Remarks of Commissioner James E. Newsome, before the National Cattlement's Beef Association Annual Convention and Trade Show Live Cattle Marketing Committee, Phoenix, Arizona
January 27, 2000
Introduction
Thank you. I appreciate the invitation to speak with you today. I would like to thank Lemmy Wilson for his leadership of this committee and of his willingness to participate in the various activities at the CFTC and kindly share the comments and concerns of your industry.
It’s an exciting time to be at the CFTC, as the industry and the Commission are both undergoing many changes. Technology and innovative thinkers are driving the derivatives business, and I for one am excited about the future.
Market Glance
Since I spoke to you last year, the Commission has received a new chairman, Bill Rainer, who is leading us into reauthorization of the CFTC, away from heavy-handed regulation and into a modern oversight role. This potential policy shift will move from specific rules to adherence to "best management practices" with strong enforcement capabilities to preserve the integrity of our markets. Global derivatives markets are no longer myths, but realities. For many years, the Chicago Board of Trade (CBT) has been the largest futures exchange in the world. However, in 1999, the all-electronic German-based Eurex exchange replaced the CBT with that distinction. Just to give some perspective, the CBT’s total trading volume for 1999 was 255 million contracts, while Eurex’s reported volume for the same period was 379 million. Real competition for our domestic futures exchanges is coming from foreign exchanges, over-the-counter markets, and electronic systems.
Regulatory Challenges
This dynamic market has created some interesting regulatory challenges. Different execution types (the traditional open outcry pit model vs. electronic screen-based systems) has raised new regulatory issues, such as should the Commodity Exchange Act be overhauled to account for modernization and emerging technologies? Has the need for specific regulation changed given today’s market environment? Competition, especially for financial contracts, has forced the Commission and Congress to review the entire Commodity Exchange Act and accompanying regulations to ensure a level playing field for all market participants. However, the Commission has received some comments expressing a continued need for the CFTC to supervise agricultural contracts, given the lack of competition for that business.
Potential Solutions
Some have suggested different regulations for different markets, given the characteristics of each particular market and makeup of trading participants. Although competition from many different angles raises regulatory questions, I believe it solves many of our historical regulatory problems by increasing the quality of products available.
FutureCom
As most of you know, FutureCom has applied to the CFTC to become an Internet-based futures exchange, where participants can actually trade contracts electronically, via the Internet rather than through an intermediary on a traditional futures exchange. Approval of FutureCom has been stayed by the CFTC as more information was gathered and analyzed. I am pleased to report that just last week, the stay was lifted and Commission staff hopes to complete the application review in the very near future. As stated last year, I commend Mr. Bill O’Brien for his innovative thinking and believe that these are the ways technology can and will benefit your business in the near future.
Contract Market Rules
On November 26, 1999, the CFTC published in the Federal Register a request for public comment on a proposal to revise its procedures for the review of contract market rules and rule amendments. The original comment period expires January 25, 2000. By letter dated January 3, seven agricultural organizations requested a thirty-day extension of the comment period to permit the membership of each organization to fully consider the implications of the proposed procedures. The CFTC has granted this request, therefore accepting comments until February 24, 2000. This proposed rule would allow exchanges to implement rule changes without prior CFTC approval, as long as the exchange "certifies" to the Commission that changes are fully in compliance with the Commodity Exchange Act. Exchanges have requested this change in order to be able to respond immediately to changes in the marketplace and/or competitive pressures. As this proposed rule is pending approval by the CFTC and we are in the process of receiving comments, I am unable to comment any further on this issue. However, as I know many of you will have comments, I encourage you to submit comments prior to February 24.
Speculative Position Limits
The Chicago Mercantile Exchange has proposed amendments to the Exchange's live cattle futures and option contracts. On Monday, the Commission published the proposal in the Federal Register for comment. The comment period closes on February 8, 2000. Since the matter is pending Commission approval, I cannot comment further than to say I look forward to reviewing the proposal and subsequent comments received.
Agricultural Trade Options (ATO's)
An ATO is an agreement giving the agricultural producer the right, but not the obligation to deliver his or her commodity in the future for a set price. ATO’s are generally similar to the tradition exchange-traded options, but are traded directly between commercial parties. As I reported last year, I was not at the CFTC during the creation of our ATO pilot program, but I did support the concept of additional risk-management tools for farmers and ranchers. However, I told you some things would need to be changed in order to make the program successful. On December 6, 1999, the Commission adopted several changes to the program that should increase the success of the program. Highlights of changes include permitting cash settlement and offset or cancellation of ATO’s and streamlining disclosure statements, registration requirements, and reporting/record-keeping requirements. These program changes are effective on February 4, 2000.
Summary
I am excited about the future of this industry, given the emergence of technology and market participants, such as Bill O’Brien, who are bold enough to use it. I predict in the near future, there will be more competition in all markets, giving potential users more options. I also believe the regulatory structure will, and should, adapt to allow the business to grow and prosper. The CFTC should not determine winners and losers, but rather the market should make that determination. The role of the CFTC should be to maintain basic customer protections, effective surveillance and enforcement programs, while eliminating unnecessary and outdated regulations. I look forward to working with Congress and with market users, like yourselves, to ensure the Commission has the ability to respond to market innovations.