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REVIEW THE COMMODITY FUTURES TRADING
COMMISSION'S GOVERNMENT
PERFORMANCE RESULTS ACT PLAN
WEDNESDAY, OCTOBER 22, 1997
House of Representatives,
Subcommittee on Risk Management
and Specialty Crops,
Committee on Agriculture,
Washington, DC.
The subcommittee met, pursuant to notice, at 3:10 p.m., in room 1300, Longworth House Office Building, Hon. Thomas W. Ewing (chairman of the subcommittee) presiding.
Present: Representatives Smith, Lewis, Bryant, Moran, Condit, Pomeroy, Goode, and Boswell.
Staff present: Stacy Carey, director, Subcommittee on Risk Management and Specialty Crops, Gregory Zerzan, Ryan Weston, Wanda Worsham, clerk; and John Riley.
STATEMENT OF HON. THOMAS W. EWING, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF ILLINOIS
Mr. EWING. The Subcommittee on Risk Management and Specialty Crops hearing on the Commodity Futures Trading Commission's Government Performance Result Act plan will come to order.
I would like to thank and welcome Brooksley Born, the Chairperson of the Commodity Futures Trading Commission, and Rick Hillman of the General Accounting Office for testifying this afternoon. But also, I'd like to take a moment to thank and commend your staffs for their work thus far with the subcommittee on this issue.
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Four years ago, Congress passed a law to hold Federal agencies accountable for efficiency and achieving results. The Government Performance Results Act was signed into law in August of 1993, with the purpose of improving the confidence of the American people in the Federal Government, Federal program effectiveness, congressional decisionmaking, and the internal management of the Government. In short, the Results Act provided the tools for finding out what was working, what was wasted, and what needed to be improved, and what needed to be rethought.
As the GAO has accurately observed, an understanding has emerged that the Federal Government must be run in a more business-like manner. As companies are accountable to shareholders, the Federal Government is accountable to taxpayers. As we all know, the American taxpayer is demanding as never before that the dollars they invest in their Government be managed and spent responsibly.
The subcommittee, as elected representatives of the American taxpayers, will conduct two oversight hearings to review CFTC's efforts in meeting the legal requirements of the act. Today we will hear from the Commission and the GAO. Next week, we will hear from stakeholders. Our goal is to assure that the strategic plan is a realistic, workable plan that produces results.
The main requirement of the act directed agencies to submit a strategic plan to include: (1) a comprehensive mission statement, (2) general goals and objectives, (3) how goals and objectives are to be achieved, (4) a description of the performance goals, and (5) identification of external factors, and finally, (6) a description of the program evaluation with a schedule for future evaluations. The act also requires agencies to consult with Congress, and to solicit and consider the views and suggestions of those entities affected or interested in the plan.
In addition to the statute, guidance reports were issued by the General Accounting Office and the Office of Management and Budget to assist agencies in developing their plan. While there are elements which provide a solid foundation for a constructive report, much more work needs to be done. I commend the CFTC for being responsive to initial recommendations made by the GAO and the subcommittee. These efforts are encouraging.
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Although stakeholders will be testifying next week, many had not seen or heard of the plan until they were invited to testify before the subcommittee. Many have not seen the annual performance plan which includes most of the results, details, and annual performance targets. These entities should have been contacted by the Commission at some point during the four-year development process, long before the September 30 deadline passed.
Had effective outreach to stakeholders been conducted, the importance of this process to the Commission and to the industry would have been expanded and understood by all. Consultation is important because it is the most effective way for the agency to look beyond the vacuum of Federal bureaucracy to determine if the plan is realistic and workable. Because consultation was foregone, the initial opportunity to forge a consolidated, cooperative effort among the CFTC and stakeholders was missed. We do not want to miss this valuable chance to reach out to stakeholders, to craft an interactive vision and strategy statement on behalf of the American taxpayers.
The good news is that this is an evolving process; the opportunity for outreach still exists. For those that believe the issue will go away after next week's hearing, you're mistaken. If you have not taken the time to read the report, I strongly suggest you do so. The Results Act will be a part of future subcommittee hearings, the appropriations process, and CFTC's next reauthorization. Our goal is to make the process work. I sincerely hope we will have the cooperation of the Commission and the stakeholders in efforts to achieve this goal. Thank you.
Do you have an opening statement Mr. Lewis?
Mr. LEWIS. No opening statement.
Mr. EWING. All right, we will then start with our first panel, our first witness, Mr. Richard Hillman, Acting Associate Director, Financial Institutions and Markets Issues, the General Government Division of the General Accounting Office. Welcome, Mr. Hillman.
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STATEMENT OF RICHARD J. HILLMAN, ACTING ASSOCIATE DIRECTOR, FINANCIAL INSTITUTIONS AND MARKETS ISSUES, GENERAL GOVERNMENT DIVISION, GENERAL ACCOUNTING OFFICE
Mr. HILLMAN. Thank you, Mr. Chairman. I am accompanied today by Cecile Trope, an Assistant Director within our General Government Division, responsible for GAO's work at the Commodity Futures Trading Commission. Mr. Chairman, if it meets with your approval, I would like to submit my written statement for the record and summarize my remarks.
Mr. EWING. That's very acceptable. In fact, we encourage that.
Mr. HILLMAN. We are pleased to be here today to assist the subcommittee in its review of the Commodity Futures Trading Commission's strategic plan. Hearings such as this, are an important part of ensuring that the intent of the Government performance and Results Act is met, and we commend you, Mr. Chairman, for holding this hearing. As its title indicates, the Results Act focuses on results. The act seeks to shift the focus in Federal management and decisionmaking from a preoccupation with the number of tasks completed or services provided to a more direct consideration of the results of programs. That is the real difference those tasks or services make in citizens' lives.
In crafting the act, Congress recognized that the congressional and executive branch decisionmaking had been severely handicapping many agencies by the absence of basic underpinnings of well-managed organizations. These agencies lacked clear missions, results-oriented performance goals, well-conceived agency strategies to meet those goals, and accurate, reliable, and timely program performance and cost information to measure progress in achieving program results.
In recent years, Congress has established a statutory framework for addressing these longstanding challenges, and for helping it and the executive branch make the difficult tradeoffs that are necessary for effective policymaking. Improving management in the Federal sector will not be easy, but the Results Act focused on outcome-oriented goals and strategies, and timely, reliable program evaluations can help guide the Government for a more efficient and effective program operations.
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As indicated in the Results Act and OMB guidance, as enumerated in your opening remarks, each of the functions, each of the agency's long-term strategic plans will contain the following six major components: a comprehensive statement of the agency's mission; the agency's long-term goals and objectives for its major functions and operations; a description of the approaches or strategies for achieving those goals and the various resources needed; an identification of key factors, external and internal to the agency, that are beyond its control and could significantly affect the achievement of strategic goals; a description of the relationship between the long-term strategic goals and annual performance goals, and finally, a description of how program evaluations were used to establish a revised strategic goals and a schedule for those evaluations.
In developing their strategic plans, agencies are also required to consult with the Congress and required to solicit the view of their stakeholders. My testimony today discusses our review of CFTC's strategic plan. We specifically determined whether the plan contained each of the six components required by the Results Act, and assessed each component's strengths and weaknesses. We also reviewed the extent to which CFTC consulted with stakeholders, including the other financial market regulators. Finally, we identified challenges that CFTC faces in addressing the requirements of the Results Act.
Overall, we found that CFTC's strategic plan reflects a concerted effort by the agency to address the requirements of the Results Act. Although the plan could be strengthened in several areas, it compares favorably with the plans of other Federal financial regulators that we have reviewed. On the basis of our review, we found that CFTC's plan contained all of the components required by the Results Act, but that many of the components could be strengthened. We also found that the plan could be improved by additional stakeholder input, including interagency coordination.
More specifically, we found that (1) the plan defines goals and objectives that support CFTC's mission, but that most of these could benefit by being restated in a way that would facilitate future assessment. (2) The plan identifies activities for achieving CFTC's goals and objectives, but it could be more informative by including the resources needed for the activities, schedules for completing key actions, and ways of assigning accountability to managers and staff. (3) The plan's discussion of the relationship between goals and the annual and strategic plans could be strengthened by including more results-oriented performance measures that could be used to reflect progress made towards achieving its goals. (4) The plan identifies some key external factors that could affect the agency's ability to achieve its goal, but the plan could be improved by describing how such factors are linked to particular goals, and how a particular goal can be affected by such a specific factor. (5) The plan indicates the CFTC will use its existing processes to evaluate its programs, but the plan could be much expanded to include information on the timing and scope of future evaluations.
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And finally, we found that the CFTC's strategic plan reflects limited consultation with its stakeholders, those potentially affected or interested in its plan. We do note that the plan identifies numerous stakeholders, stating that they are valuable resources that must be tapped to provide critical feedback on the agency's goals and priorities. The stakeholders identified in the plan include futures exchanges, the National Futures Association, market users, and other Federal departments and agencies.
The plan was made available to stakeholders late in the process. As a result, the plan reflects limited consultation with stakeholders during plan development. Also the plan does not discuss how CFTC will incorporate stakeholders' views in the development of its future plans.
GAO recognizes that developing performance measures and measuring program impacts present challenges to CFTC and other regulatory agencies in addressing the requirements of the Results Act. These barriers include the following:
Problems collecting performance data; the complexity of transactions and the lack of Federal control over outcomes and results realized over long timeframes. To some extent, each of these barriers is applicable to the CFTC. While CFTC's strategic plan can be further improved to overcome these barriers, the Results Act anticipates that the process of developing a strategic plan could take several planning cycles.
GAO also recognizes that the CFTC's strategic plan is a dynamic document that the agency intends to refine. Improving management in the Federal sector will not be easy, but the Results Act can assist in accomplishing this goal. We look forward, Mr. Chairman, to continuing to work with the Congress and the CFTC to help ensure that the requirements of the Results Act are met.
And this concludes my prepared statement and I would be pleased to respond to any questions or members may have.
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[The prepared statement of Mr. Hillman appears at the conclusion of the hearing.]
Mr. EWING. Thank you Mr. Hillman, I appreciate that. I would think the formation of the performance indicators in the goals are an important part of the process, and without good measures, the agency may be measuring the wrong results. And I'd like to talk about that for a moment. You indicated that CFTC could strengthen its plan by discussing performance goals and developing more results-oriented measures against which actual performance can be compared. To do that, I'd like to run through some of the performance indicators to assess how they could be better structured.
The first one I would like to bring up is goals, outcome objectives, activities, to conduct timely review of contract market applications to determine if they are economically viable. The CFTC's performance goal is to review each submission within 10 to 45 days, but the performance indicator measures only applications received. Could you comment on that? Would it be more results-oriented to say how many were approved within a certain period of time?
Mr. HILLMAN. Absolutely, that would be a more results-oriented measure than saying how many were actually being received.
Mr. EWING. The plan doesn't go into how these were handled after they came in? It just says how many were received.
