Testimony of Brooksley Born before the Senate Committee on Agriculture, Nutrition, and Forestry

Thank you for the opportunity to present the views of the Commodity Futures Trading Commission ("Commission" or "CFTC") on S. 257, a bill to amend the Commodity Exchange Act ("Act" or "CEA"). The Commission welcomes the Committee's review of the Act. In light of changes in the futures and option markets, periodic review of the Act is necessary to ensure that it continues to serve its core purpose of protecting the futures and option markets, the participants in those markets and the public interest.

Although there are many provisions of S. 257 that the Commission supports, several of the major provisions of the bill would substantially undermine the Act's core purpose, and for that reason, the Commission urges the Congress not to adopt them.

The Commission appreciates the opportunity to suggest needed amendments to the Act. The Commission's proposed amendments, which are attached as Appendix 1 and Appendix 2, were submitted in response to the invitation of Senators Lugar and Leahy to the Commission to recommend changes to the Act. S. 257 contains none of these proposals, and the Commission urges their inclusion in legislation.

I. THE COMMISSION OPPOSES CERTAIN PROVISIONS AS CONTRARY TO THE PUBLIC INTEREST.

A. The Professional Market Exemption Could Lead to Pervasive Deregulation of Exchange Trading.

The Commission strongly opposes the provision of the bill in Section 6 that would create an exemption from the Act for "professional markets." Such a provision would eliminate federal oversight of exchange trading of futures and option contracts provided that trading is limited to "appropriate persons" and would essentially exempt such markets from all provisions of the Act other than prohibitions against fraud and manipulation. Some Commission power to act in emergencies would apparently continue, as would certain provisions concerning futures trading on securities. The Commission believes that it would likely be unable to exercise its emergency authority given the complete lack of information that would be available to it concerning transactions in professional markets. The Commission has similar concerns about the feasibility of enforcing the prohibitions on fraud and manipulation.

Under the bill, exchange trading in certain domestic agricultural commodities referred to in Section 1a of the Act would not be eligible to be traded on an unregulated professional market, apparently on the grounds that those commodities should not be subjected to the dangers inherent in deregulation. Nonetheless, approximately 84 percent of the current exchange markets, involving other agricultural products, energy, metals, lumber and financial instruments, would be free to trade without regulatory oversight. (See Appendix 3) Deregulation considered too dangerous for agricultural futures markets should not be imposed on those who use or depend on the futures markets for financial instruments, coffee, copper, heating oil, precious metals, and other commodities.

The professional markets provision likely would cause a broad elimination of regulation of our markets. In fact, the exchanges estimate that approximately 90 percent of the volume of trading on their markets is currently on behalf of persons who would be eligible to trade in an unregulated environment under this legislation. They include small businesses, proprietorships, pension funds, mutual funds, insurance companies, commodity pools of individual investors, and municipalities. Natural persons not eligible to trade in the markets because they did not meet the provision's $10 million asset test could form a corporation, enter a partnership, or establish a proprietorship that would be eligible under a lower $1 million net worth standard. Simple rule changes by the exchanges could convert them into professional markets subject to no regulation.

The deregulation of exchange trading possible under this provision would eliminate federal power to protect against manipulation, fraud, financial instability and other dangers. The bill preserves jurisdiction to bring fraud and manipulation claims after the fact. But that limited authority would provide only the illusion of protection when stripped of regulatory tools designed to prevent those abuses from occurring or making it easier to detect them when they do occur.

The need for federal regulation of the futures markets has been recognized by Congress for over seventy years. These markets serve vital price discovery and hedging functions which are essential to a healthy, capital-based economy. Business, agricultural and financial enterprises use the futures markets for pricing information, as well as to hedge against financial loss. The participants in commercial transactions rely extensively on the prices established by the futures markets, which thus affect billions or trillions of dollars in commercial activity. Moreover, the prices established by the futures markets directly or indirectly affect all Americans. They affect what we pay at the grocery store and at the service station, what we pay for our silverware, our copper plumbing, and our lumber.

It is the pricing and hedging functions of the markets--not the nature of the participants--that Congress long ago determined rendered "regulation imperative for the protection of commerce and the national public interest therein." Section 3 of the Act, 7 U.S.C. � 5 (1996). The assumption that underlies the bill's provisions -- that the markets have evolved into the bastion of sophisticated traders and so the need for regulation no longer exists -- is false. These markets have always been principally professional and certainly were in 1974 when Congress acted to create the CFTC. Little has changed since then in terms of the imperatives for regulation.

If the proposed provision were adopted, these important markets would be eligible to operate without any meaningful governmental oversight. The Commission's surveillance of the 11 U.S. futures and option exchanges likely would cease, along with many statutory and regulatory requirements such as speculative position limits, large trader reporting and exchange recordkeeping. Without these powers, the federal government would be unable to analyze aberrational price movements, including suspected or actual price manipulation. The Commission would no longer have the ability to respond to inquiries, including those from Congress about market problems, such as those involving silver in the 1980's, equity indices in 1987 and 1989, cattle in 1994 and 1995, copper and March wheat last year, and most recently heating oil.

Other statutory and regulatory requirements that would cease to exist are those designed to detect and to deter fraud and cheating of market participants, such as those relating to exchange audit trails and open outcry. The 1989 FBI sting operation revealed the existence of widespread cheating of customers in the pits of the Chicago exchanges. The two-year undercover operation ultimately led to the conviction of numerous brokers who had defrauded all types of customers -- including large institutions as well as unsophisticated individuals. As this Committee is aware, the FBI sting operation also served as the catalyst for the Futures Trading Practices Act of 1992, which contained sweeping provisions regulating all aspects of exchange trading.

The Commission supervises approximately 64,000 registered persons who trade on the floors of the exchanges or deal with customers. The Commission has received numerous reparations complaints from large institutional customers, such as savings and loan associations, alleging that they have been defrauded by their brokers^1/. Our enforcement docket also has many cases reflecting fraud and manipulation by and against large institutions.^2/ These cases evidence that large institutional market participants are as susceptible to fraud as retail investors. The Act and regulations currently impose fitness requirements, financial standards, risk disclosure and other sales standards on its registered persons to protect customers. The existing regulatory scheme significantly minimizes the risks to customers that they will be cheated. The bill's provision would strip away those protections from professional markets.

Statutory and regulatory standards related to the financial integrity of the market and its participants would also cease to apply to these markets. These standards include segregation of customer funds, net capital requirements, financial reporting, margining of accounts and bankruptcy protections. All of these standards would be eliminated by the bill.

