Remarks of Chairman James E. Newsome before the before the International Derivatives Conference, London, England
June 18, 2002
I’m honored to be here this morning and look forward to an interesting conference. Certainly, we’ll be tackling some very timely subjects as we discuss security futures, energy markets, anti-money laundering, and other issues.
First, thank you for your thoughts, prayers, and assistance in response to the September 11th tragedy. The resilience of the financial sector was impressive and the responses of market participants made me quite proud to be associated with such professionals.
With respect to security futures, the Commission was very pleased last week to officially recognize OneChicago as a designated contract market for these products. Market participants will now have the choice of yet another platform on which to trade these important new products. All that is needed now is for the regulatory structure to be completed and, in that regard, I am pleased to report continued progress.
In recent weeks, the CFTC and SEC have adopted final rules on customer protection and recordkeeping requirements and have also issued orders permitting the trading of security futures based on exchange-traded funds, trust-issued-receipts, and closed-end funds. However, we have yet to reach final agreement on the exact contours of a joint margin rule. Though I would have preferred to have reached this agreement last December, I said then and still believe, that it is as important to issue the correct rules, as it is to issue rules quickly.
Throughout the last 18 months, as our respective staffs have labored to reach agreement, I stressed to our staff my two primary objectives for this and every rulemaking: first, that no rule should be so prescriptive or burdensome that it effectively precludes an economically viable new product from trading and, second, that no rule should create an unfair advantage for one set of market participants over another. I believe we will be successful in both respects. Chairman Pitt and I have been in close contact recently and I can assure you that we are both extremely anxious to address all remaining issues at the earliest possible date. I look forward to the commencement of actual trading in security futures and am eager to see how and by whom these new products will be utilized.
I am also pleased that the CFTC and the SEC were successful in recently “grandfathering” -- or permanently excluding from the definition of “narrow-based security index” -- 42 non-U.S. security index futures that had received no-action relief from the CFTC prior to passage of the Commodity Futures Modernization Act. Providing increased legal certainty and helping to avoid market disruptions in situations like this are the kind of goals that I believe financial regulators should pursue more often.
While a great deal of our focus has been on completing rules for security futures, we have also been busy implementing other important provisions of the CFMA. For example, Commission staff has been hard at work on the study of intermediaries that is mandated by the CFMA, and has been a priority of mine. Staff have traveled extensively and met with numerous FCMs, IBs, pool operators, and trading advisors to hear their thoughts on the current oversight structure and their suggestions for improvement. And less than two weeks ago, the Commission held a public meeting to solicit the input of key representatives of the FCM, CPO, and CTA communities. By the end of this week, we will submit to the Congress our final report and recommendations.
I believe that market participants can then look forward to the same degree of improvement and rule modernization that exchanges and clearinghouses enjoyed in last year’s rulemakings. More broadly, I expect the CFTC to look at every aspect of our oversight, whether mandated by the CFMA or not. No rule should be immune to scrutiny, particularly those that are overly prescriptive or technologically obsolete or that no longer serve a legitimate public policy goal.
Turning to energy markets, I want to first assure you that the CFTC is utilizing every available resource to discover what has happened and whether and how it may have affected the commodity markets. We are coordinating our efforts with those of other federal regulators and sharing information in an unprecedented manner. Those of you who have heard me speak before know that my regulatory philosophy has two prongs: to provide sufficient flexibility to permit innovation in legitimate endeavors but, also, to vigorously investigate and prosecute those who choose to operate beyond the rules.
You should also know that I long have been a consistent proponent of the much-needed regulatory reforms and increased legal certainty ultimately brought about by the CFMA. Chairman Greenspan has told Congress there appears to have been nothing unique to the derivatives markets in what Enron and others are alleged to have done. I agree with that observation, and with that of Chairman Pitt, who has said that it would be premature to undertake legislative changes before all the facts have been gathered and evaluated. I believe that any departure from the path of progress set out in the CFMA should be approached with extreme caution.
Only after we have uncovered the facts, analyzed the evidence, and identified the true nature and causes of the problem could we responsibly recommend that Congress consider changes in our jurisdiction or authority. I can assure you that the Commission will share its findings, as well as any recommendations that we may conclude are appropriate, at the earliest possible date. At the end of the day, we must ensure that we have a regulatory structure that protects both market integrity and market participants, while at the same time allowing innovation, flexibility, and growth.
A real strength of the CFMA’s principles-based approach is that it permits trading facilities to decide for themselves the level of regulatory oversight to which they wish to be subjected by adjusting the nature of the products they trade and by selecting which types of participants will be permitted access. The CFMA effectively lowered many barriers to entry and has already begun to promote new competition, although perhaps not as quickly as some had anticipated, that can benefit all market users. Revoking these important new freedoms, with as yet no credible basis for doing so, would go completely against the will of Congress as expressed only a year and a half ago. Doing so would create a regulatory regime that could very well stifle market innovation, hinder investment in new technologies, and deny market participants the benefits thereof.
On the clearing front, the CFTC now has enhanced authority over free-standing clearing arrangements and we are currently examining how to most appropriately exercise this authority. We have already reviewed two clearing arrangements operated within non-U.S. jurisdictions, consistent with our open view toward market access issues.
On the issue of enhanced money laundering prohibitions, the Commission has been very active in cooperating with other U.S. regulators to implement the Patriot Act provisions and has participated internationally in the Financial Action Task Force and IOSCO to bring to the table differences between securities, derivatives, and banking business. We are pleased that you share our interest in not multiplying a series of different or duplicative requirements where simpler and more cooperative solutions can serve all of our goals in this area. Getting this right is especially important to cross-border transactions.
Thank you for the opportunity to be here and address this conference. I will be happy to respond to any questions you may have.