Mr. HILLMAN. When we're looking at performance indicators such as these, Mr. Chairman, what we have typically found here, and what we have found across the Federal Government thus far, is that the general tendency is to first focus on what your program outputs are, what your program processes are, and this is a typical indicator which tends to do that. What we're hoping to find, as we get more mature thinking and are more prepared to address the tenets of the Government Performance and Results Act, is to move from a concept of what we can control to a span of what we can't influence. An in this regard as it relates to this particular indicator, we'd be looking to find ways in which perhaps there would be assessments of ways to improve the efficiency of the application approval process, or improve the effectiveness of that process, as opposed to documenting to what extent these activities have occurred.
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Mr. EWING. Another question I had in that same, on goal 1, outcome objectives and on activities, deals with preparing market surveillance reports on expiring contracts for indications of price manipulation or markets disruption. The performance indicator only measures the reports prepared. And I just question whether that really gives us the answer that we want on the outcome and the objective.
Mr. HILLMAN. Overall again, what this indicator seems to be tracking is what the CFTC is already doing, preparing reports—not taking it to the next step, to determine what the added value is from developing those reports, and therefore, assessing an indicator that would address that added value.
Mr. EWING. It would be much more helpful, then, it would to me as a layman, and I would hope to many others, that if the report would indicate the number of detected price manipulations that we might have found in such activity.
Mr. HILLMAN. That would be very appropriate, Mr. Chairman, and also to actually assess a goal to potentially, through these types of reports and other related efforts, to reduce the incident rate or price manipulation or market disruption.
Mr. EWING. Going on, still under goal 1, outcome objective and also activity 6 ''to maintain current understanding of market functions through research, the performance goal is to complete research projects timely.'' The performance indicator is the number of research projects. But I think that in the plan there was no discussion about the type of report or the timeframe to assure that they were completed properly. What is a more results-oriented indicator?
Mr. HILLMAN. Again, I would say in each of these activities that are being monitored here, if the CFTC would go the next step to document not as much what they're doing, but what they're hoping to achieve from doing those activities, they would be in a much better position then to assess the extent to which their program activities are achieving their intended purposes.
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Mr. EWING. In this same vein, goal 3 is to foster open, competitive, and financially-sound markets. I would like to make a couple of points here: One, most of these activities look like it could easily fall into goal 2 of protecting the market users and the public, and, two, out of the 21 activities, there are only three activities that I can identify that have anything to do with fostering a competitive market. Three, two of the activities have no performance indicators. Activity 2 is to review and approve self-regulatory organization rules and amendments, but there is no discussion of the rule approval, approved, or a timeframe for approval.
Activity 4 is to provide exemptive relief to foster innovative transactions in trading systems, but we can't measure the result of this goal because there's no indication of how many exemptive relief transactions were requested in the first place. How could this goal and performance indicator be improved?
Mr. HILLMAN. I think you have identified instances where there are some gaps in the linkages that exist between goals that the CFTC has established and indicators of achievement of those goals and the measures that they will be using. However, I would like to say that it is not an easy thing to do, what we're asking the CFTC to do. They are under some significant challenges that they and other Federal agencies in the Government face associated with the lack of complete program data and a lack of a sense of assessment as to how the measure that they are taking, Mr. Chairman, in addition to the measures that others are taking, are really influencing the direction that they would hope that the market would be going in. It's clear that the activities that they have identified need to be rethought from a standpoint of results, not as much looking at the outputs, but at looking at the outcomes, and I believe through looking at the anticipated outcomes and assessing the possibilities for increased efficiency and increased effectiveness, each of these indicators that you have mentioned could be restructured and enhanced.
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Mr. EWING. Mr. Lewis, do you have any questions?
Mr. LEWIS. Thank you, Mr. Chairman.
Mr. Hillman, the GAO made some informal recommendations to the Commission. Did they accept any of those recommendations or all of them or leave some of them aside?
Mr. HILLMAN. We did participate with the subcommittee in informal conversations with the Commodity Futures Trading Commission late in the planning process and offered to them several of the suggestions that we have talked about today to continuously improve their plan. I'm happy to say that several of the suggestions that we have made the CFTC has already implemented. Several others are continuing challenges which we hope they will consider as they continue to refine the plan.
Mr. LEWIS. You mentioned that the CFTC fared favorably compared to other financial regulators in their plan. What areas did the Commission do well compared to other plans?
Mr. HILLMAN. The General Accounting Office has looked across Government at about 27 individual department and agencies' strategic plans during the draft stage. In addition, within our group we have looked at the strategic plans of our five regulatory banking agencies and now as well as the CFTC's plan. Overall, in general, across Government and within the plans that we looked at within our sphere of responsibility, we found some gaping holes in the development of those draft plans. For example, not all plans contained all of the six components required by the act. The CFTC plan includes a broad discussion on external factors, which could influence the achievement of its objectives, and they go the next step to identify strategies that they could follow to mitigate the risks associated with those external factors.
When we looked at plans across the Government, there was some appreciation for external factors; there was nearly no appreciation for the strategies that they would intend to pursue in order to mitigate those risks and CFTC should be commended for going to that next step.
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Finally, the plan itself has done a better job than most in trying to link its goals and objectives between its strategic plan and its annual performance plan. There are a couple of tables, particularly, that begin on page 7 of the strategic plan and again on page 33 of the strategic plan, matrices, if you will, that try to outline how the strategic planning goals and the performance planning indicators and measures are linked. While we continue to have problems, the indicators and measures that they're using are generally output-oriented and activity-based, and could become more measurable and results-oriented. We believe that the actions they have taken show a solid understanding of the direction that the plan needs to go, and incrementally we should hope to see continued improvement in the measurement area.
Mr. LEWIS. Okay. Thank you.
Mr. EWING. Mr. Goode.
Mr. GOODE. I'll pass.
Mr. EWING. Mr. Smith.
Mr. SMITH. Help me understand how you use the existing law in determining the legitimacy or accuracy of the goals that are set up. Do you look at the law and read the law and then compare that with your interpretation of the intent of the law in analyzing the legitimacy of the goals and objectives?
Mr. HILLMAN. The law itself and the implementing regulations from the Office of Management and Budget are very clear in what they're calling for in the establishment of organizational goals and general objectives and related strategies for achieving those general goals and objectives. Our assessment included a review of the Government Performance and Results Act itself, and what it called for in establishing goals, what the OMB guidance embodied within Circular A–11 called for, and then our assessment of what the CFTC actually has done in its strategic plan.
Mr. SMITH. But, I mean, you're leaving out the statute law, but somebody reads the law that's passed by Congress in setting up CFTC in 1974 to say, ''These are Congress' goals and objectives of what CFTC should be doing.'' Is there analysis of GAO looking at that, the objectives of the law that's passed in relation to the promulgated rules and relation to the goals and objectives? [Laughter].
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Ms. TROP. I would say that the answer there is, yes, it is.
Mr. SMITH. We hope so. [Laughter.]
Ms. TROP. Yes. I mean what CFTC has to do is, CFTC in preparing its strategic plan not only identifies what its mission is, but it describes in there its legislation, its enacted legislation. So that's the starting point for its development of the strategic plan. So in our assessment of the plan itself, we sought to determine how well it reflected its statutory obligation as it developed its plan.
Mr. SMITH. So somebody in GAO is reading that 1974 act, and what Congress decided was the legislative goals and objectives to help analyze the strategic plan, the goals, the objectives, therefore, a proper analysis of the outcome, et cetera?
Ms. TROP. I say that's generally a good description.
Mr. SMITH. Do we have the kind of expertise in assessing the performance outcome or do you hire consultants, outside expertise, consultants, to help assess when you are analyzing a more technical type of performance?
Ms. TROP. In terms of what GAO has, we actually have people with expertise in program evaluation in our office and they've assisted in evaluating the plans of various Federal agencies. But what we have not done ourselves is try to say to CFTC or another Federal agency, ''You have a performance goal here; we don't think this is the right goal.'' What we will do is evaluate whether that goal meets the requirements of the act, and that is that you can measure whether or not the performance that is desired has been achieved.
Mr. SMITH. And so do you use the same kind of goals or analysis and evaluation and expertise on evaluating CFTC's performance as you would other financial regulator institutions?
Ms. TROP. Absolutely.
Mr. SMITH. It seems to me then there's a little bit missing because of the uniqueness of that part of the market and such as the Chicago Board of Trade, et cetera, that CFTC is overseeing to get a good analysis of whether they're meeting objectives for that kind of oversight responsibility. It seems to me there needs to be an understanding of the problems of how you oversee that regulation, and you're comfortable and you're willing to tell this committee that, yes, there is the kind of expertise that understands how CBOT and other traders are operating to the extent that you can evaluate and analyze how good CFTC is doing in their oversight responsibility.
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Ms. TROP. I probably left one thing out, and that is the team that looked at this plan was the team of people in GAO that primarily does the evaluations of the activities of the Commodity Futures Trading Commission. So myself and Rich Tsuhara, who works closely with me, we've been looking at exchange activities and the activities of the industry for some years, and what we've done is we've worked with people in the program evaluation area who have greater expertise, and people like Rick Hillman who have broader knowledge of the operations of the Federal Government in general, to do our analysis and bring to you what we have today.
Mr. SMITH. Thank you, Mrs. Trop.
Mr. CONDIT. Mr. Chairman, I don't have any questions, but I would like to enter a statement into the record, if I may.
Mr. EWING. Without objection.
[The prepared statement of Mr. Condit follows:]
PREPARED STATEMENT OF HON. GARY A. CONDIT, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF CALIFORNIA
I want to thank the chairman for convening the subcommittee to discuss the Commodity Futures Trading Commission's strategic plan.
The Government's Performance Results Act of 1993 offers Congress and the regulated community some of the much needed understanding into the agencies' missions, goals, and strategies to achieve these goals.
Quite frankly, this has been a long time coming—by having Government agencies become more accountable for their actions.
In addition, this law allows for Government agencies to shift their concerns away from traditional concerns such as staffing and activity levels and towards more important issues such as results.
Finally, I would like to compliment Chairperson Born and the CFTC for their job on the CFTC's strategic plan. While there are some areas such as stakeholder involvement that need to be addressed, I firmly believe that they have provided us with a very workable and informative document for the committee to use.
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Mr. EWING. Mr. Pomeroy, do you have any questions?
Mr. POMEROY. Basically, is the thrust of the Results Acts to require Federal agencies to perhaps engage in what might be analogous to materiality and the CPA audit and make certain that the reviews, in this instance, of the financial regulators at the Federal level, is related to the essential function of that financial regulation, not merely in following long-time procedures that may or may not be relevant to that task? Is this act supposed to basically put a planning and ongoing evaluation process on the agencies, and your report today is monitoring their compliance with that act?
Mr. HILLMAN. The act really intends to move the focus away from outputs and processes to real results and challenges each of the agencies who are responsible for implementing the act to better understand for themselves what the added value is that that entity is providing to the citizens of the United States and how they can ensure that the added value they're providing is being done in the most efficient and effective way.
