The Changing Face of Regulation
by CFTC Commissioner Walt Lukken
Swiss Futures and Options Association Conference
Bürgenstock, Switzerland, September 9, 2004

I appreciate the opportunity to help celebrate the 25th anniversary of the Bürgenstock conference and to address this distinguished group regarding the changing face of regulation. American humorist Groucho Marx aptly described politics -- and I believe this applies equally well to regulating -- as “the art of looking for trouble, finding it, misdiagnosing it, and then misapplying the wrong remedies.” My comments today will address Groucho’s remark and how regulators can avoid being the brunt of this joke.

When I came to the Commission two years ago, I challenged myself, and our agency, to adhere to an oversight philosophy termed “smart regulation.” The “smart regulation” idea is one that has been advocated by President Bush as a means for improving the delivery of government services to U.S. taxpayers. Dr. John Graham, current administrator of regulatory affairs for the President, was the first to term and advance this approach in the U.S. He notes that this philosophy is not uniformly pro-regulation or anti-regulation, but instead seeks to promote the adoption of regulations that are effective, less costly and tailored to societal objectives. The benefit of adopting this approach is that it does not necessarily involve changes in legislation or regulation but rather entails a rethinking of the process in which federal agencies make decisions. It is also not unique to the U.S. Many regulators here today may already be abiding by its principles.

The road to “smart regulation” begins with three basic steps: first, agencies must strive to adopt greater transparency in their decision-making to bestow fairness and legitimacy on the process; second, agencies must leverage technology in an effort to gain better information, improve analysis and become more productive and cost-efficient; and third, agencies must cooperate and coordinate with other regulatory authorities, both domestically and internationally, to maximize their effectiveness and efficiency. I will briefly discuss each of these points.

Transparent decision-making ensures that those impacted by government decisions have a timely opportunity to influence the outcome. Greater openness in the process provides the public, even those in opposition to the outcome, with a sense that the decision was completed in a fair and logical manner. In the time I’ve been at the Commission, the CFTC has made significant strides towards greater transparency. Last year, the agency adopted a new policy to immediately put exchange and clearing organization applications on its website for public comment, even though not required by law or regulation. With the click of a mouse, any citizen of any nation can reference these applications for designation, as well as proposed rulemakings and amendments to Commission orders. With minimal costs to the Commission, we have greatly improved public access to important agency information, increased the speed by which our agency can make informed decisions and heightened the quality of comments that the agency receives.

Maybe not as popular as, our website,, containing last year’s application by Eurex US to be a designated contract market, received a good number of hits over this proposal. The CFTC posted the entirety of the Eurex application minus those sections deemed proprietary. This allowed the industry, both proponents and opponents, to quickly address areas of support or concern. In turn, the agency, after its own careful analysis, was able to specifically address each of the points raised by the comments. As a result, the application was approved well before the statutory deadline and within days of the target startup date of the exchange. From start to finish, this regulatory review, probably the largest undertaken by this agency, took less than five months to officially complete. The openness of this process greatly added to the quality of the analysis and helped ensure that the public ultimately deemed the decision as sound, fair and balanced. I would suggest that this reasoning is also behind IOSCO’s recent decision to consider more consultation in developing new standards, which I would generally support and welcome for the reasons I stated.

The second key element to the smart regulatory framework is the improved use of technology. So much has been made over the past few years on the productivity revolution in the private sector that we almost overlook the impact that technology has had on the federal government. Private sector productivity in the U.S. has grown twice as fast over the past eight years than it did over the preceding two decades, jumping from an average of 1.5 percent to roughly three percent. At that rate, our nation’s standard of living is expected to double every 24 years versus every 47 years. Maintaining a high level of productivity is vital to a nation’s economic well-being. And nothing seems to impact productivity more these days than technology, even if it’s a free iPod.

Society reaps similar benefits from higher productivity in the government sector through improved delivery of services. Unfortunately, the measurement of government productivity is difficult to quantify in the U.S. The U.S. Bureau of Labor Statistics stopped collecting data on government productivity in 1994 right as the technology economy was taking off. Anecdotally, however, we can see the significant impact that technology has had on the government’s delivery of services in the U.S., including the CFTC.