The risk posed by large market participants to the financial stability of the markets has clearly been demonstrated most recently by the trading losses of firms such as Metallgesellschaft, Barings Plc., and Sumitomo Corporation. The protections currently built into our regulatory system have served to isolate the risks created by such trading losses and thus have limited the systemic harm resulting from them. Those protections would be eliminated by the bill, which would thus increase the likelihood of devastating losses on our markets.

Some U.S. exchanges have argued that they need to be freed from the existing regulatory scheme in order to compete in the global marketplace. The U.S. futures exchanges are the strongest, most competitive, and most innovative in the world. Over the past decade, under the current regulatory regime, trading volume has risen by 131%--from 216 million contracts in 1986 to nearly half a billion contracts in 1996. The trading volume on U.S. exchanges in calendar year 1996 was the second highest in history (See Appendix 4), and the volume on the Chicago Board of Trade ("CBT") set a new world record. U.S. exchanges introduced 92 new CFTC-approved futures contracts in fiscal year 1996. (See Appendix 5) Market participants are attracted to our markets specifically because they are well regulated and are the fairest, safest and most transparent in the world.

The dramatic success of U.S. exchanges has led other countries to emulate us by establishing futures markets of their own. The recent rapid growth of those foreign markets has caused the U.S. percentage of world trading to decrease at the same time that U.S. trading volume has continued to grow.

Partially in response to these developments, Congress in 1992 directed the Commission to study the competitiveness of U.S. futures exchanges with their counterparts abroad. The study, concluded in April 1994, found that the U.S. exchanges' decreasing proportion of the world futures trading volume has been accompanied by steady and vigorous growth in U.S. trading activity and in the number and diversity of instruments traded domestically. The growth in foreign markets' share of world volume was found to result to a significant extent from the growth of contracts that satisfy local demands, such as contracts based on local underlying cash markets or on cash markets in the same time zone. Most of these contracts do not compete directly with U.S. exchanges' contracts. The report concluded that U.S. markets have not been competitively disadvantaged in a significant way as the result of weaker or different regulation in foreign countries.^3/

To the extent that there has been direct competition between U.S. and foreign exchanges, U.S. exchanges have frequently fared well. For example, between 1986 and 1996, trading volume in CBT's Treasury Bond market increased 58 percent, from 70 million contracts in 1986 to 111 million contracts in 1996. During that same time period, the London International Financial Futures Exchange sought to establish a competing futures contract on the U.S. Treasury Bond, but failed to succeed in capturing any significant share of that market and ultimately discontinued trading in the contract.

The Commission believes that markets in such global futures and option products require vigorous regulatory oversight wherever they are located and has worked assiduously to raise the level of foreign regulation over foreign markets. The Commission has been active through the International Organization of Securities Commissions ("IOSCO") and other international groups to urge heightened regulation and holds annual training seminars for foreign regulators on the U.S. regulatory approach, which is considered to be an international model. In October 1996 about eighty regulators from thirty nations attended the Commission's sixth annual seminar, and the Commission also provides technical assistance to foreign regulators in improving their regulatory oversight of their markets.

In its competitiveness study, discussed above, the Commission concluded that foreign regulation is being raised to internationally accepted standards and that in many instances these new standards reflect U.S. practices. This development has continued and is most recently demonstrated by the international initiatives that followed the default of Barings Plc. and the losses by Sumitomo Corporation.^4/ The bill's proposed professional market deregulation would likely deal a serious blow to that development. If the United States were to condone unregulated markets, one could expect other countries to follow suit.

At the same time that the Commission is encouraging foreign nations to improve their regulatory oversight, the Commission is also dedicated to the elimination of unnecessary and burdensome regulation of U.S. futures exchanges and commodity professionals and to the encouragement of our markets to remain competitively strong. The Commission currently is reviewing and amending its rules to ensure that they do not impose undue burdens.

As part of the Commission's effort to reduce regulatory burdens on the exchanges, it established in November 1995 a pilot program as Part 36 of its rules for exempting professional markets from a number of regulatory requirements. Unlike the professional markets provision of S. 257, which flatly and precipitously would eliminate regulation, the Commission's rules are designed to test the effect of reducing regulation on professional markets. They also carefully delineate certain regulatory exemptions while maintaining other needed regulatory provisions. The Commission has indicated that it would use the experience of the pilot program to consider whether a different level of regulatory relief should be provided to professional markets.

To date, no exchange has asked to participate in the professional markets pilot program. The Commission has invited the U.S. exchanges to discuss why they have not taken advantage of the professional market provision and how the Commission could make it more useful to them. The Commission remains open to dialogue with the exchanges on this issue.

The Commission adopted the professional market rules in response to exchange petitions seeking exemptive relief similar in scope to that which would be permitted by this bill. The Commission carefully considered those petitions and the public interest implications of granting them. Public comment was sought twice. See 59 Fed. Reg. 54,138 (1994); 58 Fed. Reg. 43,414 (1993). The Commission received a total of 69 comment letters expressing all levels of support for and opposition to the exchanges' petitions. Other federal regulators generally opposed the granting of exemptive relief as broad in scope as that contemplated by this bill.

In refusing to participate in the proposed pilot program, some U.S. exchanges have expressed the opinion that they are entitled to operate in the same unregulated environment as the over-the-counter markets -- a goal that the proposed bill likely would achieve. However, in the Commission's view, exchange trading involves important public interest considerations which require a higher level of regulation than over-the-counter markets. All markets are not the same, and the appropriate regulatory framework must depend on an analysis of the characteristics of the particular market.

Even if an exchange market does not include the small retail customer, exchange trading poses greater public policy implications than over-the-counter trading. While the use of centralized clearing provides important benefits, it also creates a concentration of risk not present in individually negotiated, bilateral over-the-counter transactions. Without careful regulatory oversight, that concentration of risk poses more serious systemic threats than the decentralized risk of the over-the- counter market. The strong public interest in preserving and protecting the price-discovery and price-basing functions performed by the exchanges also distinguishes them from most over-the-counter markets. In addition, centralized markets involve transactions between anonymous parties generally acting through intermediaries. The participants in exchange trading, unlike the participants in the over-the-counter markets, are unable to determine the identity of their counterparties or their creditworthiness. Regulation helps to ensure both the fairness and the financial integrity of exchange-traded transactions. For all these reasons, exchange trading requires a higher level of regulation than trading in over- the-counter markets as they currently exist.