Mr. POMEROY. A question on that, and maybe you'll have more to add on that one, but has the act brought about a level of introspection in the agencies that it was intended to, or has it merely added another set of to-do functions that the agency now has to comply with along with the earlier outputs that you have mentioned?
Mr. HILLMAN. I believe that it's probably a little too soon to tell the extent to which we are seeing real gains across the Federal Government to implementation of this act. After all, the first action that was to take place with this act was completed with the September 30, 1997 issuance of strategic plans to the Congress and the Office of Management and Budget. Subsequent cycles included the development of annual performance plans and annual performance reports and continuous adaptation of the strategic plan to the changing influences associated with the responsibilities that the Commission and other agencies have. My sense is, though, that across the Government this is not something that the agencies are taking lightly; that they're making a serious attempt to move away from what we have been tracking before, tasks and activities, and looking more towards the realization of what we're hoping to achieve by fulfilling those activities.
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Mr. POMEROY. Ultimately, that really is a management function, and you can't legislate management; you can only achieve management through management. Yet, perhaps it's helpful guidance or there might be something gained in compliance. I think I probably voted for the Results Act and I believe its purposes are positive and I'm pleased to hear you say that the agencies are taking it seriously. I do note, while you do have a list of areas where performance might have been improved, generally you indicate that the CFTC in their execution of their responsibilities of the Results Acts compare favorably with other Federal financial regulators?
Mr. HILLMAN. Yes, they do. As far as they have gone, they've done a very good job. Thus far, they have cataloged and understood, perhaps to a degree greater than they have before, what the activities and tasks are that they are performing across the organization, and how they are linking up to general goals that they have established. What we're asking the Commission to do is to go to that next step then—once they've understood the activities and tasks that they are doing, is to try to remunerate the extent to which they expect to see real improvement resulting from those activities and tasks and to articulate areas in a more quantifiable way where their actions are intended to result in real improvement.
Mr. POMEROY. I used to be an insurance commissioner. I tried to get my financial examiners to incorporate materiality in their audits. I had an examiner that was more interested in reading board minutes than evaluating factors relating to company solvency. [Laughter.]
And so I've kind of been down the road of what you're trying to achieve here. It is just, I think, very difficult to impose from the outside through a legislative mandate something that is either going to happen or not by virtue of the quality of its management. I think the report you're telling us reflects very positively on the present management at CFTC.
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Mr. HILLMAN. What we're trying to hopefully accomplish is transplanting best practices we found in the private sector into the Federal Government. It's not an easy thing to do. Measures like this have been tried before. We're hopeful that the full embodiment of the Government Performance and Results Act is going to provide the impetuses with which we can see real improvement.
Mr. POMEROY. Now when you say, ''quantification,'' in this instance I think that would be very difficult. It would be like them saying, ''well, we, by bringing on the practice, we avoided 'X' number of consumer fraud incidents in the future, or 'X' numbers of trading debacles in the future'' isn't that right? I mean, it's really very difficult to say my examiner could have said, by incorporating materiality, we won't have any companies go insolvent anymore. I mean, how do you project the kind of future outcome from financial regulatory nuance? And that is my final question. Thank you for your report.
Mr. HILLMAN. You're very welcome. The act requires, and OMB does as well, a more rigorous program evaluation process than has ever been attempted in agencies before. And that is an area which cannot be overemphasized. If goals are established and measures aren't taken to attempt to understand the extent to which those goals are actually being achieved and what mitigating factors ought to be employed in order to further ensure goals are achieved, then much of what we have done would be for naught.
Mr. EWING. Thank you, Mr. Pomeroy.
And we should let the record show that the bill that created this passed by a voice vote, so there's a great deal of latitude on whether we support it in retrospect or not. But it must not have been too controversial. [Laughter.]
We have two new members, and I would encourage all members to come back right after the vote, but, Mr. Moran, do you have any questions?
Mr. MORAN. Mr. Chairman, thank you, no. Having just arrived, I'll defer any questions I have until later.
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Mr. EWING. I would like to just conclude, then, with a few questions. Out of this report I get a couple of ideas that, if we carry just a little further the outline of what the CFTC is doing into what the results of their activities were, instead of how many cases they handled, and if we had had a little more consultation—and I think that's still something that can be achieved—we might be able to get a better working relationship between regulator and those that are regulated.
And I know the GAO has suggested that his consultation has great value in making the report and I guess I just ask you, why do you put that importance on that process?
Mr. HILLMAN. The consultation process is an integral part of the strategic planning process. It helps to create a basic understanding among stakeholders of competing demands that they face and helps to identify the best ways for addressing them. The consultant process provides an important way to ensure that goals that are established are the most appropriate, the most forward-looking, and that the objectives and the strategies that are employed are the best that can be achieved.
Across Government, one of the more significant challenges seems to be the extent to which there are overlapping responsibilities, and the CFTC is in a situation where they fall into a similar situation. And we would hope that, through consultation with other regulators, that the plans that are developed can become more mutually-reinforcing and that the efforts that they conduct will be more aligned.
Mr. EWING. You have indicated that you thought there was lack of or there could have been more consultation than has shown up in your review. What would be the process from here on for us, for the CFTC to maybe try and rectify that lack of consultation?
Mr. HILLMAN. I think there's a number of avenues that could be taken. And part of the reason I think that the consultation was as limited as it was the timing with which the plan was being developed and the process that they went through, that they were running against the September 1997 deadline. But the activities that the Commodity Futures Trading Commission engaged in on a regular basis, as discussed in the partnership arrangements in its budget submissions, include commission-sponsored conferences, symposiums, roundtables, educational opportunities, and outreach efforts, contacts with advisory committees, as well as information-sharing across regulatory organizations. If they would use some of the partnership arrangements that they already have established as part of their normal process and infuse into those things a greater dialog and a discussion of the strategic plan and the goals they hope to achieve, I think that through that process there'd be a more mutual understanding of the extent to which CFTC is able to make a contribution and what we're getting for the investment that we're making.
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Mr. EWING. That's an excellent suggestion. Are there any agencies that you would hold up as being an excellent example of the consultation?
Mr. HILLMAN. One agency which we have looked at which we were very pleased with the consultative process fell within the Department of Transportation. In that area, they sought comments from each of their employees, so that their employees would have an opportunity to read the plan and discuss how it would affect their day-to-day jobs and activities. In addition, they conducted a departmentwide survey to identify programs and other Federal agencies where they might have some shared authorities and coordinated early drafts and plans with those agencies. More importantly, they receive comments from across their stakeholder environment and held a symposium of their own, a 2-day symposium, where Secretary Slater, as well as his leadership team, conducted a retreat and considered comments from their employees, from unions, from their customers and their stakeholders, and deliberated about whether to accept or reject literally hundreds of comments. That type of cohesion and that type of process where they'd gotten the involvement of their stakeholders gave them the opportunity, then, to craft what they might consider to be the most essential goals and perhaps the most appropriate strategies for achieving them.
Mr. EWING. Thank you. I'm going to excuse the first panel. You're welcome to stay and I'm going across the street and vote and then come right back. I appreciate, Mr. Hillman and Ms. Trop, both of your contribution here today and the work you've done on this. Thank you very much.
Mr. HILLMAN. Thank you, Mr. Chairman.
Mr. EWING. The subcommittee will stand in recess for just a few minutes. Thank you.
[Recess.]
Mr. EWING. Our second panel is Chairperson Born, of the CFTC. Thank you again for your cooperation in being here and we look forward to hearing from you.
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STATEMENT OF BROOKSLEY BORN, CHAIRPERSON, COMMODITY FUTURES TRADING COMMISSION
Ms. BORN. Thank you very much, Mr. Chairman, for inviting me. Mr. Chairman and members of the subcommittee, I'm very pleased to be here to represent the Commodity Futures Trading Commission before this subcommittee to discuss the CFTC's strategic plan as developed under the Government Performance and Results Act of 1993 or the GPRA. I would like to summarize my written testimony and ask that the full testimony be included in the record.
Mr. EWING. Without objection, that's very acceptable.
Ms. BORN. Thank you very much. I would also like to commend the chairman for holding these hearings, which I think will benefit the CFTC very much in the ongoing development of our strategic plan.
The Commission strongly endorses the goals of the GPRA and believes that activities required by the GPRA can help it plan and administer its programs better. The GPRA also should enable us to allocate Federal resources more efficiently and effectively. The Commission's mission statement, adopted as part of the GPRA process, incorporates the fundamental principles embodied in our statutory mandate. The mission of the Commodity Futures Trading Commission is, To protect market users and the public from fraud, manipulation, and abusive practices related to the sale of commodity futures and options and to foster open, competitive, and financially-sound commodity futures and option markets.
The goals, outcome objectives, activities, and strategies included in our strategic plan are designed to support and to further the Commission's mission. Throughout the development of our strategic plan, the Commission recognized the potential value to the agency of the GPRA's mandates and directed that our planning and budgeting processes be managed together. To assure this coordination throughout the agency, and the development of a meaningful plan with input from all the Commission's operating divisions, the Commission created an internal staff task force in September of 1996 to identify the activities, outcome objectives, and goals that would support the Commission's mission and vision. The Commission also consulted with numerous outside entities, as directed by the GPRA.
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For example, at the initial stages of drafting we reviewed the draft strategic plans of other agencies and consulted with those agencies. We also submitted a draft of our strategic plan to the Office of Management and Budget, our congressional oversight and appropriations committees, and the General Accounting Office this past August. Our staff engaged in discussions with representatives of these groups and received a number of comments and suggestions from them. We were able to incorporate many of these comments into our final plan.
We also reached out to interested persons in the general public by publishing our draft strategic plan in the Federal Register on September 15, 1997 for public comment, and by posting the plan on our Internet home page. While we have received only a few formal comments as of this date, I've discussed this strategic plan with other interested persons, and several parties have advised us that they expect to comment in the near future. The Commission has also provided copies of the plan to all members of its active advisory committees, and to each of our former Commissioners asking for input. We also understand that copies of our draft plan went to the other financial regulatory agencies.
The Commission unanimously approved the final strategic plan and submitted it to Congress and the OMB on September 30, 1997. However, the Commission's planning process continues, and the Commission welcomes additional comments as it reevaluates its strategic plan over the next 5 years. We recognize that successful implementation of our strategic plan requires the opportunity for input from all persons potentially affected by or interested in our regulatory activities. It also requires that we balance the often competing interests of those persons in a manner consistent with our statutory mandate and the agency mission.
The strategic plan describes many of the ongoing priorities of the Commission. For example, one of the Commission's top priorities this year has been to ensure that the agency is responsive to the competitive challenges facing the U.S. futures industry and its customers, while at the same time preserving important customer protections and market safeguards. This priority reflects each of the three strategic goals included in our strategic plan. These goals are: (1) protect the economic functions of the commodity futures and option markets; (2) protect market users and the public, and, (3) foster open, competitive, and financially-sound markets.
