Remarks of Commissioner James E. Newsome before the Chicago Kent Derivatives and Commodities Law Institute, Chicago, Illinois

October 28, 1999

I am delighted to be here today to speak with you and my fellow panelists about the CFTC's agenda for the coming months and years, and I'd like to thank the Chicago-Kent Law School, and also particularly thank Gloria Matthews, for all the hard work that has gone into making this a successful and productive conference and to Barbara Wierzynski for her work on setting up this panel.

First of all, let me make the traditional disclaimer that these remarks represent my own views, and not necessarily those of my colleagues or of the Commission. That said, I believe this is one of the most interesting, exciting, and challenging topics on the Chicago-Kent docket this year. Where will the industry be headed in the next few years? Where will business grow, and where will it falter? And how will the regulators respond? With the technological, legal, and political landscape changing so rapidly and so dramatically, it will take some farsighted thinkers to anticipate and address the numerous issues facing our industry. I think a great many of those people are here at this conference. If I may, I'd like to take some time to add my thoughts to the discussion of an appropriate regulatory agenda, and to give you some ideas about how we might accomplish that.

Given my background and experience, I tend to look at issues from the private-sector point of view. This leads to two basic points I want to emphasize today: first, I believe we need to appropriately deregulate our domestic exchanges to allow them to compete in today's global financial markets, and second, we need to provide legal certainty for over-the-counter markets to allow them to continue to thrive. How do we do this, and why? I'll start with the second part of that question. Let's take it as axiomatic that business seeks to operate in the most efficient manner possible; therefore, if there is an opportunity to increase efficiency (and therefore profits) by operating outside the United States in order to avoid overly burdensome regulation, the rational business decision is to do just that. Accordingly, those business entities that migrate offshore are no longer within our policy-making authority. In other words, with the exodus of business beyond our borders goes the ability of the United States to continue to make policy determinations that affect the global economy. I believe it is critical that regulators in this country recognize this fact, and act so as to foster innovation that will allow American businesses to continue to grow as worldwide market leaders.

Now to the first part of the question—how do we accomplish an appropriate regulatory agenda? Although it may seem overly simplistic, I believe as a crucial first step, regulators should engage in cost/benefit analyses before taking any action whatsoever. Too many times the government acts, even with the best of motives, without giving due notice of and attention to the costs of its action. For the reasons I've just mentioned, we cannot afford to do that. So I will start from the premise that we take regulatory actions when, and only when, the benefits of such actions clearly outweigh the costs.

Soon after coming to the Commission, it was obvious to me the need for reduced regulation. Several months ago, I convened a meeting of representatives from the three largest domestic exchanges to discuss the issue of regulatory relief. They provided me with a list of items to address some of their concerns. In the intervening months, I have made consistent, strong efforts to try to get certain items on that list accomplished, specifically, relief from pre-approval of contract market designation rules, a payment for order flow advisory, a market maker program advisory, and a final resolution on dual trading orders. I chose those items from the exchanges' lists as ones that could and should be addressed immediately, without changes in existing authority and without further direction from Congress. More broadly, it is apparent to me that the umbrella approach of regulating all markets the same is antiquated. Markets have changed, competition has changed, and regulatory needs have changed. We must develop a system that recognizes levels of sophistication, levels of need, risk of manipulation, and regulate accordingly.

Now to the more difficult query:  how do we determine the costs? The short answer is, the regulator listens to the regulated. As many of you already know, I believe that regulatory reform should be industry driven, and there's a good reason for that:  the markets know best what's best for the markets. We need to hear what your problems are, but more importantly, we need to hear your suggested solutions. Obviously, we're going to get competing concerns, and competing resolutions, but we cannot make appropriate decisions without industry input. I believe that is the only reliable method for a regulator to truly determine the potential costs of an action.

Perhaps most importantly, I believe there is a fundamental question that should be asked prior to our taking regulatory action: what is the federal interest? In other words, has Congress vested within our regulatory purview a specific interest to protect? And do we have the flexibility to act appropriately? If not, then we should not, indeed, cannot act. Federal agencies can become unwieldy vehicles, precisely because they are not driven by market forces; that is all the more reason for us to act only upon specific authority, only within our particular area of federal interest, and only with an appropriately targeted focus. We should not embellish or embroider what Congress charges us with doing, and we should recognize that our public service can be best accomplished with regulatory prudence rather than zealousness.

As I've stated previously, I believe that market discipline and adherence to best-practice standards can achieve better enforcement of fundamental market integrity concerns than can any amount of overlaid regulation. This does not mean that I slight in any way the Commission's duty to protect the public—indeed, just the opposite is true. I believe we best accomplish that goal by protecting the integrity of the markets we oversee, and we do that through sensible use of our antifraud and anti-manipulation authorities. Ultimately, an appropriate regulatory focus should protect the public, ensure safe, sound, and competitive markets, and otherwise get out of the way so people can get on with the business of doing business.

I haven't yet spoken about technological change, but I don't believe this discussion can be relevant without addressing the issue. In other words, talking about the CFTC's upcoming role means talking about dealing with electronic trading systems. The dramatic and rapid evolution of these systems has, and will continue to have, a profound impact on all aspects of our industry—from the way transactions are effected, to the place they are effected, to the manner in which they are cleared, and to the business structure of the entities that are operating execution and clearing functions, just to name a few.

In that vein, I would urge all of us to “think outside the box” in coming up with proposals for regulatory reform. I have listened to discussions of some rather radical ideas for reform, and I'm heartened by the creativity they embody. We're all realistic enough to know that no one will get everything they want, and that the end result will most likely not be perfect. But we have a singular opportunity at this point in time to create a new structure, a new paradigm of regulation, that will foster innovation, strengthen the safety and soundness of the markets, and lead us to new challenges we've not yet envisioned. I look forward to working with Congress, with the industry, and with other regulators to arrive at a workable, reasonable, and most of all beneficial resolution of our regulatory issues. I am hopeful that, at the end of the day, market activity flows to and from various industry sectors because of true economic competitive forces, and not because of regulatory obstacles. Thank you.