Testimony of Commissioner David D. Spears before the United States House of Representatives Committee on Agriculture Subcommittee on Risk Management and Specialty Crops
May 18, 1999
Mr. Chairman and members of the Committee, I appreciate the opportunity to testify here today as you continue to gather information in preparation for CFTC reauthorization. My remarks, which represent my own personal views and not the official position of the CFTC, will be rather general in nature. As you know, the Commission expects to be joined very shortly by two new members, including a new chairman. When that new membership is in place, I expect our top priority will be to reach consensus on formal agency positions regarding a wide range of specific reauthorization issues. For now, I would like to share with you a few general thoughts on the inherent challenges of this reauthorization process and some of the policy considerations that are critical to meeting those challenges.
In my view, the primary challenge for today’s financial regulator is keeping pace with changes in the industry it regulates. This is especially true in the CFTC’s regulatory arena, where recent years have seen globalization of the financial markets, remarkable new electronic trading technologies, a bewildering array of new products, and challenges to US futures exchanges from both overseas and over-the-counter (OTC) competitors.
As we take up the challenge of amending the CEA, I believe this committee’s most difficult task will be finding the appropriate balance between competing policy considerations. I believe the process of regulation should be a public/private partnership – a cooperative system that enables the US futures industry to grow and prosper. I recognize the industry’s legitimate concern over the competitive challenge they face from foreign markets and OTC competitors. I understand the need to reduce unnecessary regulatory burdens so they can meet that competition on a level regulatory playing field. But where will that level be? Achieving regulatory parity will entail difficult policy choices involving the structure of financial security, market integrity, and customer protection standards that have been the cornerstone of US futures regulation for over 70 years.
I recognize that the sophisticated, professional traders who account for the vast majority of financial futures volume do not need the same level of regulatory protections as smaller traders. However, we cannot forget that granting regulatory relief to those market professionals could lead to a two-tiered market structure. The second-tier, residual market, which would surely include a greater proportion of the agricultural contracts, could face diminished price discovery capability and proportionately greater regulatory costs.
I realize that OTC markets need legal certainty; and I strongly support CFTC cooperation, as part of the President’s Working Group on Financial Markets, to help provide that certainty. However, as noted in the Working Group’s Hedge Fund Report, efforts to provide legal certainty cannot ignore such factors as potential systemic risk from the activities of highly leveraged institutions.
I recognize that it makes no sense to saddle electronic trading systems with rules originally designed for open outcry trading pits. Over half of the CEA’s requirements for exchanges do not even apply to electronic systems. But switching to electronic trading will not turn everyone in the marketplace into a saint. Somebody will still need to take responsibility for protecting customers in the electronic marketplace from abusive trading practices and fraud.
As Congress tackles these difficult policy choices, I would like to stress one additional point. The Commission, US futures exchanges, and market participants all need and deserve a CEA that is flexible enough to allow for appropriate regulatory responses to changing circumstances. Let me give you an example of the benefits of flexible statutory authority. Last June, the Commission issued rules for an agricultural trade options pilot program. Those rules were drafted in the immediate aftermath of the hedge-to-arrive crisis. In my view, an understandable desire to avoid similar problems with ag trade options resulted in a program with too many regulatory bells and whistles. The result – exactly nobody signed up for the program. The good news, however, is that our staff is now hard at work drafting amendments to make the pilot program more user-friendly. We can do this because the CFTC’s broad statutory authority over options gives us the flexibility to adjust our regulations as needed. Also, when implementing these or any regulatory changes, the agency should apply a rigorous cost-benefit analysis. Bear in mind, however, that both the costs and the benefits of futures regulation are very hard to measure.
CFTC reauthorization has always been a difficult and controversial process. The stakes are too high to expect anything else. But reauthorization does not have to be a disagreeable or antagonistic process. I believe the best results can be achieved with an open mind and a cooperative attitude. In that spirit, I have held numerous meetings with representatives of the exchanges, the brokerage community and farm organizations aimed at better understanding the competing interests and seeking consensus where possible. I plan to continue that process as the reauthorization debate continues. I commend this committee for getting an early start on reauthorization issues and I look forward to similar cooperative efforts with the committee as well. I am confident that these efforts will result in a reauthorization bill that will enable the CFTC and the markets it regulates to meet the challenges of the 21st century.