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Consistent with its strategic goals, since the beginning of 1997, the Commission has taken numerous actions to strengthen and to modernize our regulatory regime. For example, this past spring the Commission implemented new fast-track procedures for processing contract designation applications and exchange rules changes. These new procedures significantly streamlined and expedited the review process for most new exchange contracts and many exchange rules, permitting approval within 10 days for many types of contracts and within 45 days for certain other contracts. Since adoption of these procedures, 15 new contract designation applications have been filed with the Commission, 7 of which were eligible for fast-track review. And the Commission has approved all eligible contracts within the fast-track time period.
The fast-track process addressed a competitive need of the futures exchanges to be able to introduce new contracts quickly, while not compromising the interest of market users and the general public. It's a good example of how we must balance the needs and often divergent interests of interested persons while achieving our broader mission. There are numerous other examples of the regulatory streamlining initiatives that the Commission has undertaken in the last several months which were included in my written testimony.
Mr. Chairman, I would like to conclude by once again thanking you for your interest in this matter. We remain committed to both the spirit and the letter of the GPRA, and welcome the opportunity to work with Congress, the OMB, other financial agencies, the regulated industry, users of the futures market, and interested members of the public in refining our strategic plan. Thank you very much, and I would be pleased to answer any questions.
[The prepared statement of Ms. Born appears at the conclusion of the hearing.]
Mr. EWING. Thank you very much, Brooksley, for all that you do. It shouldn't go without saying that the CFTC does an outstanding job, and while we might not always agree on every aspect, an extremely important function that most people don't even know is being carried out and it's one of the reasons that are markets are good in America. And you should be congratulated on your leadership down there and for what's happening, and hopefully the plan is a way to improve. Maybe Congress should do a performance plan. [Laughter.]
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I think that comes in November every other year. [Laughter.]
But one of the things that came up in talking with the GAO and in their testimony here would be, could we make the plan so that it came up with more performance indicators as to the results as compared to just how many people may have filed with your agency on any matter? Maybe you could speak to—some of the results may be private, maybe not public record, or maybe it's all public record.
Ms. BORN. This raises a very interesting issue for us and we're obviously open to any help that any members of the committee or the GAO or other financial regulatory agencies can assist us with. I think GAO has itself recognized the difficulties for a regulatory agency whose mandate is to prevent and deter bad things from happening to quantify and measure outcomes. From one perspective, the strength of our markets, the confidence of investors, is measured by, for example, the 500 million contracts traded last year, the trust on the part of commercial entities in our markets by being willing to base trillions of dollars worth of their transactions on the prices discovered on the markets; the emulation by other countries of our regulatory scheme—these are some of the outcomes that we're striving for.
It is very difficult for a regulatory agency to quantify outcomes when its mission is to prevent manipulation or to deter fraud. How do we measure how much we deter, how much we prevent? It is also difficult for a small agency to prepared a strategic plan. We've had a $55 million budget this past year. We have no trained strategic planners. We have no funds for consultants. We've done it ourselves and it is difficult to craft as well polished a plan as one might ideally wish for.
I know from my own meetings with the other heads of small regulatory agencies—and we've been meeting bimonthly, we've had two meetings on the GPRA—that is a very difficult issue for all the regulatory agencies that have a mission of preventing bad things from happening. If instead the mission is to process adjudications only, for example, they can then say the outcome we want is speedier resolution—we want to decide cases in 3 months rather than 6 months—but for an agency that is mandated to detect manipulation in its incipiency and try to prevent it from happening, it's difficult.
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Also, you mentioned legal barriers. We do have some limitations on reporting of information like trader positions which are the basis for our detection of incipient manipulations, for example. But this, I believe, is an ongoing challenge, and we look forward to any advice and help we can get on it.
Mr. EWING. In the followup to that issue, I believe that what you say makes very good sense, and probably the first thing that you should have on any list of quantified results is we think we've stopped a lot of things that shouldn't have happened and they didn't happen. And there is no way to count that. But then I would hope that they would be able to count some of the things that actually have happened, as GAO has pointed out—how many new contracts were submitted and how many were approved on a timely basis, because that is kind of an issue with the stakeholders and some of the people that you regulate, how timely they get their contract, new contracts, approved. So I think that would be and could be a big plus for your agency with their record there to see for all of us.
Moving on to another point that was made was that of your consultation with stakeholders. And I think that I would have to preface my question by saying, when I deal with my stakeholders, I usually only hear from them when they're unhappy. And I'm sure that that happens with your agency, and maybe they don't come forward as readily because they aren't unhappy. But I would just ask if you feel there are ways you can encourage maybe more of that in the future, or even before this plan is totally put in cement this year, to encourage them to submit suggestions and comments?
Ms. BORN. I certainly think that your holding these hearings is a big help in that regard, Mr. Chairman, because there certainly has been more interest in the strategic plan since you announced the hearings than there had been before. Let me say, first of all, that we interact very deeply and constantly with many of the interested and regulated persons that we deal with. We have public meetings at which the public is, and interested persons are, asked to report and to have input to us. We have a lot of public comments periods. We also hold roundtables and we have active advisory committees the very purpose of which is to have input.
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I should add that, when we put out the strategic plan for public comment, a number of the heads of these interested organizations talked to me and said, ''Brooksley, we see that you've asked for public comment; we are interacting with you on these other important issues which our attention is focused on. Will you forgive us if we don't comment?''
And I said, ''Well, we would like you to read the plan when you have time, and we're open to input because this is an ongoing process.''
We did not treat September 30, the day we needed to submit the strategic plan, as the end of the process. In many ways, it's the beginning of a process of continually reviewing, revising, and improving the plan. I also should add that when I arrived at the Commission at the end of August 1996, the staff immediately came to me and said that GPRA, of which I was totally unaware, had been on the books for 3 years and, because there had not been a confirmed Chair, the Commission had made a decision to delay starting the strategic planning process until then. So we really didn't get underway until September of 1996 in this process.
As you may know, if you've engaged in strategic planning, it is a very time-consuming and resource-consuming effort, and a year is a very short time to accomplish a strategic plan. I'm very pleased with the product that our task force has come up with and the Commission has approved, but I don't think any of us think it's the be-all and end-all and final word on a strategic plan.
Mr. EWING. Thank you. I have a couple of other questions, but I'll go on to Mr. Bryant.
Mr. BRYANT. Thank you, Mr. Chairman.
Welcome and thank you for testifying today. It's good to have you back on the Hill. I would just simply say I have a few questions I'd like to ask, but in followup to Chairman Ewing's question, I, too, had some concern about the lack of response from outside groups that obviously would be affected by this. And, again, it may well be the first time out and not really knowing how to best advertise or solicit these types of comments. I would think given that many of these groups have associations, and so forth, maybe some communication with the actual national association for them to further disseminate this need for comments might be an effective way to reach some of the stakeholders.
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I would, as a question, ask you concerning this process of identifying and evaluating and addressing the potential outside thing, outside interest that might affect the Commission. I think if I've missed this, you can straighten me out, but I think your report fails to make any reference to hostile legislation, legislative changes. And given that we've been through hearings within the last year concerning some of these, I'm wondering if that would not be more appropriate to have included some reference to possible legislative changes?
Ms. BORN. We certainly could. The whole underlying assumption, however, of the strategic plan is that Congress has mandated our mission in the Commodities Exchange Act; our plan is based entirely on the requirements of that act, and the methods that we think most efficiently implement the act. Obviously, if Congress were to decide to change our mission or to change our statutory mandate, the strategic plan would have to be changed immediately. This strategic plan does not come from any independent source, it comes from Congress; it comes from the statute.
Mr. BRYANT. How would a list of Commission's accomplishments from 5 years ago compare to the strategic plan you have today and did the past accomplishments match up to what you have stated as your goals?
Ms. BORN. Of course, I wasn't at the Commission 5 years ago. Five years ago, the over-the-counter markets were just beginning to emerge and be a major element. Foreign exchange trading was just beginning to take off. There are a lot of differences in the markets today. At that point, 5 years ago, we were just reauthorized with the 1992 act and were given a mandate by Congress, for example, to exempt certain portions of the over-the-counter market. I think that would have been what the Commission would have considered its major priorities in 1992 and 1993.
Today, there have been great changes in terms of globalization, technological developments, 24-hour trading around the world, and the Commission has undertaken a thorough-going review of our regulatory scheme to react to changes and make sure we're taking advantage, for example, of the new technological changes. We have this year permitted for the first time our registered people, futures brokers, commodity pool operators, et cetera, to communicate electronically with their customers if their customers consent to that. Before, they had to communicate by hard copy through the mail. We have also allowed electronic reporting to us. Five years ago, the period of time for our approving contract designations, new contracts, was considerably higher than the 45 to 90 days that we're now approving them, and we're trying to get it down to 10 to 45 days.
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Mr. BRYANT. Over that period of time, all the mechanisms and the processes and the technologies that have obviously changed substantially, the core mission of the Commission is still essentially the same, and that was I hear you're saying it's so. You're still talking about doing the same thing, just in different ways?
Ms. BORN. Very much so. I think the legislation has basically held up rather well in terms of our core missions, despite the changes in the market. These markets are still used for risk shifting and price discovery. They're still subject to threats from manipulation of the price and fraud, and the statute is designed to protect commercial interests in the United States and the American consumer from those things happening.
Mr. BRYANT. Let me, if I could, ask you just two short questions, perhaps. Did your work on this strategic plan reveal any shortcomings or areas that should be receiving more attention? And if I might just add the last part of that question, what, I guess if anything, did you learn from developing this strategic plan? Again, any shortcomings or areas that should be receiving more attention, and if there was anything else generally that you learned from developing the plan?
Ms. BORN. In the development of the plan, I think the primary thing that we learned was to bring together the operating parts of the Commission with the budgeting and finance parts of the Commission. The task force that drafted the plan and presented it to the rest of the Commission consisted of a senior person, a deputy director from each of our operating divisions, our acting executive director, and our Chief Financial Officer, and for the first time, we are now able to relate our goals and mission to how we're spending our money, to make sure that it's consistent with our priorities, and I think that's a great benefit.
I don't think that the GPRA process itself identified any shortcomings. The Commission, as a whole, simultaneously with the strategic planning process, because it had not had a fully confirmed five-member Commission for many years until a year ago, has been going through an evaluation of our priorities, where we should be putting most of our energies, and has come up with regulatory reform, i.e., streamlining and modernizing our regulations to recognize the changes in the market and the technological developments, as our top priority, and I suppose you can say that perhaps not even resources had been going into that. I think the explanation for that is that, without a full complement of Commissioners, it was a very difficult situation in which to expect innovation to occur.
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Mr. BRYANT. Thank you, Mr. Chairman.
Mr. EWING. Just a couple more questions: Have you set, as part of this plan, a schedule to review the plan and update it, and who do you report these review and updates to?