According to a recent private study, the U.S. ranks tied with Singapore for second in the world as the nation with the most mature utilization of web-based technologies for the delivery of government services. Canada ranks first. The U.S. result derives from such notable government websites as, the official web-portal of the entire U.S. government available in both English and Spanish, and, the centralized site for posting and commenting on all federal regulatory proposals.

President Bush’s E-Government budget initiative has been a key aspect of this success. E-Government advances improved Internet technology to facilitate the interaction between citizens and businesses with the government and to save taxpayer funds. For example, more than 2.4 million U.S. taxpayers filed their federal income tax returns online last year. Should this trend continue, the U.S. Internal Revenue Service believes that the resulting savings will allow the agency to free up enough resources to hire an additional 2,200 auditors. Of course, not everyone in the U.S. is thrilled over this prospect, but it is clear to see how technology has helped the government shift valued resources to areas where more focus is needed.

Similarly, the CFTC is striving to use e-technology to become more effective at meeting its public mission. The percentage of the CFTC budget devoted to technology and IT personnel has grown considerably and now accounts for nearly 10 percent of our expenditures and staff allocation. I expect your agencies have seen similar budgetary shifts.

Looking across our agency, the CFTC’s largest division, the enforcement section, has made vast technological improvements in its bid to become more productive. The division has established an Internet fraud team that dedicates significant staff resources and utilizes sophisticated web crawling technology to locate individuals who may be attempting to defraud the public. This effort enables the agency to search over 100,000 websites a month using key words indicative of fraudulent activity.

The impact of this program has been sizeable. In FY 2004, nearly ten percent of the enforcement cases brought by the agency were a direct result of this technology and accomplished at a cost equivalent to one full-time employee. This is in stark contrast to five years ago when our agency’s Internet fraud program was simply one employee manually surfing the “net” for illegal futures activity. This was not only inefficient, but also ineffective. The adoption of this new web crawling technology, which the agency is now updating, has improved the productivity of our enforcement team significantly. And it may have saved the sanity of the poor enforcement staff member previously assigned to surfing duty.

In addition, the agency’s lawyers will soon benefit from the implementation of our E-Law initiative. This proposal will impact the entirety of the litigation process by utilizing the latest litigation software and hardware to improve the proficiency of our attorneys and make our enforcement division virtually paperless. The E-Law initiative will equip our litigators with laptops and provide them with the ability to manage cases electronically, to digitally input and store evidence, and to produce court and other reporting requirements automatically. E-Law will enable our attorneys during depositions and trials to receive a live feed of the transcript, allowing them to search and reference statements real-time. In addition, our investigative attorneys who raid illegal boiler rooms will now be equipped with UBS flash drives -- in essence handheld hard drives -- that will permit them to download an enormous amount of documents and evidence from perpetrators’ computers on-site versus physically seizing the equipment or hiring firms to extract the evidence.

Having evidence in a searchable and manageable electronic format is key to today’s investigations. Without this ability, cases like the one the CFTC brought against Enron, which was recently settled for $35 million, would have been impractical due to the more than 100,000 documents that needed legal review. The E-Law program, which will facilitate this paperless transition, is expected to save the Commission between 35 and 75 percent compared to manually processing the more than 1 million paper documents handled by the agency annually.

The Commission also utilizes cutting-edge technology in its surveillance of the markets, firms and clearinghouses. Our market surveillance team receives daily electronic reports from firms on the large futures positions held by their customers. Staff uses software to analyze these large trader reports, in combination with other commercially available data, to determine whether there is a concentration of positions that may create the potential for disorderly trading conditions or market distortions. The Large Trader Report System has effectively served as the backbone of our market surveillance program over the years.

For overseeing the financial conditions of firms and clearing organizations, our Division of Clearing and Intermediary Oversight employs sophisticated software to process monthly electronic financial statements from registered firms and to perform over a hundred automated checks on the information to determine whether a firm is experiencing financial difficulties, such as becoming under-capitalized or failing to maintain properly segregated customer funds. Staff uses other programs to evaluate the potential risks that commodity price volatility may have on individual accounts, on FCMs carrying those accounts and on clearing organizations. If a problematic account is flagged, staff will run the SPAN Risk Manager system, which CME developed and made commercially available for other market users, to conduct stress tests using real or hypothetical price moves to assess financial risks. Each of these analytical tools, alone or working in tandem, enhances the Commission’s ability to conduct financial surveillance and maintain the integrity of the markets.