The bill's provision exempting professional markets raises several additional regulatory concerns about market structure. It anticipates that regulated markets in agricultural products would trade side-by-side with unregulated markets on the same exchange and that trading on them might be cleared by the same clearinghouse. Thus, CBT's grain markets could trade alongside totally deregulated Treasury bond markets. A serious regulatory issue would be created as to whether the Commission could effectively regulate the agricultural markets in that environment. (Indeed, such problems led to the regulation of all exchange markets in 1974.)^5/ The Commission also seriously questions whether the funds related to regulated and unregulated trading should be commingled in the same clearinghouse. Significant public policy concerns would be raised by subjecting funds relating to the regulated market to risks of trading in unregulated markets.

B. The Treasury Amendment Provision Could Deregulate Exchange Trading and Reduce Protections to Unsophisticated Retail Customers.

Section 2 of the bill is designed to clarify the scope of the Treasury Amendment to the CEA. The Treasury Amendment, which was enacted in 1974, excludes some over-the-counter transactions in futures on certain financial instruments from the provisions of the CEA.^6/ The purpose of the Treasury Amendment was to prevent the application of the CEA to the sophisticated institutions trading in the interbank market in foreign currency and the dealer market in government securities. However, the scope of the Treasury Amendment has been the subject of considerable debate and litigation.

The Commission agrees that the Treasury Amendment needs to be clarified. However, it opposes Section 2 of the bill. That provision would apparently extend the Treasury Amendment's exemption to exchange trading for the first time. Since nearly 40 percent of the current futures exchange trading is in foreign currency and government securities instruments, the bill would result in a profound deregulation of the exchange markets. The provision would also eliminate the protections afforded by the CEA in over-the-counter sales to unsophisticated retail customers.

As an alternative to Section 2 of the bill, the Commission urges Congress to adopt the Commission's proposal to clarify the Treasury Amendment. (See Appendix 2) The Commission's proposal seeks to accommodate the interests of the Department of the Treasury in ensuring that the over-the-counter interbank foreign currency market and the dealer market in government securities are exempt from regulation under the CEA while at the same time retaining important CEA protections and safeguards for exchange trading and over-the-counter sales to retail customers.

The Commission's proposal would retain the regulatory requirements of the CEA over exchange trading in futures and options on the Treasury Amendment instruments. The requirements of the CEA have been imposed on exchange trading in such contracts since the creation of the Commission in 1974 and continue to be extremely important to proper regulation of exchange markets. Those markets have grown tremendously and now comprise a large portion of U.S. exchange trading in futures and options. For example, trading in government securities and foreign currency futures and options accounts for 70% of the trading volume of CBT, the largest U.S. futures exchange.

Section 2 of the bill would limit the applicability of the CEA for the first time to only those boards of trade in which sales are made "to the general public." Thus, under the bill futures exchanges would be able to develop totally unregulated markets in Treasury Amendment instruments by restricting participation in those markets to a group smaller than "the general public," a term that is not defined in the bill. Such markets -- unlike the other exempt professional markets discussed above -- would not even be subject to the antifraud and antimanipulation provisions of the CEA. The Commission strongly opposes this aspect of the bill and recommends the deletion of the phrase "to the general public."

As discussed above, centralized markets, such as futures exchanges, concentrate credit risks that are diffused on an over- the-counter market. They also serve important public price- discovery and price-basing functions that are generally not performed by over-the-counter markets. Furthermore, the participants in these markets -- including pension funds, insurance companies, mutual funds, municipalities, endowment funds and publicly owned companies -- use these markets for important hedging and risk-shifting purposes, rely on the integrity of these markets and are entitled to be protected from fraud, manipulation, trade abuses and financial failures. Vigilant market surveillance, careful review of contract design and exchange rules and supervision of market professionals are necessary to protect against market disruptions that would interfere with these important pricing functions. In fact, the Commission recently proceeded against an institution for price manipulation on the CBT Treasury note futures market. In the Matter of Fenchurch Capital Management, Ltd.,[Current Transfer Binder] Comm.Fut.L.Rep. (CCH) �26,747 (CFTC July 10, 1996).

Federal oversight of futures exchanges is a principal objective of the CEA. The important public interest in such regulation is as true for exchanges trading Treasury Amendment instruments as for any other futures or option contracts. Revisions to the Treasury Amendment should not be used as a vehicle for their deregulation.

2. Sales to Retail Customers Require the Regulatory Protections of the CEA.

In the Commission's view, unsophisticated retail customers should be afforded the same regulatory protections when trading in futures and option contracts involving Treasury Amendment instruments as they receive when trading in other futures and option contracts. The provision in S. 257 by its terms exempts off-exchange sales of futures and options in Treasury Amendment instruments to the general public from all of the protections of the CEA. An exception to that blanket exemption apparently applies the CEA to certain off-exchange sales of foreign currency futures and options to retail customers by "unsupervised entities," a term that is not defined in the bill. For the first time, Congress would endorse the sale of futures and option contracts to members of the public without the important protections provided by the CEA.

The Commission strongly opposes the bill's deregulation of such sales to unsophisticated retail customers. The Commission and most federal courts have interpreted the Treasury Amendment not to exempt such sales from the protections of the CEA. At the time the Treasury Amendment was enacted in 1974, Congress stated that the general public should receive the same regulatory protections in all futures trading regardless of the commodity involved and specifically referred to some Treasury Amendment instruments. Thus, this Committee stated in 1974:

While the futures markets in a number of agricultural commodities have been regulated in varying degrees since 1922, many large and important futures markets are completely unregulated by the Federal Government. These include . . . markets in a number of foreign currencies. A person trading in one of the currently unregulated futures markets should receive the same protection afforded to those trading in the regulated markets.^7/

Fraudulent off-exchange sales of foreign currency futures and option contracts to the public have been a problem since before the Commission was created in 1974. They have become a more widespread problem, however, in recent years. The Commission has brought 28 cases involving the illegal sale of foreign currency futures or option contracts to the general public -- 19 of them since 1990.^8/ This increased enforcement activity has included a rise in cases of "affinity fraud," in which members of a particular ethnic or religious group are targeted as victims of the fraudulent activity. Fraud in sales of foreign currency futures and option contracts appears to be occurring in Europe as well.^9/

In the 19 cases brought by the Commission since 1990, more than 3200 customers invested over 250 million dollars in these fraudulent schemes. While the Commission does not have precise figures, the records in these cases indicate that most of the funds invested were never returned to the customers. To date, the Commission has prevailed in all but one of these cases.