Ms. BORN. We are scheduled to do annual evaluations of the plan and will be taking those into account in our so-called APPs, Annual Performance Plans, and making minor adjustments to the strategic plan through that vehicle, but only minor adjustments are necessary, and that will be the vehicle through which minor adjustments to the strategic plan are reported to Congress and this committee, as well as to OMB. If that evaluation indicates a need for significant restructuring of the plan, obviously, the Commission plans to do those revisions at the time it becomes necessary to revise the plan.
We will also be doing quarterly evaluations through our quarterly objectives review, which is a review that the Commission has done for a long period of time and that we are trying to adapt to help us on a quarterly basis do a snapshot of how we're doing on the plan and whether revisions are necessary, as well as the annual plan.
Mr. EWING. So there will at least be an annual review which will be presented to OMB and to the Congress, and there isn't a date that there will be a new plan constructed; it's just an ongoing——
Ms. BORN. That's right. It's a 5-year plan that started in 1997 and ends in 2002, and I think a formal revision is necessary in three years. Let me just ask my experts. In three years, there will have to be, under the statute, a formal revision, and obviously, since it's a 5-year plan, I assume that at the end of 5 years a whole new plan would have to be put in place.
Mr. EWING. In your objectives—you had a list of objectives—only three appear to have any significant relevance to one of your three major goals, and that is open and competitive markets. And I wonder if you were going to give that more consideration, and I certainly think that fits into the modern—or what's happening in the industry internationally and nationally, and wondered what your comments were on that.
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Ms. BORN. I agree with that. I agree that that's one of our very top priorities, and we are, in fact, doing a great deal. The regulatory streamlining process that we're going through is designed to eliminate unnecessary regulatory burdens. We're also engaged in considerable amount of international activity with foreign regulators that's designed to increase the levels of regulation of markets abroad.
First of all, we feel that this is necessary in order for us to be able to protect our own markets because of the globalization of trading and the impact that activities in London or Tokyo or Singapore can have one our own markets. But beyond that, we think it's an important part of making sure that there's a level regulatory playing field. And as a matter of fact, next week I'm going to go to Tokyo for a 2-day meeting that will be the culmination of a year-long effort that we and the United Kingdom regulators and the Japanese regulators started last fall in light of the Sumitomo problems. We hope at the end of next week that the 17 major regulators of commodities markets will enter into agreed-to international best practices standards for market surveillance and contract design for commodities markets. This will be an all-time first in terms of setting an international regulatory floor, and I'm very pleased to say that our own regulatory scheme and the principles that are embodied in the Commodity Exchange Act are essentially the principles that international regulators seem to have come to a consensus on. The Commission feels as though this is a very important part of our mission and eventually hopes that the markets will, and international regulators will, move to greater harmonization of regulation as well, so that our markets can have foreign investors come in without any kind of barriers and our people can invest in foreign markets without any kind of artificial barriers caused by different regulatory schemes.
Mr. EWING. We, as I indicated before, here in the committee and on the Hill, don't see all these things that run very smoothly. You only see the flat tires and the bumps. And there are two issues here on the Hill today, the delivery points issue with the Board of Trade and the legislation introduced in both the House and the Senate to make major changes in how your agency does its regulating. It would appear to me that if the plan was constructed right and if it was operating as probably envisioned by those who put this legislation forth to begin with, many of these issues and these small areas of controversy that are contained in this legislation are contained in the need for the delivery points. Would there be a method in that plan to almost see this coming, and say the Commission can address it or they can't address it, to where much of the work of the committee here wouldn't be to pass new and far-reaching controversial legislation, but to really stamp of approval that the regulator and the regulated have been able to work out many of the issues between them and come here for, more or less, an approval? Do you see this plan having that potential?
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Ms. BORN. I think in the long term it may well. Obviously, we need a great deal of input from all interested parties in helping us with the plan. I think also that it's a question of more interaction between all the interested persons, whether they be the regulated people or the people who are designed to benefit from regulation, in the process of rulemaking and decisionmaking by the Commission and a growth of trust. I certainly hope that we get an increasing degree of participation and coming together with respect to the Commission's very well-intentioned and good-faith efforts to streamline and modernize our regulatory regime. We are at this time getting a great deal of cooperation from the exchanges and from the organizations of commodity professionals, and from user groups like the agricultural trade associations, and other commercial interests. And it seems to me that together, working together, we can improve the regulatory scheme in a way that everyone will benefit from.
Mr. EWING. I'm glad to hear that, and I think a good example of what I'm talking about is in the legislation which I introduced; just a part of it dealt with expediting how contracts are submitted to your agency and the approval process, and maybe the legislation isn't perfect, but I think there wouldn't be that suggestion if there weren't those out there who thought that there should be an expedited or more efficient way to do that, and I would hope that the Commission won't just take that as some kind of carping off here to decide, but that there's an issue and something that needs to be thought about, talked about, to make it work a little better.
Ms. BORN. Indeed, last spring we adopted the fast track contract approval which allows us to approve a number of contracts on a 10-day fast track and others on a 45-day fast track, and I can report to the subcommittee that, from our perspective, this is working very well. Half of the contracts submitted to us so far have been submitted pursuant to the fast-track time schedules, and we have met the time schedule in every one of the contracts that's been so submitted.
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So I would like to thank the chairman for providing us with some very good ideas in the legislative package he introduced last winter and assure him that we are picking up on a number of those ideas and either implementing them, as we have the fast track contract designation process, or are in the process of considering them and putting them out for public comment.
Mr. EWING. I appreciate hearing that, too, because I did know that you had made those accommodations and I think that's just the way it ought to work. And there will be things that you will be, any regulator's going to be, asked to do that they can't do. And that goes without saying and this doesn't mean that whatever legislation that's offered has all the answers, but I think it's really what we want to do is make Government more efficient, serve better, serve in a more time expedient way, and so that we don't have as many of those issues coming back up here to be resolved legislatively.
I would just close my questioning with the question that I assume I have your assurances that you will try and have more contact, and more involvement, and more feedback from the stakeholders as we complete this original plan and as we do the different reviews in the months ahead?
Ms. BORN. Indeed, that is certainly our plan and desire, and I can only say that I'm very sorry that I'm going to be in Tokyo next week when you have the next hearing on this, because I would very much like to be able to attend, and of course I will get the transcript and the copies of written testimony and be very interested in them. The Commission will certainly be interested in any testimony next week in terms of suggestions for improvement of the strategic plan.
Mr. EWING. You can be assured that if I'm here in the chairman's seat next week, I will ask what they have done to make their suggestions available to you and encourage them to do that, because it is a two-way dialog and the stakeholders need to be encouraged as well as to encourage your agency to be open and receptive to those suggestions.
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Ms. BORN. We appreciate that, Mr. Chairman.
Mr. EWING. Thank you for being here. Have a good trip to Tokyo.
Ms. BORN. Thank you very much, Mr. Chairman.
Mr. EWING. The subcommittee is adjourned.
[Whereupon, at 5:01 p.m., the subcommittee was adjourned subject to the call of the Chair.]
[Material submitted for inclusion in the record follows:]
Statement of Richard J. Hillman
Under the Government Performance and Results Act of 1993 (GPRA or Results Act), executive agencies were to complete—not later than September 30, 1997—strategic plans in which they define their missions, establish results-oriented goals, and identify strategies they will use to achieve those goals for the period of 1997 through 2002. The House Subcommittee on Risk Management and Specialty Crops, House Committee on Agriculture, asked GAO to assess the strategic plan of the Commodity Futures Trading Commission (CFTC) for compliance with the Results Act.
On the basis of its review, GAO found that CFTC's strategic plan contained all of the major components required by the Results Act. However, as discussed below, GAO identified several areas in which CFTC could improve its plan.
The plan defines goals and objectives that supported CFTC's mission, but most of these could benefit by being restated in a way that would facilitate future assessment.
The plan identifies activities for achieving CFTC's goals and objectives, but it could be more informative by including the resources needed for the activities, schedules for completing key actions, and ways for assigning accountability to managers and staff.
The plan's discussion of the relationship between goals in the annual and strategic plans could be strengthened by including more results-oriented performance measures that could be used to reflect progress made toward achieving its goals.
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The plan identifies some key external factors that could affect the agency's ability to achieve its goals, but the plan could be improved by describing how such factors are linked to particular goals and how a particular goal can be affected by a specific factor.
The plan indicates that CFTC will use its existing processes to evaluate its programs, but the plan could be expanded to include information on the timing and scope of future evaluations.
The draft plan was made available to stakeholders late in the process. As a result, the plan reflects limited consultation with stakeholders during plan development. Also, the plan does not discuss how CFTC will incorporate stakeholders' views in the development of future plans.
GAO recognizes that developing performance measures and measuring program impacts present challenges to CFTC and other regulatory agencies in addressing the requirements of the Results Act. However, it is important that CFTC and other regulatory agencies continue their efforts toward that end. Any new methods or research approaches developed by one agency could also be useful to others.
GAO also recognizes that CFTC's strategic plan is a dynamic document that the agency intends to refine. Improving management in the Federal sector will not be easy, but the Results Act can assist in accomplishing this goal.
Mr. Chairman and members of the subcommittee:
I am pleased to be here today to assist the subcommittee in its review of the Commodity Futures Trading Commission's strategic plan. Hearings such as this one are an important part of assuring that the intent of the Government Performance and Results Act of 1993 is met, and we commend you, Mr. Chairman, for holding this hearing. The consultative process provides an important opportunity for Congress and the executive branch to collectively ensure that agency missions are focused, goals are results-oriented, and strategies and funding expectations are appropriate. As you know, the Results Act required executive agencies to complete their initial strategic plans by September 30, 1997, and CFTC met this requirement.
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My testimony today discusses our review of CFTC's strategic plan. We specifically determined whether the plan contained each of the six components required by the Results Act and assessed each component's strengths and weaknesses. We also reviewed the extent to which CFTC consulted with stakeholders, including the other Federal financial market regulators. Finally, we identified challenges that CFTC faces in addressing the requirements of the Results Act.
CFTC's strategic plan reflects a concerted effort by the agency to address the requirements of the Results Act. Although the plan could be strengthened in some areas, it compares favorably with the plans of other Federal financial regulators that we have reviewed.See The Results Act: Observations on Draft Strategic Plans of Five Financial Regulatory Agencies (GAO/T-GGD-97-164, July 29, 1997). On the basis of our review, we found that CFTC's plan contained all of the components required by the Results Act but that some of the components could be strengthened. We also found that the plan could be improved by additional stakeholder input, including interagency coordination. Finally, due to the complex set of factors that determine regulatory outcomes, measuring program impacts presents challenges to CFTC in addressing the requirements of the Results Act, as it does for regulatory agencies in general. However, the use of program evaluations to derive results-oriented goals and to measure the extent those goals are achieved is one key to the success of the process. Notwithstanding the need for improvements, we recognize that CFTC's strategic plan is a dynamic document that the agency intends to refine.
