact of technological developments on exchange trading of derivative products. The Commission has pending before it the first application for designation of a completely electronic, Internet-based futures market. Just last week the Chicago Mercantile Exchange (CME) began trading its new "E-mini" S&P 500 contract, which for the first time on a U.S. futures exchange combines simultaneous electronic and open-outcry trading on the same contract. We have entered an era where customers and commodity professionals can communicate via computer.

These changes in our markets present challenges to both the marketplace and market regulators. To remain competitive, markets must keep pace with technological innovations and the needs of their customers. Market regulators must ensure that their regulatory regimes are streamlined to avoid imposing unnecessary burdens on the regulated industry and stifling market innovation. We must also seek to modernize our rules to take advantage of efficiencies offered by technology.

One of the Commission's top priorities during the past year has been to ensure that the agency is responsive to the challenges facing the U.S. futures industry and its customers while at the same time preserving important customer protections and market safeguards. The Commission has accomplished a great deal in its efforts, although we can and will do more. Since the beginning of 1997, the Commission has taken several actions to streamline and to modernize our regulatory regime.

One of our first actions this Spring was taken in response to concerns expressed by the futures exchanges that the Commission's contract approval process was too slow to allow them to bring new products to market as quickly as they would like. The Commission implemented new "fast-track" procedures for processing contract designation applications and exchange rule changes. These procedures significantly streamlined the review process for most new exchange contracts and many exchange rules, permitting approval within 10 days for many types of contracts and 45 days for certain other contracts.

Prior to adoption of the fast track procedures, the Commission had already reduced its average contract approval time to about 90 days. Since adoption of these procedures, 15 new contract designations have been filed with the Commission, seven of which were eligible for fast-track review. Except for the one contract submitted just last week, the Commission has approved all eligible contracts within the fast-track time period. Even contracts not subject to the fast-track procedures -- such as stock index futures contracts which must be forwarded to the SEC for comment -- have been approved in record time. For example, this past summer the Commission approved the CME's E-mini S&P 500 contract and the Chicago Board of Trade's (CBOT) Dow Jones Industrial Average contract within days of receiving the statutorily required SEC comment letters.

The Commission's streamlining efforts have brought significant benefits to futures commission merchants (FCMs), commodity trading advisers (CTAs) and their customers. For example, in June the Commission approved an interpretation permitting streamlined procedures for allocation of customer orders which are bunched for execution by CTAs. The CBOT commented that the action was "extremely important to the industry, in that it facilitates the flow of large customer orders directed by CTAs." The Futures Industry Association (FIA) praised the initiative for responding to the need to adapt the regulatory scheme to evolving market conditions. The Managed Funds Association (MFA) recognized the importance of the customer protections maintained by the Commission, noting that its action provided clarity to all parties and furthered protection of customers by providing for their fair and equitable treatment.

The Commission also provided relief to FCMs with respect to the capital treatment of short option positions to permit more FCMs to carry such positions for customers and to facilitate efficient use of capital without creating undue financial risk.

The Commission has streamlined many of its reporting and disclosure requirements. For example, the Commission amended its reporting requirements to permit filing by large traders of CFTC Form 40, Statement of Reporting Trader, only when requested by the Commission rather than annually. In an important development for CFTC registrants who are also SEC registrants, we adopted rule amendments to harmonize certain financial reporting requirements with the requirements of the Securities and Exchange Commission. The Commission also has approved in principle two-part risk disclosure documents for commodity pool offerings, which potentially would highlight the core information required to be provided to customers.

In our most recent regulatory reform action taken in early September, the Commission proposed amendments to its rules governing the risk disclosure obligations of FCMs and introducing brokers (IBs). If adopted, the proposed rule amendments should speed the account opening process for financially sophisticated customers identified in the rule and provide the flexibility to FCMs and IBs to design their own disclosure of risk by eliminating certain mandatory risk disclosure information and procedures. This proposal responds directly to industry calls to permit different regulatory treatment of sophisticated customers where appropriate.

The Commission also has adopted a number of initiatives designed to take advantage of the increased efficiencies and reduced costs made possible through the use of electronic media. In June the Commission opened the way for FCMs to use electronic media in communicating with their customers. The Commission's Advisory permits FCMs to deliver monthly statements, trade confirmations and other account statements solely by electronic media to customers who consent to electronic transmission in lieu of receiving paper documents. Also in June, the Commission authorized CTAs and commodity pool operators (CPOs) to provide risk disclosure documents to their customers via electronic media. The Commission's interpretation enables CPOs and CTAs to provide customers with a risk disclosure summary and a hyperlink connection to the entire risk disclosure document.

The Commission also has adopted measures to permit the electronic filing of documents with the Commission. In April the Commission adopted a rule allowing CTAs and CPOs to file their required disclosure documents with the Commission electronically. We also have undertaken a program to permit FCMs to file required financial reports with the Commission electronically. These electronic media initiatives should increase the timeliness of information flow, reduce the administrative costs of commodity professionals and allow all members of the industry and their customers to reap the benefits of technological advances. As a side benefit to the Commission, these initiatives will assist us in performing more precise computer analyses of firm financial conditions.

Many of the Commission's actions over the last year were undertaken in direct response to concerns raised by members of the industry. Others were undertaken following an internal review and recommendations by Commission staff. The Commission currently is working on several additional regulatory initiatives, most of which are in direct response to issues raised by members of the industry.

For example, in response to concerns expressed by certain futures exchanges and the FCM community about the need to address the special needs of large institutional market participants, the Commission intends to undertake a review of whether to permit certain non-competitive, off-floor transactions executed subject to the rules of a contract market. The FCM community also has requested that the Commission review whether post-order allocation of bunched orders could be allowed with respect to orders of sophisticated customers with their consent.

The Commission also intends to review whether it should use its exemptive authorities to expand permitted investments of customer funds by an FCM or a U.S clearing organization to include certain additional categories of liquid and readily marketable investments, as advocated by many FCMs. The CEA currently restricts investment of such funds to obligations of the United States or any state and obligations fully guaranteed by the United States. The Commission also intends to consider a request from industry representatives that it permit futures-style margining of options for certain customers. With respect to each of these proposals, the Commission will seek to accommodate the needs of the industry and its customers with our mission to protect market users and to foster market integrity.

The Commission's ongoing commitment to streamlining its regulatory requirements and to fulfilling its responsibilities under the CEA in an efficient and cost-effective manner is further evidenced by its recent delegation to the National Futures Association (NFA) of certain Commission functions. The NFA, a self-regulatory organization of commodity professionals designated by the Commission under the CEA to perform certain regulatory functions, has been actively seeking such added responsibilities.

During the past year, the Commission delegated additional authority to the NFA in several areas including:

registration decisions relating to floor brokers and floor traders with disciplinary histories;

ethics training of commodity professionals; and

various registration and processing functions relating to non-U.S. firms.

The Commission is continuing to evaluate other functions that could be delegated to the NFA. For example, it will shortly consider a proposal to authorize NFA to review disclosure documents required to be filed by CPOs and CTAs.

As you can see from this brief description, the Commission has made significant strides in the past eight months in streamlining and modernizing our regulations. We are committed to doing more. I am issuing today a renewed challenge to the Commission staff to fill up our regulatory reform suggestion box. I also would like to reiterate my open invitation for industry participants and other interested persons to share with us their views on possible regulatory reforms. I strongly believe that, working together, the Commission and members of our industry can lessen regulatory burdens while preserving the important protections of customers and market integrity that have made the US futures markets the strongest, most competitive and most innovative in the world.