The Commission has also noted an increase in foreign currency futures and options being offered to the public on the Internet. The availability of such new technology to solicit customers compounds the existing problem and extends it across state and international borders. Effective policing of this activity requires a federal enforcement effort, since state authorities have neither the resources nor the broad-based jurisdiction to cope with the problem.

Because of difficulties of carrying the burden of proof in establishing fraud in many of these cases, the Commission has also relied on other provisions of the CEA -- such as the requirements that futures and option contracts must be traded on an exchange--in order to obtain speedy injunctive relief against these operations. Reliance solely on a fraud violation could extend proceedings for critical periods of time.

Moreover, quite apart from explicit misrepresentations in the marketing of these contracts, both the nature of the instruments and their risks are commonly unknown or misunderstood, particularly by the unsophisticated customer. The nature of futures and options, their high degree of leverage, and the volatility of commodity prices significantly increase the risk of loss for customers.

To address these problems, Congress has enacted in the CEA a detailed set of requirements designed to protect the public. These include such important safeguards as comprehensive risk disclosures, registration, fitness and financial requirements for commodity professionals dealing with the public, customer fund segregation, and reporting and recordkeeping requirements. While the Commission has been given the power to exempt transactions from some or all of these requirements, the Commission continues to concur with Congress's judgment that these protections are necessary to ensure a safe environment for trading by the public.

The bill's provision allowing all but "unsupervised entities" to sell foreign currency futures and options to the public not only fails to define what entities are contemplated, but also fails to provide any assurance that supervision would include these customer protections. (Of course, sales of futures on Treasury Amendment instruments other than foreign currency to the public would be totally unrestricted and unregulated under the bill.)

The Commission does not believe that any entity, including a bank, securities broker or other financial institution, should be able to sell futures and options to the general public free from such customer protections. Congress has never drawn regulatory distinctions in the CEA based on the nature of the entity selling futures and options to the public. It is not the nature of the sellers, but rather the inherent risk characteristics of the products themselves that give rise to the necessity for regulation.

Neither the federal banking laws nor the federal securities laws^10/ currently provide the regulatory protections necessary for sales of futures and options to the general public, as the CEA does. Furthermore, neither the Securities and Exchange Commission ("SEC") nor the banking regulators have had experience in regulating sales of futures to the general public by their regulated entities, as the CFTC has.

In light of the recent history of abuse in the sale of off- exchange foreign currency futures and option contracts to the public, the Commission believes more caution, not less, is required at this time. Furthermore, futures and options in all of the Treasury Amendment instruments pose identical risks to the public and warrant the same protections.

3. The Unregulated Over-the-Counter Market Should Be Limited to Sophisticated Traders.

The Commission's proposal would specify that over-the-counter futures and option transactions entered into between "appropriate persons" would not be subject to the CEA's requirements except to the limited extent described below. "Appropriate persons" are currently defined in the CEA to include sophisticated traders, such as banks, other financial institutions, persons regulated by the CFTC or other agencies, corporations or other entities with a net worth of one million dollars or more, and such other persons as the CFTC determines to be appropriate under its exemptive authority. Thus, the Commission's proposal is intended to ensure that transactions among the sophisticated traders in the interbank and dealer markets would remain free of regulation. The Commission believes such traders do not need the full range of CEA protections required by the general public. The provisions of S. 257 would not limit the unregulated markets to such appropriate persons, but rather would deregulate over-the-counter sales to unsophisticated retail customers, as discussed above.

4. Fraud and Manipulation Should Be Prohibited in the Over-the-Counter Market.

The Commission's proposal would ensure that fraud and manipulation in over-the-counter transactions between sophisticated traders (i.e., "appropriate persons") would be prohibited by some provision of federal civil law. S. 257 would fail to do so.

The Commission believes that there is an important national interest in prohibiting fraud and price manipulation in futures and option transactions in the Treasury Amendment instruments, even if that trading is conducted between sophisticated traders in an over- the-counter transaction. The over-the-counter market for futures and options in these instruments is too large and too significant for the federal government to be without power to police fraud and manipulation. The potential damage caused by fraud and manipulation can reach far beyond the particular participants in the affected transactions and can create risks for the financial markets as a whole. Moreover, recent experience demonstrates that even sophisticated traders may be defrauded or attempt to manipulate prices.^11/

To the extent that federal civil laws other than the CEA would prohibit fraud and manipulation in this vast over-the-counter market, the Commission is willing to defer to other regulators to enforce those laws.For example, The Commission understands from the federal banking regulators that over-the-counter trading by financial institutions is currently subject to federal civil laws prohibiting fraud and price manipulation enforced by the banking regulators. Consequently, there would be no need for the fraud and manipulation prohibitions of the CEA to apply to such over-the- counter transactions by financial institutions. However, in the Commission's view, the fraud and manipulation prohibitions of the CEA should apply to trading that is not the subject of other federal antifraud and antimanipulation laws.

In addition, to the extent that any person or entity registered under the CEA is a participant in an over-the-counter transaction, the transaction should be subject to the fraud and manipulation prohibitions of the CEA. The Commission should retain the authority to police fraud and manipulation by the registrants it has responsibility for regulating.

5. Option and Futures Transactions Should Be Treated The Same.

Currently, the exemption from the CEA in the Treasury Amendment applies to transactions in certain defined instruments. Although it has been generally recognized that this exemption includes futures contracts on the defined instruments, some courts have held that the exemption does not include options on the grounds that options are not transactions "in" such an instrument, at least until they are exercised.^12/ The Commission is proposing that the Treasury Amendment should be amended to accord the same treatment to options and futures. When traded over-the- counter between sophisticated entities, both types of instruments should generally be exempt from the regulatory provisions of the CEA, but CEA protections are necessary for sales of both futures and options on exchanges and to retail customers.

C. Codification of the Exemptions for the Over-the-Counter Markets Would Greatly Reduce Federal Oversight of Those Markets.