My comments apply to the strategic plan that CFTC formally submitted to Congress and the Office of Management and Budget (OMB) in September 1997. In general, our assessment of CFTC's plan was based on knowledge of the agency's operations and programs; past and ongoing reviews of CFTC; results of work on other agencies' strategic plans and the Results Act; discussions with CFTC, OMB, and Subcommittee staff; and other information available at the time of our assessment. The criteria we used to determine whether CFTC's plan complied with the requirements of the Results Act were the Results Act itself and OMB guidance on preparing strategic plans (OMB Circular A–11, Part 2). To assess CFTC's consultation with stakeholders and to identify challenges in implementing the Results Act, we relied on the results of our previous work and/or discussions with CFTC and OMB officials.
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Background
CFTC is an independent agency that administers the Commodity Exchange Act, as amended,7 U.S.C. 1 et seq. and was created by Congress in 1974. The principal purposes of the act are to protect the public interest in the proper functioning of the market's price discovery and risk-shifting functions. In administering the act, CFTC is responsible for fostering the economic utility of the futures market by encouraging its efficiency, monitoring its integrity, and protecting market participants from abusive trade practices and fraud.
As its title indicates, the Results Act focuses on results. The Act seeks to shift the focus of Federal management and decisionmaking from a preoccupation with the number of tasks completed or services provided to a more direct consideration of the results of programs—that is, the real differences those tasks or services make in citizens' lives. In crafting the Act, Congress recognized that congressional and executive branch decisionmaking had been severely handicapped in many agencies by the absence of the basic underpinnings of well-managed organizations. These agencies lacked clear missions; results-oriented performance goals; well-conceived agency strategies to meet those goals; and accurate, reliable, and timely program performance and cost information to measure progress in achieving program results. In recent years, Congress has established a statutory framework for addressing these long-standing challenges and for helping it and the executive branch make the difficult tradeoffs that are necessary for effective policymaking.This framework includes as its essential elements the Chief Financial Officers (CFO) Act; information technology reform legislation, including the Paperwork Reduction Act of 1995 and the Clinger-Cohen Act; and the Results Act. The CFO Act was expanded and amended by the Government Management Reform Act. Improving management in the Federal sector will not be easy, but the Results Act can assist in accomplishing this task.
The Results Act requires executive agencies to prepare multiyear strategic plans, annual performance plans, and annual performance reports. First, the Act requires agencies to develop a strategic plan covering the period of 1997 through 2002. As indicated in the Results Act and OMB guidance, each plan is to include six major components: (1) a comprehensive statement of the agency's mission, (2) the agency's long-term goals and objectives for all major functions and operations, (3) a description of the approaches (or strategies) for achieving the goals and the various resources needed, (4) an identification of key factors, external to the agency and beyond its control, that could significantly affect its achievement of the strategic goals, (5) a description of the relationship between the long-term strategic goals and annual performance goals, and (6) a description of how program evaluations were used to establish or revise strategic goals and a schedule for future evaluations. In developing their strategic plans, agencies are to consult with Congress and solicit the views of stakeholders.
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Second, the Results Act requires executive agencies to develop annual performance plans covering each program activity set forth in their budgets. The first annual performance plans, covering fiscal year 1999, are to be provided to Congress after the President's budget is submitted to Congress in early 1998. An annual performance plan is to contain the agency's annual goals, measures to gauge performance toward meeting its goals, and resources needed to meet its goals.
And third, the Results Act requires executive agencies to prepare annual reports on program performance for the previous fiscal year. The performance reports are to be issued by March 31 each year, with the first (for fiscal year 1999) to be issued by March 31, 2000. In each report, the agency is to compare its performance against its goals, summarize the findings of program evaluations completed during the year, and describe the actions needed to address any unmet goals.
CFTC'S Strategic Plan Contains All Six Required Components, but Some Components Could be Strengthened
Based on our review, we found that CFTC's strategic plan contains all of the six major components required by the Results Act. The plan defines the agency's mission, establishes goals, lists activities to be performed to achieve the goals, identifies key factors affecting the achievement of the goals, discusses the relation between the goals of the strategic and annual performance plans, and addresses methods for evaluating the agency's programs. However, we identified several areas in which CFTC could improve the plan as it is revised and updated.
Mission Statement
Consistent with the OMB guidance, the strategic plan contains a brief mission statement that broadly defines CFTC's basic purposes: to protect market users and the public from abusive practices and to foster open, competitive, and financially sound futures and option markets. In addition, the accompanying background of the mission statement defines the agency's core responsibilities and discusses the agency's enabling legislation.
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General Goals and Objectives
Consistent with the OMB guidance, the strategic plan describes CFTC's goals and general objectives, providing staff with direction for fulfilling the agency's mission. The agency's three goals are to (1) protect the economic functions of the commodity futures and options markets, (2) protect market users and the public, and (3) foster open, competitive, and financially sound markets. The plan further defines each goal in terms of a number of outcome objectives. For example, under goal two, the plan includes the outcome objectives of promoting compliance with and deterring violations of Federal commodities laws as well as requiring commodities professionals to meet high standards.
The OMB guidance notes that a strategic plan's general goals and objectives should be stated in a manner that allows for future assessment of whether the goals and objectives are being achieved. Although the general goals and outcome objectives support the agency's mission, most could benefit by being restated in a way that facilitates future assessment of whether they have been achieved. Examples of objectives that could be restated include overseeing markets used for price discovery and risk shifting as well as promoting markets free of trade practice abuse.
Description of How the General Goals and Objectives Will Be Achieved
Consistent with the OMB guidance, the strategic plan lists-key activities that staff are to perform to accomplish the outcome objectives and, in turn, general goals. For example, an outcome objective of goal three is to facilitate the continued development of an effective, flexible regulatory environment. The specific activities to be performed for this objective include providing regulatory relief, as appropriate, to foster the development of innovative transactions and participating in the President's Working Group on Financial MarketsThe President's Working Group on Financial Markets was created following the October 1987 stock market crash to address issues concerning the competitiveness, integrity, and efficiency of the financial markets. The Secretary of the Treasury chairs the group, and other members include the chairs of CFTC, the Federal Reserve System, and the Securities and Exchange Commission. to coordinate efforts among U.S. financial regulators.
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The plan also discusses actions for communicating accountability to CFTC managers and staff. These actions include instituting a performance management system to create a more effective communication tool for mangers and staff and using the annual performance plan to better communicate specific goals and performance levels to staff.
The OMB guidance notes that a strategic plan should briefly describe the resources needed to achieve its goals and objectives, for example, in terms of operational processes, staff skills, and technologies, as well as human, capital, and other resources. The guidance further notes that a plan should include schedules for initiating and completing significant actions as well as outline the process for communicating goals and objectives throughout the agency and for assigning accountability to managers and staff for achieving objectives.
Although CFTC's plan lists specific activities to be performed to achieve its goals and objectives, it could be made more informative by discussing the resources needed to perform the activities and by providing schedules for initiating and completing significant actions. Similarly, the plan's discussion of communicating accountability could be expanded to address how CFTC will assign accountability to managers and staff for achieving objectives.
Relationship Between Goals in the Annual Performance and Strategic Plans
Consistent with the OMB guidance, the strategic plan discusses the annual plan activities in relationship to each of the strategic plan's goals. Many of the identified annual plan activities reflect CFTC's ongoing regulatory responsibility to protect market participants and oversee the markets. The strategic plan also includes a discussion on measuring the activities to be performed to accomplish each goal. Finally, the strategic plan mentions that the annual plan establishes indicators and targets with the goal of ensuring that day-to-day activities are appropriately defined and measured.
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According to the OMB guidance, a strategic plan should briefly outline the type, nature, and scope of the annual performance goals and the relevance and use of these goals in helping determine whether the strategic plan's goals and objectives are being achieved. The linkage between the two plans is important because a strategic plan's goals and objectives establish the framework for developing the annual performance plan. Moreover, annual performance goals indicate the planned progress in that particular year toward achieving the strategic plan's goals and objectives.
While CFTC's strategic plan discusses performance measures, it does not include performance goals that could be used to indicate the planned progress made each year toward achieving the general goals and objectives. Moreover, its measures focus on activities that are generally not stated in a manner that allows for future assessments and that may not always measure the intended outcomes. Examples of such measures include ''potential violators deterred,'' ''informed market users,'' and ''high level of compliance fostered.'' CFTC could strengthen its plan by discussing performance goals and developing more results-oriented performance measures against which actual performance can be compared. As discussed below, regulatory agencies, such as CFTC, face barriers in developing such measures.
Key External Factors Affecting Achievement of General Goals and Objectives
Consistent with the OMB guidance, the strategic plan discusses some external challenges that could alter CFTC's ability to meet its goals and objectives, and it also discusses the strategies for meeting such challenges. The external challenges include the growing use of over-the-counter derivatives; structural changes in the financial services industry, including the convergence of the securities, futures, insurance, and banking industries; and globalization of financial markets. Strategies to address such challenges include fostering strong relationships with foreign authorities and responding to structural changes to ensure a level playing field as the futures, insurance, securities, and banking industries become more integrated.
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The plan also discusses four internal, or management, challenges that could alter CFTC's ability to meet its goals and objectives, and it discusses strategies for meeting such challenges. Internal challenges include diminishing resources, recruiting and retaining qualified staff, and remaining abreast of technology. Strategies to address such challenges include reviewing resource requirements for operations and programs to ensure sound fiscal management, setting standards for staff recruitment, and implementing the agency's data processing plan.
According to OMB guidance, a strategic plan should not only discuss key external factors but also indicate their link to particular goals and describe how the factors could affect the achievement of the goals. While the plan discusses external factors and strategies for addressing them, the link between particular factors and goals is not clear. CFTC could strengthen its plan by describing how the external factors are linked with particular goals and how a particular goal could be affected by the external factors. Also, the plan might benefit from a discussion of external factors that represent significant challenges for the financial industry, such as those relating to the ''year 2000'' computer dating problem The year 2000 computer dating problem relates to the need for computer systems to be changed to accommodate dates beyond the year 1999. and those relating to proposals for revising the Commodity Exchange Act that could affect CFTC's jurisdiction and that of other Federal financial market regulators.See The Commodity Exchange Act: Legal and Regulatory Issues Remain (GAO-GGD-97-50, April 7, 1997).
Program Evaluations and Strategic Plans
The strategic plan specifies that CFTC will use methods and processes that are already in place to evaluate how well it is implementing its strategic and annual performance plans for the first 3 years. According to the plan, these processes are to provide information on, among other things, program accomplishments, staff activities, and CFTC's financial condition and resource usage. However, the plan also explains that the reporting process related to program accomplishments will be evaluated to determine how it may be used for reporting on program progress toward meeting the goals, outcome objectives, and activities in the strategic plan as well for setting overall priorities and allocating resources consistent with those priorities. Similarly, reviews and evaluations are described for the systems related to staff activities and resource usage. As such, we note that CFTC's evaluations are to be of its existing measurement and monitoring systems and that CFTC does not appear to be planning any evaluations of the manner and extent to which its programs achieve their objectives.
