Oral Testimony of Commissioner James E. Newsome before the U.S. House of Representatives Committee on Appropriations, Subcommittee on Agriculture, Rural Development, FDA, and Related Agencies

March 21, 2001

Thank you Chairman Bonilla and members of the Subcommittee. I appreciate the opportunity to be here today to testify before you on behalf of the Commodity Futures Trading Commission.

    Since creating the Commission in 1974, Congress has tasked the CFTC both with protecting participants in the commodity futures and options markets against manipulation, abusive trade practices, and fraud and with enabling the markets to better serve their critically important economic role of providing a mechanism for price discovery and a means of managing risk. Most of the participants in the futures and option markets are commercial or institutional users of the commodities they trade and those commodities wind up ultimately in countless food and consumer products or are consumed in the provision of many important services.

    I believe strongly in the oath I took to pursue that mission faithfully, to maintain the integrity of the futures and options markets and to protect participants against fraud and manipulation.

    As you know, 2000 was a very exciting and challenging year for our agency and for our industry, and we expect this year to bring even more of the same. The Commodity Futures Modernization Act, or CFMA, was signed into law on December 21, 2000, and with its enactment we were given the monumental task of overhauling the entire regulatory structure of the commodity futures and options industry. While we recognize the tremendous pressures this will bring to bear on our staff and resources, we are extremely pleased to have the opportunity to carry out the mandates of our new, flexible oversight structure, and we are firmly committed to doing so in accordance with the timetables that are given within the statute.

    The CFMA provides legal certainty for over-the-counter markets, lightens regulatory burdens on domestic exchanges, and lifts the ban on single-stock futures. In each area, the new Act requires action by the Commission, including 15 rulemakings and 3 studies. In some cases, we are required to coordinate our efforts with those of other federal regulators. The timetables, quite properly in my opinion, are aggressive and our staff is working diligently to ensure that we meet each deadline.

    The CFMA also clarified the Commission’s authority with regard to prosecuting foreign exchange bucket shops and provided a new framework for the oversight of designated clearing organizations. Implementation of these provisions will require a tremendous commitment of resources and effort, both this year and next.

    Additionally, the Act moved the Commission from a role as a front-line regulator to a more flexible oversight role. Some may believe that, in our new capacity, the agency will need fewer resources than in the past. I would respectfully submit to you, Mr. Chairman, that just the opposite is true. It seems to me that a driving force behind passage of the CFMA was the desire to liberate the markets and allow innovation and flexibility to permit clearing organizations to respond appropriately to these market developments. I believe that market participants will respond enthusiastically to this opportunity. Indeed, they have already begun to do so.

    For example, rapid developments in technology, particularly in telecommunications and the Internet especially, have sparked great interest in electronic exchanges and trading platforms. In just the last year or so, the Commission has approved three new exchanges and granted no-action relief to two electronic trading platforms for energy products. By comparison, only two new exchanges were designated during a more than ten-year period prior to that and neither became an economically viable trading platform.

    I suspect that those three new exchanges represent just the tip of the iceberg. We are currently reviewing the applications of, or have received serious inquiries from, another half dozen proposed electronic exchanges and we anticipate that some of the B2B electronic cash markets may also give rise to additional electronic futures exchanges.

    This exciting growth and innovation in the marketplace has begun, and will continue, to provide real benefits to market participants, customers, and the economy as a whole. However, because our primary responsibilities have not changed, growth and innovation will also place increasingly greater demands on our resources. Several areas in particular appear to me to require significant attention and effort:

(i) new exchanges and alternate trading platforms, for which tailored oversight must be fashioned to fit each market along a spectrum of regulatory classifications from full oversight to basic fraud and manipulation protections;

(ii) a new product area (single-stock futures) which potentially will lead to new contracts;

(iii) advancements in the practices of clearing houses to respond properly to these new products and new trading platforms; and

(iv) an expansion of our enforcement mission to now include prosecutions in the increasingly problematic area of foreign-exchange bucket shops.

    To effectively fulfill our responsibilities in these areas, the Commission and its staff must rely heavily upon information management and telecommunications resources that are capable, efficient, and up-to-date in order to allow flexible, fast, and appropriate responses to market conditions and events. I should emphasize that, as a financial regulator, and particularly a regulator that is witnessing phenomenal growth in electronically-based market activity, the Commission depends upon its information management and telecommunications resources for far more than mere administrative tasks such as facilitating inter-office communication. Without adequate resources in this area, we cannot effectively monitor markets to detect potential problems on a timely basis. Nor can we reconstruct market events when disputes arise or when violations are alleged. These monitoring and investigative responsibilities require the processing of vast quantities of information and our Office of Information Resources Management represents not a support function but rather a mission-critical core competency of the Commission.

    But our human resources, the dedicated people that interpret and act upon the information provided by our computer resources, are even more critically important to the performance of our mission, to the protection of market participants and the markets themselves. This mission requires staff members with the proper training and with solid experience in the specifics of the markets we oversee. All too often, however, we lose good people just as they are coming into their own as commodity lawyers, economists, and trading specialists.

    In most cases the CFTC’s ability to compensate such highly skilled people lags not only far behind that of the private sector, but, I think more critically, well behind other federal financial regulators. This is particularly hard on our Enforcement division, where we hire and train excellent litigators who then leave for higher compensation at other agencies. I recognize that this situation is not entirely unique. However, as an agency, we operate and compete primarily in the financial sector. Therefore, Mr. Chairman, I respectfully request this Committee’s support for removing the agency from the Title V restrictions regarding pay so that we may successfully hire and retain the dedicated staff we need to accomplish the important mission that have in front of us.

    Again, I am proud to represent the Commission here today and I thank you for the opportunity. I would be happy to answer any questions you may have.