The Commission opposes the provisions of Section 5 of the bill that would exempt certain private transactions between sophisticated traders, including swaps and hybrid instruments, from all or most provisions of the Act by codifying Parts 35 and 34, respectively, of the Commission's regulations.^13/ Section 5 of the bill would also exempt off-exchange trading of futures on securities and securities indices from the provisions of the CEA for the first time.^14/

The Commission has provided legal certainty to the over-the- counter derivatives market by the careful and responsible exercise of the exemptive authority granted to the Commission by Congress in 1992. For example, in 1993 the Commission exempted over-the- counter swaps transactions among sophisticated traders from provisions of the CEA other than antifraud and antimanipulation laws.^15/ The Commission opposes transforming its regulatory exemptions into a blanket statutory exemption because doing so would eliminate the ability to modify the exemptions based on developments in the market. The Commission believes that the flexibility permitted by the existing regulatory exemptions is both necessary and appropriate to protect the public interest and to allow for the development of new trading vehicles needed by commercial interests. In contrast, it would be a mistake to grant a statutory exemption that would remove all Commission oversight from the over-the-counter markets (with the exception of the reserved prohibition against fraud and manipulation) and would eliminate the Commission's authority to impose appropriate terms and conditions on exempt transactions.

The U.S. over-the-counter derivatives market is a $53 trillion market that includes a large number of rapidly changing products and participants. As has been recognized repeatedly in recent years, the size and nature of this market create a potential for systemic risk to the nation's financial markets that requires vigilance by federal regulatory authorities.^16/ Recent crises on the over-the-counter markets, such as the losses by the State of Wisconsin Investment Board, Orange County, Proctor and Gamble, and Gibson Greeting Cards, demonstrate that over-the-counter risks are real and should remain subject to government oversight and governmental authority (See Appendix 8).

In the last five years, the increase in the potential risk these markets pose to the system has caused U.S. and international regulatory authorities to consider how best, on a cooperative basis, to assure needed oversight. Both the CFTC and the President's Working Group on Financial Markets, consisting of the Secretary of the Treasury, the Chairman of the SEC, the Chairman of the Board of Governors of the Federal Reserve System, and the Chairperson of the CFTC, have been monitoring and evaluating developments in this market. The CFTC and the SEC are jointly encouraging voluntary initiatives by market participants to address the potential risks of this market.

Currently, the Commission sees no need to alter the scope and nature of the exemptions it has granted. Nevertheless, if federal monitoring of these markets were to demonstrate that additional regulatory action were necessary, the Commission currently would be able to act quickly without having to seek new legislation. The President's Working Group on Financial Markets has endorsed the Commission's authority to modify existing exemptions for over-the- counter transactions. The Group recognized that such authority serves the important function of permitting the gathering of information and the imposition of additional constraints on over- the-counter transactions if warranted. It also recognized that this authority can be used in consultation with other regulators to encourage private sector initiatives.^17/

At a time of innovation and increasing complexity in the world financial markets, federal regulators should be given flexibility to adapt to changing conditions. The CFTC has used its regulatory authority responsibly to allow innovation while preserving the public interest. The proposed legislation would eliminate any ability to respond to new developments.

D. The Provisions on Contract Market Designation and Exchange Rules Are Unnecessary and Unworkable.

The Commission opposes provisions of the bill which would effectively preclude meaningful Commission review of new futures and option contracts and exchange rules. The bill would allow the Commission a mere ten days to review virtually any submission of an exchange. Section 7 of the bill would permit an exchange to begin trading a new contract ten business days after its submission to the Commission unless the Commission notified the exchange within that time that it intended to review the contract for disapproval.^18/ Similarly, Section 9 of the bill would permit an exchange rule to go into effect ten business days after it was submitted to the Commission unless, within that time, the Commission notified the exchange of its intent to disapprove the proposed rule. These provisions -- which would apply to new contracts and rule proposals irrespective of their complexity or potential public impact -- are unnecessary, unworkable and potentially harmful to the public interest.

The supposed justification for these proposals -- delay in contract and rule approval -- is already being addressed by the Commission through regulatory action. As part of the Commission's commitment to streamline its rules and to reduce unnecessary regulatory burden, in November 1996 the Commission proposed rules that would permit many new futures and option contracts to be approved within ten calendar days and most others to be approved within 45 days. The comment period on these proposed rules has ended, and the Commission intends to decide whether to adopt such fast-track contract approval procedures by the end of this month. If adopted as proposed, the current average review period of 90 days would be cut at least in half for contracts that are submitted under the procedure and meet the standards for fast-track approval.^19/ Even under the current procedure, the Commission approved a record 92 futures and option contracts in fiscal year 1996, averaging one contract every 2.7 business days. The approved contracts involved such diverse commodities as milk, potatoes, electricity and the NASDAQ 100 Index.^20/

The Commission has also proposed fast-track approval procedures for changes in exchange rules. The comment period on these proposals has also ended, and the Commission intends to determine whether to adopt final rules by the end of this month. Under its current procedure, the Commission reviewed 555 rules last year, 153 of which were subject to prior approval procedures. The Commission already reviews two-thirds of all exchange rule change submissions in ten days or less and 80 percent within 30 days or less. The Commission's proposed rules should result in an even larger number of exchange rules being reviewed within ten days and would also substantially reduce the time within which the Commission must review those rules that are not processed in ten days or less.

In light of the Commission's proposed changes to its rules, it is unnecessary and premature to amend the Act at this time. The Commission's proposals address the concern of the exchanges that the current review process takes too long. The Commission also plans to review Guideline No. 1, which establishes form and content procedures for contract market designation applications, as part of its ongoing efforts to streamline its procedures and to reduce unnecessary regulatory burdens. The Commission's experience under its proposed fast-track procedures should be assessed before adoption of a radical statutory change such as that proposed in S. 257.

The Commission believes that its proposed approach to review of new exchange contracts and rules would accomplish the bill's goals in a manner which would better protect important public interests. First, the review periods established by the Commission's proposed procedures would allow the Commission a meaningful opportunity to assess the legality of the exchanges' proposals and their impact on the public interest. Second, the current substantive legal requirements would continue to apply to each new contract and rule. Third, the public's ability to comment on significant new contracts and rules would be preserved in many instances. Fourth, exchanges could elect to amend illegal or deficient submissions under current procedures, rather than having the Commission disapprove them.