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The OMB guidance notes that a strategic plan should briefly describe program evaluations used to prepare the plan and provide a schedule for future evaluations outlining the methodology, scope, and issues to be addressed. CFTC's plan does not mention whether any evaluations were used to prepare the plan; however, CFTC officials told us that no evaluations were used. As CFTC revises and updates its plan, the plan could be made more useful by including the results of program evaluations used to prepare the plan. It could also be made more informative by discussing the timing and scope of future program evaluations as well as the particular issues to be addressed.
CFTC'S Strategic Plan Reflects Limited Consultation
In developing their strategic plans, agencies are to consult with Congress and solicit the views of stakeholders—those potentially affected by or interested in the plan. Agencies have discretion in determining how this consultation is conducted. The OMB guidance notes that some general goals and objectives will relate to cross-agency functions, programs, or activities. In such cases, it instructs agencies to ensure that appropriate and timely consultation occurs with other agencies during the development of strategic plans with cross-cutting goals and objectives.
CFTC's strategic plan identifies numerous stakeholders, stating that they are valuable resources that must be tapped to provide critical feedback on the agency's goals and priorities. The stakeholders identified in the plan include futures exchanges, the National Futures Association, market users, and other Federal departments and agencies. The plan also discusses CFTC's working relationships with other organizations and jurisdictions. For example, it notes that CFTC staff work through various intergovernmental partnerships to consult on issues of importance to CFTC and other Federal financial regulators, including Federal securities and bank regulators.
The draft plan was made available to stakeholders late in the process. As a result, the plan reflects limited consultation with stakeholders during plan development. Also, the plan does not discuss how CFTC will incorporate stakeholders' views in the development of future plans. CFTC published its draft strategic plan in the Federal Register on September 16, 1997, to solicit comments.62 Fed. Reg. 48613. The comment period ended on October 16, 1997. In addition, CFTC made the draft plan available on its internet home page and provided copies of the draft plan to present and former members of its advisory committees. Furthermore, every former CFTC commissioner and chairperson was contacted and asked to provide feedback on the draft plan, and CFTC officials told us that the draft plan had been provided to the other Federal financial market regulators for comment. Nonetheless, CFTC officials told us that there were only two parties outside of Congress, OMB, and at your request, the GAO that had provided the agency feedback on the plan, as of October 16, 1997.
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CFTC officials told us that they plan to use the same approach in developing future plans as they did in developing the current plan. CFTC's lack of success with this approach suggests that the agency should consider alternative approaches.
CFTC Faces Challenges in Implementing the Results Act
In enacting the Results Act, Congress realized that the transition to results-oriented management would not be easy. Moving to a results orientation could be especially difficult for CFTC and other regulatory agencies. We analyzed a set of barriers facing certain regulatory agencies in their efforts to implement the Results Act in a June 1997 report.Managing for Results: Regulatory Agencies Identified Significant Barriers to Focusing on Results (GAO/GGD-97-83, June 14, 1997). These barriers included the following: (1) problems collecting performance data, (2) complexity of interactions and lack of Federal control over outcomes, and (3) results realized only over long time frames. To some extent, each of these barriers is applicable to CFTC.
As implementation of the Results Act proceeds, CFTC, like other regulatory agencies, is likely to continue encountering barriers to establishing results-oriented goals and measures and, as a result, in evaluating program impact. Although developing performance measures and evaluating program impact are difficult, it is important that CFTC and other regulatory agencies continue their effort toward that end. Any new methods or research approaches developed by one agency could also be useful to others.
In summary, it is important to recognize that while CFTC's strategic plan can be further improved, the Results Act anticipated that the process of developing an effective strategic plan could take several planning cycles. Nonetheless, we are pleased that CFTC's strategic plan reflects improvements based on the suggestions that we made during informal meetings with agency officials as well as suggestions that the agency received from congressional committees and OMB. We look forward to continuing to work with the Congress and CFTC to ensure that the requirements of the Results Act are met.
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Testimony of Brooksley Born
Mr. Chairman and members of the subcommittee: I am pleased to represent the Commodity Futures Trading Commission before this Subcommittee today to discuss the CFTC's strategic plan as developed under the Government Performance and Results Act of 1993 (GPRA). The Commission strongly endorses the goals of the GPRA and believes that activities required by the GPRA can help it plan and administer its programs better. The GPRA also should enable us to allocate Federal resources more efficiently and effectively.
The Commission's Mission Statement adopted as part of the GPRA process incorporates the fundamental principles embodied in our statutory mandate. The mission of the Commodity Futures Trading Commission is to protect market users and the public from fraud, manipulation, and abusive practices related to the sale of commodity futures and options, and to foster open, competitive, and financially sound commodity futures and option markets.
The detailed goals, outcome objectives, activities and strategies included in our strategic plan are designed to support and to further the Commission's mission.
Throughout the development of our strategic plan, the Commission recognized the potential value to the agency of the GPRA mandates and directed that our planning and budgeting processes be managed together. To assure this coordination throughout the agency and the development of a meaningful plan with input from all of the Commission's operating divisions, the Commission created an internal staff task force in September 1996 to identify the activities, outcome objectives and goals that would support the Commission's mission and vision.
The Commission also consulted with numerous outside entities as directed by the GPRA. For example, in the initial stages of drafting, we reviewed the draft strategic plans of other agencies and consulted with other agencies. We also submitted a draft of our strategic plan to OMB, our Congressional oversight and appropriations committees, and the General Accounting Office this past August. Our staff engaged in discussions with representatives of these groups and received a number of comments and suggestions from them. We were able to incorporate many of those comments into our final plan.
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We also reached out to all interested persons and the general public by publishing our draft strategic plan in the Federal Register on September 15, 1997, for public comment and by posting the plan on our Internet home page. While we have received only a few comments as of this date, several parties have advised us that they expect to comment in the near future. The Commission has also provided copies of its draft plan to all members of its active advisory committees and to each of our former commissioners asking for input.
The Commission's draft strategic plan served as the basis for the CFTC's initial Annual Performance Plan (APP), which was submitted to OMB last month as a part of our FY 1999 budget request, continuing the link between strategic planning and budgeting. The Commission will be working with OMB in refining the APP as the President's budget request is prepared, and the revised APP will be submitted to Congress in February 1998 along with the President's budget request. The Commission unanimously approved the final strategic plan submitted to the Congress on September 30, 1997.
While the Commission has submitted its strategic plan to OMB and Congress, its planning process continues, and the Commission welcomes additional comments as it reevaluates its strategic plan over the next 5 years. Indeed, the Commission will continuously assess whether to make modifications to the plan before the mandatory review in FY 2000 to ensure that the plan clearly reflects the Commission's mission. Minor adjustments, if any, will be reported to Congress in APPs submitted each year with the President's budget request, while major adjustments, if any, will be the basis for a revised strategic plan.
We recognize that successful implementation of our strategic plan requires the opportunity for input from all persons potentially affected by or interested in our regulatory activities. It also requires that we balance the often competing interests of those persons in a manner consistent with our statutory mandate and agency mission.
The strategic plan describes many of the on-going priorities of the Commission. For example, one of the Commission's top priorities this year has been to ensure that the agency is responsive to the competitive challenges facing the U.S. futures industry and its customers, while at the same time preserving important customer protections and market safeguards. This priority reflects each of the three strategic goals included in our strategic plan. These goals are:
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(1) Protect the economic functions of the commodity futures and option markets; (2) Protect market users and the public; and (3) Foster open, competitive, and financially sound markets.
Consistent with its strategic goals, since the beginning of 1997, the Commission has taken numerous actions to streamline and to modernize our regulatory regime. For example, this past Spring the Commission implemented new fast-track procedures for processing contract designation applications and exchange rule changes. These new procedures significantly streamlined the review process for most new exchange contracts and many exchange rules, permitting approval within 10 days for many types of contracts and within 45 days for certain other contracts. Since adoption of these procedures, 15 new contract designations have been filed with the Commission, seven of which were eligible for fast-track review. The Commission has approved all eligible contracts within the fast-track time period. The fast-track process addressed a competitive need of the futures exchanges to be able to introduce new contracts quickly while not compromising the interests of market users and the general public. It is a good example of how we must balance the needs and often divergent interests of interested persons while achieving our broader mission.
In June 1997 the Commission approved an interpretation permitting streamlined procedures for allocation of customer orders which are bunched for execution by commodity trade advisors (CTAs). We believe the streamlined procedures for bunched-orders have brought significant benefits to futures commission merchants (FCMs) and CTAs, without compromising the interests of the customer.
In our most recent regulatory reform action taken in early September, the Commission proposed amendments to its rules governing the risk disclosure obligations of FCMs and introducing brokers (IBs). If adopted, the proposed rule amendments should speed the account opening process for the sophisticated customers identified in the rule and provide flexibility to FCMs and IBs.
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The Commission also has adopted a number of initiatives designed to permit commodity professionals to take advantage of the increased efficiencies and reduced costs made possible through the use of electronic media. In June 1997 the Commission opened the way for FCMs to deliver monthly statements, trade confirmations and other account statements solely by electronic media to customers who consent to electronic transmission in lieu of receiving paper documents. Also in June 1997 the Commission authorized CTAs and commodity pool operators (CPOs) to provide risk disclosure documents to their customers via electronic media.
The Commission also has adopted measures to permit the electronic filing of documents with the Commission. In April 1997 the Commission adopted a rule allowing CTAs and CPOs to file their required disclosure documents with the Commission electronically. We also have undertaken a program to permit FCMs to file required financial reports with the Commission electronically. These electronic media initiatives should increase the timeliness of information flow, reduce the administrative costs of commodity professionals and allow all members of the industry and their customers to reap the benefits of technological advances.
Many of the Commission's actions over the last year were undertaken in direct response to concerns raised by regulated entities and persons, a process encouraged by the GPRA. Others were undertaken following an internal review and recommendations of Commission staff. The Commission currently is working on several additional regulatory initiatives, most of which are in direct response to issues raised by members of the futures industry.
For example, in response to concerns expressed by certain futures exchanges and the FCM community about the need to address the special needs of large institutional market participants, the Commission intends to undertake a review of whether to permit certain non-competitive, off-floor transactions executed subject to the rules of a contract market. The FCM community also has requested that the Commission review whether post-order allocation of bunched orders could be allowed with respect to orders of sophisticated customers with their consent.
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The Commission also intends to review whether it should use its exemptive authority to expand permitted investments of customer funds by FCMs or US clearing organizations to include certain additional categories of liquid and readily marketable investments. The Commodity Exchange Act currently restricts investment of such funds to obligations of the United States or any state and obligations fully guaranteed by the United States. The Commission also intends to consider a request from industry representatives that it permit futures-style margining of options. With respect to each of these proposals, the Commission will seek to accommodate the needs of the industry and its customers with our mission to protect market users and to foster market integrity.