Technology, however, is a double-edged sword. Criminals are also becoming increasingly tech-savvy in their efforts to separate individuals from their money and to hide those funds from the authorities. The Internet has allowed criminals to access a larger pool of victims from anywhere in the world. Our agency sees a multi-factor increase of fraudulent activity on websites, especially those based-offshore in unregulated jurisdictions. This causes us concern whether our agency has all the necessary legal authority to shut down such offshore sites that are defrauding U.S. customers. These situations compel the agency to rely on the assistance and capabilities of other foreign jurisdictions to help shut down these malfeasants.

This is why the last criterion for smart regulation is so important, which is better coordination and cooperation between regulatory authorities, not only for preventing criminal activity as I’ve described, but also for ensuring the proper oversight of legitimate global market participants. A pertinent case in point is Eurex’s global clearing link that is currently under review by the CFTC. The consideration of this cross-border proposal requires the CFTC to work closely with our European regulatory counterparts to ensure that our respective missions are being fulfilled. Already this year, German authorities have visited the CFTC’s Washington and Chicago offices to learn about our oversight program and CFTC staff plans to reciprocate with a visit to Germany this fall.

Such coordination is enhanced through the participation of nations in international regulatory organizations, like IOSCO, and through regulatory conferences such as we are having today. For my European counterparts in attendance today, this is “preaching to the choir.” Cross-border coordination is something that Europe has been addressing for sometime now and we “Yanks” can learn from your experience.

Acting Chairman Sharon Brown-Hruska and I recognize the importance of such regulatory coordination, both internationally and domestically. The CFTC, as an active member of IOSCO, participated in the initial development of IOSCO’s regulatory standards for markets and is now involved with the assessment of whether members are abiding by such benchmarks. Permit me to brag about our International Division led by Andrea Corcoran. Her staff and the IT personnel at the CFTC led the IOSCO endeavor for creating and implementing a web-based assessment program that nations could complete online to analyze whether they are meeting IOSCO standards. This program is up and running and it demonstrates a unique blending of both technology and international cooperation.

Another good example of this e-coordination is the National Futures Association’s International Regulators Alert System, which was developed in partnership with the CFTC to provide international regulators with the information they need regarding CFTC registrants who conduct business in their jurisdictions. Under this program, if a CFTC registered firm is doing business in another jurisdiction, a foreign regulator can request from NFA via e-mail all regulatory information that is relevant to that firm. Once the initial request is made, the system will automatically send the regulator quarterly notices. Urgent information regarding the firm, such as withdrawal from membership and disciplinary actions, will be sent to the regulator automatically. I would urge you to consider using this free service, which is currently used by regulators in seven non-U.S. jurisdictions.

Regulatory harmonization also enables our agency to improve upon its own system of surveillance and oversight by learning from the methodologies of other countries. For example, over the past two years the CFTC has worked with numerous financial regulators, including those of Australia, France, Germany, Italy, Portugal, Switzerland and the United Kingdom, to share insights on the development of risk-focused supervision. We also have been working with the Australians to learn more about their innovative case management system. Finally, our Chicago regulatory conferences that we host each fall typically includes presentations and round-table discussions by non-U.S. regulators on global approaches to oversight and market development. I certainly believe that good ideas do not stop at our borders or our lines of jurisdiction.

Domestically, the CFTC harmonizes its regulatory efforts with its participation in the President’s Working Group on Financial Markets. The PWG, consisting of the Secretary of the Treasury and the Chairmen of the Federal Reserve, the SEC and the CFTC, meets multiple times a year to discuss policy matters that impact the broader marketplace. This group has proven effective at coordinating the efforts of these governmental bodies so a consensus might be reached among the major U.S. financial regulators. Speaking with a unified voice is important, especially during times of market crisis, and the PWG has worked well to provide that type of cooperative leadership.

In conclusion, I would note that many jurisdictions here today are already abiding by the smart regulatory philosophy without having put a label on it. Some, in fact, may be further down this regulatory road than our agency. But I find it important to publicly address our commitment to such methodologies as those of us who serve the public attempt to make good, informed decisions in our home nations. The smart regulatory agenda is a common-sense approach meant to help guide us in achieving that end. Thank you again for allowing me this opportunity to address your group.