Sections 7 and 9 of the bill would be unworkable. The time limits that would be imposed are too short to permit effective review of potentially problematic new exchange contracts and rules. Currently, the Commission reviews proposed contracts to ensure that they are not readily susceptible to manipulation. This pre- designation review process is premised on the Congressional judgment, which has been supported by regulatory experience, that the best way to minimize the possibility of manipulation and market disruption is to have properly designed contract terms in place before a new contract begins to trade. This judgment was recently endorsed by regulators from 17 countries who stated their consensus that proper contract design is an important protection against manipulation and other market abuses.^21/

In practice, Commission review of new contracts has materially improved many of the contracts that have been submitted for approval with significant deficiencies. The Commission frequently uses the review and approval procedures to encourage exchanges to amend proposed contracts to address design shortcomings identified by Commission staff.^22/ For instance, staff review resulted in extensive revisions to the recently proposed potato contracts of the New York Cotton Exchange, which as proposed raised significant concerns about the adequacy of deliverable supply. In light of the history of manipulation of potato futures in the 1970's and early 1980's, such revisions to the contracts as approved by the Commission were clearly necessary to protect the public interest. Commission staff also raised and helped resolve issues presented by the Mexican peso contracts of the Chicago Mercantile Exchange ("CME") and the MidAmerica Commodity Exchange. At the time those contracts were submitted, neither exchange had received the authorization from the Mexican central bank required to permit delivery of pesos as provided by the proposed terms of the futures contracts.

For proposed contracts that raise such significant legal or policy issues, the ten days available to the Commission under Section 7 to perform its review is simply inadequate to evaluate properly whether the contract should be permitted to trade. Thus, Section 7 would effectively require the Commission to address problems in contract design after the contract had begun to trade.

Disapproving or modifying a contract after trading has begun would be far more disruptive than the current prior-approval approach. A current example illustrates the difficulties in dealing with contract design flaws in midstream. The Commission has recently notified CBT that the delivery specifications of two of its major contracts -- the corn and soybean futures contracts -- no longer comply with the provisions of the Act. The Commission's action is based on its finding that the CBT contracts no longer "tend to prevent or diminish price manipulation, market congestion, or the abnormal movement of such commodity in interstate commerce[.]" Section 5a(a)(10) of the CEA, 7 U.S.C. � 7a(a)(10) (1996).

Notwithstanding long-term market trends that led to a divergence between the cash grain markets and the delivery specifications of the contracts, CBT has failed to correct the contract design problems. CBT's difficulties in addressing the problems with its grain contracts demonstrate how entrenched interests at the exchanges can block timely action required by the public interest. Correction of the delivery specifications under the guidance of the Commission will be difficult and will have to be implemented over an extended period because the contracts are actively trading. During that extended period, the contracts will require great vigilance in market surveillance efforts to guard against possible manipulation. Such difficulties can be avoided in a case where the contract design can be improved before trading begins.

Similarly, with respect to proposed exchange rules, many submissions that the Commission now receives do not contain adequate information about the operation, purpose, and effect of the proposal to allow for a meaningful evaluation of their legality or impact on the public interest. Others raise issues that require independent research or the solicitation of comment from persons outside the Commission and the exchange. Thus, although Commission staff currently reviews a high percentage of proposed contract market rules within a ten-day period, there remain submissions for which effective review within ten days is not feasible.

For instance, a proposal of CME to establish the Globex Foreign Exchange Facility -- an international electronic trading system -- required about six months to review due to the novel and complex financial and market integrity issues raised by the proposal. The significant competitive and antitrust issues raised by another proposal of CME -- to prohibit exchanges of on-exchange futures positions for physical commodities off-exchange in certain delivery months -- required a review period of just over one year. In both cases the Commission received public comments supporting and opposing the proposals.

The Commission reviews carefully exchange proposals to consider whether they could facilitate fraud or abuse of customer orders. Such customer protection concerns were raised, for instance, in the Commission's review of CBT's proposal concerning the post-settlement trading session range. It was also a concern in the review of the proposed rules of CBT, CME and NYMEX limiting liability for losses caused by failures in their electronic trading systems. Ultimately, these proposals were approved or allowed to go into effect, but only after they were changed to address such concerns.

Sections 7 and 9 effectively would mandate that the Commission choose between allowing a new contract to begin to trade (or a new rule to go into effect) and initiating disapproval proceedings at a time when neither alternative may be supported by the record. If the Commission were to select the former, illegal or otherwise flawed contracts and rules might go into effect, diminishing the level of market integrity or customer protection. If the Commission were to select the latter, Commission and exchange resources might be unnecessarily diverted by protracted and elaborate disapproval procedures, including a full hearing on the record before the Commission, when an acceptable contract or rule could have been developed using a more efficient, informal, and cooperative process. Furthermore, the Commission would likely be unable to determine whether it could carry its burden of establishing the grounds for disapproval within the tight time constraints imposed by the provisions.

Finally, under the bill the public effectively would be precluded from participation in the Commission's review process. The Commission would be unable to solicit the views of market users, other market regulators and other interested persons during the truncated review period before a contract or rule became effective.

Members of the industry trading in the underlying commodity or other interested persons frequently provide extremely valuable information and analysis concerning dangers posed by a proposed contract or rule. For instance, 83 comment letters were filed with the Commission in response to a Federal Register release announcing proposed changes in the CME live cattle contract. The Commission approved the changes to the contract after the exchange modified its proposal to respond to many of the comments received.

Furthermore, some proposed contracts and rule changes require review by or coordination with other financial regulators.^23/ For example, on February 3, 1997, the New York Stock Exchange and other securities exchanges changed the terms of their circuit breakers (i.e., trading halts required by a specified drop in the market) with the approval of the SEC. Simultaneously, the three futures exchanges trading domestic stock index futures changed their circuit breakers so as to approximate the securities exchanges' circuit breakers. These rule changes were approved by the Commission only after soliciting public comment and careful coordination with the SEC to assure that the rules would complement the securities exchanges' rules and become effective simultaneously. This coordination was necessary to protect the country's equity markets, as well as the futures and option markets. Under the proposed rule approval provision, the Commission would lose much of its ability to assure such coordination.

Given the large number of persons who rely on the integrity of exchange prices and the fairness of exchange activities -- from producers to consumers to investors -- the Commission opposes truncating the contract and rule review process in the extreme manner contemplated by Sections 7 and 9 of S. 257. The likelihood that manipulation and other market disruption would be caused by poorly designed contracts would increase significantly, and the protection of the interests of all market participants would become more difficult for the Commission.

The Commission also opposes the provision in Section 14 of the bill that would shorten the time for the Commission to review proposed rules of the National Futures Association ("NFA"). Preservation of an adequate time to review rules of registered futures associations, such as the NFA, is essential given the significant role such organizations play in establishing industry- wide standards on customer protection issues. The Commission also notes that, consistent with its efforts to streamline its review of exchange rules, it intends to propose rules in the near future to establish fast-track review procedures for the rules of registered futures associations.

E. The Commission Would Oppose the Cost-Benefit Provision Unless Modified.

Section 11 of the bill, which requires the Commission to consider the costs and benefits of certain of its actions, is unnecessary. The Commission already considers these factors in taking regulatory action. Nevertheless, the Commission would not oppose Section 11 if it were modified in certain respects described below.

The Commission believes that consideration of costs and benefits is appropriate in the development of sound regulatory policy. Accordingly, the Commission routinely considers the costs and benefits that may be imposed by the rules that it adopts. These considerations are often brought to the Commission's attention during the public comment period mandated by the Administrative Procedure Act. The Commission also conducts regulatory flexibility analyses as required by the Regulatory Flexibility Act.

However, in the Commission's view, a statutory directive such as Section 11 to consider costs and benefits should be limited to major rules. For example, under Section 304 of the Federal Crop Insurance Reform and Department of Agriculture Reorganization Act of 1994 ("USDA Reorganization Act"),^24/ the Department of Agriculture is required to perform a risk assessment and cost- benefit analysis for a rule likely to have an annual impact on the economy of $100 million or more in 1994 dollars. Such a limitation reflects a recognition of the significant expenditure of governmental resources potentially involved in conducting a cost- benefit analysis.

In addition, a cost-benefit analysis is appropriate only with respect to the adoption of rules and regulations. As currently drafted, Section 11 would require the Commission to undertake a cost-benefit analysis in adopting certain orders. The scope of this requirement is unclear and would prove problematic if interpreted to apply to matters, such as contract market designations, for which cost-benefit analysis would be extremely complex and difficult.

Furthermore, Section 11 would require the Commission to second-guess Congress when considering any rule or regulation that the Commission has been directed to adopt by Congress pursuant to the Act or other law. The provision thus would create the likelihood of conflicts between legislative mandates. To be workable, Section 11 should specifically exempt all rules and regulations which Congress has directed the Commission to adopt.

The Commission also recommends that Section 11 should explicitly state that the Commission's cost-benefit analysis shall be final and not subject to judicial review. Such an approach is taken in the USDA Reorganization Act.^25/The absence of clarity here could encourage unnecessary litigation against the government and require the Commission to adopt additional burdensome and time- consuming procedures to address litigation risks.

The Commission understands that Section 11 would not require quantification of costs and benefits. As the Summary and Discussion of the bill states "The requirement is not for a quantitative cost-benefit analysis, but a mandate to consider both costs and benefits, as well as other enumerated factors." The Commission endorses such a non-quantitative approach to cost- benefit analysis. A requirement of quantification would likely preclude the Commission from implementing rules for which important benefits to the public are difficult to quantify or to measure. The Commission therefore would oppose any quantification requirement as contrary to the public interest.

As discussed below, the Commission supports a number of provisions of S. 257 that will be helpful to the Commission in its administration of the Act.

The Commission supports Section 3 of the bill, which would clarify that futures contracts may be used as a means of hedging non-price risks. While traditionally futures contracts have been used to hedge price risks, newer contracts such as the area yield contracts allow for non-price risks to be hedged in the futures markets as well.

B. Delivery Points for Foreign Futures Contracts.

The Commission supports Section 4 of the bill regarding U.S. delivery points of foreign futures contracts. This provision would require the Commission to consult with home-country regulators of foreign exchanges which locate delivery points in the United States to secure adequate assurances that the existence of the U.S. delivery points would not create the potential for disruption in trading of a commodity on a U.S. futures exchange or in interstate commerce. This provision is consistent with the Commission's longstanding commitment to such international efforts. The remaining provisions of Section 4 regarding the books and records and reporting obligations of U.S. warehouses of foreign exchanges would be helpful in strengthening the Commission's authority to obtain information from such warehouses to facilitate its market surveillance activities. Ironically, the bill would thus grant the Commission with more authority to obtain information about "professional markets" on foreign exchanges such as the London Metal Exchange than it would have with respect to a domestic exchange's "professional market."

C. Delivery by Federally Licensed Warehouses.

The Commission supports Section 8 of the bill, which would repeal Section 5a(a)(7) of the Act relating to federal warehouses.

The Commission supports Section 10 of the bill, which would make two clarifications to the Act's audit trail provisions. First, it would provide that contract markets may determine the means by which they carry out their audit trail responsibilities. Second, it would add a new paragraph confirming that current law establishes performance standards and does not mandate the use of specific technology to satisfy the Act's audit trail requirements. These provisions would codify the Commission's interpretation of the audit trail provisions.

E. Disciplinary and Enforcement Activities.

The Commission supports Section 12 of the bill, which contains two provisions related to the Commission's enforcement program. Section 12(a) would declare the sense of Congress that the Commission should avoid, to the extent practicable, unnecessary duplication of effort in pursuing disciplinary and enforcement actions if adequate action has been taken by a self-regulatory organization ("SRO"). This provision would confirm the existing practice of the Commission. In opening enforcement investigations and in commencing litigation, the Commission considers whether the activities in question have been adequately addressed by a designated SRO and seeks to avoid unnecessary duplication of effort. This provision would not create any substantive or procedural rights for third parties.

Section 12(b) would require the Commission to report to Congress on the effectiveness of its enforcement activities. The Commission believes that such a report would provide a useful opportunity for the Commission to inform Congress about the scope, direction and effectiveness of its enforcement program.

F. Delegation of Functions by the Commission.

The Commission supports Section 13 of the bill, which would express the sense of Congress that the Commission should (1) review its rules that delegate authority to SROs, (2) consistent with the public interest and law, determine which additional functions, if any, should be delegated to SROs, and (3) establish oversight procedures to ensure adequate performance of any additional functions so delegated. The provision would also require the Commission to report to Congress on these matters.

The Commission has recognized that the activities of SROs supplement and complement the Commission's regulatory efforts and has delegated responsibilities to SROs where appropriate. Such delegation helps to assure the effectiveness of the Commission's programs at reduced taxpayer cost. For example, the Commission has delegated a number of regulatory functions to the NFA, which has done an excellent job in carrying out those responsibilities.^26/ Section 13 would support the Commission's ongoing consideration of delegating additional functions to SROs and would afford the Commission an opportunity to report its findings to Congress.

The Commission supports the provisions of Section 14 relating to statutory disqualification and NFA disciplinary proceedings. The Commission also supports the technical provisions of this Section that correct existing law.

The Commission has recommended amendments to the Act to clarify and to strengthen the Commission's ability to address fraud and other abuses. (Appendix 1) The proposed amendments are narrowly drawn and carefully targeted to accomplish the following important goals:

S. 257 contains none of these provisions. The Commission urges the Committee to include them in any legislation.

Congress should eliminate any ambiguity as to the Commission's authority to prosecute all fraud in futures transactions. The Commission therefore proposes three small changes to the language of Section 4b(a), the Act's principal antifraud provision.

First, Section 4b(a)(2) now prohibits fraud committed by any person in connection with futures contracts "made, or to be made, for or on behalf of any other person." The Commission proposes the deletion of this language to make clear that Section 4b(a) is not limited to fraud committed in a broker-customer relationship. The "for or on behalf of" language could impede law enforcement efforts against fraudulent, off-exchange transactions by bucket shops acting as principals with their customers rather than as brokers. While the Commission has generally been successful in pursuing fraud cases in these situations,^27/ Congress should confirm the Commission's authority to pursue fraud in any futures transaction.

Second, Section 4b now prohibits fraud in connection with "any order to make, or the making of" a futures contract. The Commission proposes to delete this quoted language and to replace it with language that makes clear that Section 4b reaches fraud occurring prior to placing an order as well as in all other phases of a futures transaction. This amendment will make Section 4b consistent with Commission practice and case law addressing fraudulent solicitation of futures customers. ^28/

Third, the Commission recommends striking the language in Section 4b that seems to require that a futures contract involved in fraudulent activity is or may be used for hedging, price discovery or delivery in interstate commerce. This language does not appear to serve any beneficial purpose -- in the Commission's experience fraud often occurs in purely speculative futures transactions that have no hedging purpose. Some U.S. Attorneys have expressed reluctance to charge a violation of Section 4b in criminal cases because of the burden this language appears to create to prove the economic function served by the contract.

The Act now provides that a person acting as a futures commission merchant ("FCM"), introducing broker ("IB"), commodity pool operator ("CPO") or commodity trading advisor ("CTA") is required to register with the CFTC and to comply with other requirements imposed on registrants if the person's conduct involves futures contracts traded "on or subject to the rules of a contract market." The Commission proposes to delete this quoted language from the definition of these terms to confirm that persons involved with illegal, off-exchange futures contracts may also be found liable for failing to register or to comply with the other requirements imposed on registrants.^29/

The Act's registration requirements mandate basic minimum qualifications for those involved in customer solicitation, trading and/or advice. Persons should not be able to evade those requirements or the other requirements applicable to registrants by engaging in the sale of illegal, off-exchange futures contracts. While the Commission has successfully charged persons marketing such contracts with violations of the registration and other provisions,^30/ the Commission believes that Congress should confirm the Commission's authority to do so.

To read the "on or subject to" language in the FCM registration provision of Section 4d as limited to exchange- traded contracts would undercut the very purpose of the registration requirement for FCMs: to protect customer assets and customer transactions. Moreover, it would be anomalous to impose a sanction on persons for failing to register when selling lawful contracts, but not to impose such a sanction for failure to register on persons selling illegal contracts.

Congress in 1986 made a similar amendment to Section 4b of the Act, the principal futures antifraud provision. Prior to 1986, Section 4b contained the "on or subject to" language. Although the Commission had successfully charged 4b fraud against persons selling illegal off-exchange futures, Congress determined to delete this language. The House Report characterized this amendment as "technical" and noted that it "would simply codify the Commission's interpretation of Section 4b . . . ."^31/ Congress should now act in a similar manner to eliminate this potential obstruction to effective enforcement of the Act.

The Commission proposes an amendment to clarify its authority to bring civil enforcement proceedings for violations of Section 9 of the Act, which imposes criminal sanctions for certain misconduct. For example, Section 9(a)(1) prohibits embezzlement of customer funds, and Section 9(a)(2) prohibits cornering or attempting to corner any commodity.

The Commission believes that it has the authority to commence an administrative proceeding or to file a civil action in court for a violation of any provision of the Act, including Section 9, and has done so successfully.^32/ However, because of the current wording of Section 9, a question might be raised whether violations of Section 9 can only be addressed in a criminal prosecution brought by the Department of Justice. Because of the seriousness of the conduct that Section 9 addresses, there should be no question as to the Commission's authority to pursue that conduct through enforcement proceedings. Therefore, the Commission proposes a clarification of its civil enforcement authority over the conduct prohibited in Section 9.

In a recent CFTC enforcement case, the U.S. Court of Appeals for the Ninth Circuit upheld an assessment of $165,000 in receivership costs against the CFTC despite the absence of a finding that the receivership was obtained in bad faith.^33/ The Commission believes that this decision misconstrues the statute relating to assessment of costs and is an unprecedented departure from applicable principles of sovereign immunity as enunciated by the Supreme Court and other courts of appeals. The Commission therefore proposes an amendment that would overturn this ruling and place the Act on a par with the federal securities laws, which explicitly prohibit the assessment of costs for or against the SEC.^34/

The prospect of costs being assessed against the Commission even though its litigation position was justified would have a chilling effect on its enforcement program. The appeals court's decision also poses a serious threat to the Commission's ability to protect the public. In CFTC enforcement cases, receiverships are often necessary to preserve customers' assets and to manage customers' open market positions properly. It is frequently important to have a receiver appointed promptly to prevent harm to the assets or open positions. Receivership costs can be substantial, depending on the complexity of the tasks that the court asks the receiver to undertake. If the Commission faced the possibility of being assessed substantial receivership costs merely because it did not ultimately prevail in the underlying litigation, the Commission might not seek the appointment of a receiver in cases where a receiver was necessary to protect the assets of investors or might delay doing so for critical periods of time during which customer assets could be lost or stolen by the perpetrators of the scheme.

The Equal Access to Justice Act already enables litigants to recover attorneys' fees if a court determines that the Commission was not substantially justified in bringing an enforcement case. The Commission's proposal would not affect that right. U.S. taxpayers, however, should not be penalized for Commission actions taken in good faith to preserve investors' funds.

The Commission looks forward to working with the Committee and the Congress to strengthen the Act to deter fraud and manipulation and to maintain the competitive strength, fairness, and integrity of the nation's futures and options markets. The Commission wishes to stress that the significant public interest in our futures and option markets, which are the largest and most liquid in the world, demands an effective regulatory scheme to protect against market abuses. Nevertheless, the Commission is committed to improving the Act and streamlining its regulations so as to impose only those regulatory requirements necessary to protect the public interest. The Commission stands ready to assist the Committee and Congress in their consideration of S.257.