The Commission's ongoing commitment to streamlining its regulatory requirements and to fulfilling its responsibilities under the Commodity Exchange Act in an efficient and cost-effective manner is further evidenced by its recent delegation to the National Futures Association (NFA) of certain Commission functions. The NFA, a self-regulatory organization of commodity professionals designated by the Commission under the Act to perform certain regulatory functions, has been actively seeking such added responsibilities.
During the past year, the Commission delegated additional authority to the NFA in several areas including:
-Registration decisions relating to floor brokers and floor traders with disciplinary histories;
-Ethics training of commodity professionals; and
-Various registration and processing functions relating to non-U.S. firms.
The Commission continues to welcome the submission of ideas for regulatory reform for consideration by the Commission.
Mr. Chairman, I would like to conclude by once again thanking you for your interest in this matter. I would also like to assure all members of this Subcommittee that we remain committed both to the spirit and to the letter of GPRA and welcome the opportunity to work with Congress, the OMB, other financial agencies, the regulated industry, users of the futures markets and interested members of the public in refining our strategic plan.
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REVIEW THE COMMODITY FUTURES TRADING
COMMISSION'S GOVERNMENT
PERFORMANCE RESULTS ACT PLAN
WEDNESDAY, OCTOBER 29, 1997
House of Representatives,
Subcommittee on Risk Management
and Specialty Crops,
Committee on Agriculture,
Washington, DC.
The committee met, pursuant to notice, at 1:17 p.m., in room 1300, Longworth House Office Building, Hon. Thomas W. Ewing (chairman of the subcommittee) presiding.
Present: Representatives Moran, Goode, McIntyre, Boswell.
Staff present: Stacy Carey, director, Subcommittee on Risk Management and Specialty Crops; Ryan Weston, Wanda Worsham, clerk; and John Riley.
OPENING STATEMENT OF HON. THOMAS W. EWING, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF ILLINOIS
Mr. EWING. The second hearing on the Commodities Futures Trading Commission's Government Performance Result Act plan will come to order, and I want to welcome everybody here, and if the first panel wants to take the seat, because I am a few minutes late, I will cut my opening statement down from a half an hour to a very few minutes.
I would like to welcome and thank all the witnesses for appearing before the subcommittee this afternoon. CFTC's Result Act plan is an important document that will be a part of future subcommittee hearings, the appropriations process, CFTC's next authorization. Our goal is to make the Government Performance and Result Act work.
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Last week we received testimony from the General Accounting Office and the Commodity Futures Trading Commission regarding CFTC's strategic plan and Annual Performance Plan. GAO's review provided us with background information on how well the CFTC formulated its Result Act report when compared with how well other Federal agencies performed in drafting their reports.
Generally the CFTC work diligently to create its GPRA report, which contains all six components required by the Results Act. We did find that the plan had areas that could be improved, such as, performance indicators were not necessarily measuring the right results. Resources that would be needed to achieve goals and objectives were not mentioned. The exact external factors could have on individual goals were not discussed. And a major subcommittee concern was the adequacy of CFTC's solicitation of stakeholder ideas and input. Even though the draft strategic plan was printed in the Federal Register, the question was could the CFTC have done more to consult with others concerning this annual performance plan. The consultation process outlined in the law was established to enable you to share your views and thoughts in a cooperative process with your regulator.
It is the subcommittee's hope that CFTC will do more direct consulting with its stakeholders in the future. We want you to know what our impressions are, what are the positive aspects of the plan, what areas need additional work and refinement.
Each of you were invited here today because you have a vested interest in the operation of the CFTC. The Results Act is designed to assure Federal agencies by running in a business-like manner, just as your operation must function. This exercise is vitally important because you and the Commission best know the markets, and are therefore in the best position to formulate a well prepared strategic plan. We look forward to your testimony.
And I want to acknowledge that Chairperson Brooksley Born is here. She canceled her trip to Japan just to be here today. Isn't that right? I don't think the fluctuation of the market had anything to do with her staying close to home and to her job here in Washington.
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I am pleased with the interaction and the cooperation from the chairperson, and the dialog which I think is being opened here in an effort to arrive at this plan. And with that, we'll start with our first witness.
Mr. Arbor.
STATEMENT OF PATRICK ARBOR, CHAIRMAN, CHICAGO BOARD OF TRADE
Mr. ARBOR. Thank you. Good afternoon, Mr. Chairman and members of the subcommittee. I am Patrick Arbor, chairman of the Chicago Board of Trade, and I am accompanied by Thomas R. Donovan, our president and chief executive officer. We welcome this opportunity to look at some of the strategic issues which the Commodities Future Trading Commission and the entire U.S. risk management industry need to address.
From the chairman of the Federal Reserve to the farmer in the field, market watchers for decades have extolled the public benefits of a centralized exchange style trading. The CFTC's strategic plan calls those benefits ''vital economic functions of price discovery, and risk transfer.'' Now if the Commission truly believes these benefits are vital, then its plan has a glaring deficiency. It never addresses a fundamental question which you and Congress have been wrestling with for over 2 years. If off-exchange and foreign markets continue their spectacular growth, while regulations makes U.S. exchanges more costly, will the United States exchanges survive to provide these much touted public benefits?
This is not an academic exercise. U.S. exchanges and all members of the U.S. futures industry face this critical issue everyday. We've looked at the results of another strategic plan, the London Financial Futures Exchange's. Their volume has almost tripled in 5 years in a less regulated environment. And indeed in September of this year they surpassed the volume at the Chicago Board of Trade. They are now vying for the title of the second largest futures exchange in the world.
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The CFTC's narrow ''Current Perspective on the Industry'' from its strategic plan, displays only a 1-year static industry snapshot taken in 1997. It disguises the contraction that has occurred in the U.S. exchange-traded segment of the risk management industry. In 10 years the number of registered professionals have shrunk by about 8 percent. But more telling, the number of FCMs has contracted by 39 percent. Today only 233 FCMs are sending orders to the seven unaffiliated exchanges, now actively trading future contracts down from nine in 1987. The numbers are small and consolidating more each year, and indeed we just heard a couple of days ago that Harris Futures is leaving the business.
Will those remaining be around to see the outcome of the CFTC's 5-year plan? Not all I assure you. Will those public benefits that grow out of centralized exchange trading continue? Not if regulatory costs for exchanges and the lack of parity with the over-the-counter markets aren't addressed ''vital issues'' the CFTC's strategic plan spends little or no time confronting.
Regulatory costs divert users to other markets, sapping the liquidity of exchanges. Again, if the CFTC believes that price discovery and risk shifting are ''vital'' functions, their plan needs to ensure that liquidity remains a hallmark of exchange trading. That is why cost-benefit analysis should be incorporated into the CFTC's strategic plan.
Regarding the lack of parity with over-the-counter markets, the CFTC has two fundamental choices. Under the powers Congress gave it in 1992, the agency can truly streamline the exchange regulatory structure by providing exchange-traded products, the smallest segment of the risk management marketplace, with cost-effective rational regulations, appropriately tailored for the market user; or the agency again using those same powers can impose regulatory conditions on otherwise exempt providers of similar risk management products.
I do not support the latter approach. The first approach—to streamline regulation of exchange products—is the only path to parity that works. And that is why the Board of Trade supported your legislative reforms, Mr. Chairman, as well as those of Senator Lugar. Nothing in the CFTC's strategic plan addresses the enormous regulatory disparities that are caused by the statute.
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First, under the Supreme Court's Dunn decision, futures on Government securities and foreign currencies are not subject to any CFTC jurisdiction if traded off-exchange. Thus the treasury amendment creates a new competitive issue which the agency ignores. And second, the Shad-Johnson accord bans single stock futures. But foreign exchanges, however, already trade these products. The CFTC's plan never mentions that disparity.
Unless these competitive disparities and the CFTC's strategic astigmatism are corrected, the ''vital'' public benefits of price discovery and risk transfer will not remain available to the public. To us, the best 5-year plan we have seen is the kind of legislation, you, Mr. Chairman and Senator Lugar, have proposed. If legislation is not enacted, we see only a CFTC's strategic plan for the status quo; a status quo for yesterday's markets that will not address the rapidly changing market needs of the future.
To focus on a future world of electronic trading, global markets and heightened institutional business, the CFTC must answer some basic questions: What does the CEA cover and why? Does it only apply to exchanges and those who use them, or does the CFTC have a broader jurisdiction? If so, what is it? Is this the appropriate regulatory structure for the future? Is there an appropriate ratio of cost to benefits in CFTC regulation, and how will those ''vital'' benefits of price discovery and risk shifting be maintained?
Until those serious questions are addressed, strategic planning is a meaningless exercise. It sets the agency on an journey, without a compass. Thank you.
[The prepared statement of Mr. Arbor appears at the conclusion of the hearing.]
Mr. EWING. Mr. Sandner.
STATEMENT OF JOHN SANDNER, CHAIRMAN, CHICAGO MERCANTILE EXCHANGE
Mr. SANDNER. Thank you very much, Mr. Chairman.
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As you know, we have written testimony, which I would ask permission to submit for the record.
Mr. EWING. Absolutely.
Mr. SANDNER. Thank you very much.
And I want to say for the record, we are deeply honored that Chairperson Born canceled her trip to Japan to be here with us. So now I'm going to change my remarks and be kinder and gentler in my remarks, since she was so kind to be here with us.
I agree with your opening comments, Mr. Chairman about the dialog with the CFTC and its seeming enthusiasm to be more understanding of our issues. I think the chairperson at the CFTC, the staff, and other commissioners, have been much more open in terms of having dialog. That isn't to say that we don't have a long way to go, but I think the door is open for us to go in and have discussions.
Nonetheless, I was quite disappointed with the vision statement because it didn't address some of the critical problems. We have, for the last year, been trying to get legislation to address these issues. And those problems are really quite simple, and that's why I want to keep this oral statement very very simple.
We have a number of problems, but one that really jumps right out in front of you, is that we're in a highly competitive situation in our industry. Yet, when you look at the vision statement, and how important our industry is, and that's recognized totally by the CFTC, you really wouldn't know it by the things that the CFTC is trying to address. The CFTC is focussed on more surveillance and compliance type issues, rather than looking outside the nine dots. The CFTC shows insufficient concern about what we should like going into the next millennium.
The over-the-counter market is thriving; foreign exchanges are thriving, securities exchanges are thriving, and they're all in our business. I appreciate why they are our business, because it's a great business, and it is a business that is very much needed on a global basis—risk management, price discovery, asset allocation. We'd like to stay in this business: and we'd like to be able to compete in this business.
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If I show you a chart, which I've had reproduced very quickly this morning, both at Merc and the Board of Trade, in terms of the over-the-counter growth in our products, you'll see—I know you can't see it from there, but I'll just sort of stick it up—you see, we were really running in lock step when we were complimentary, when the swaps and the over-the-counter market would come to our exchanges to offset and to manage the risk and the over-the-counter market products that they were trading. But we parted company about 3 or 4 years ago, and the swaps market has grown exponentially. While we have grown somewhat, it's very very minuscule compared to the growth of swaps And that tells us a lot; that they don't look to us anymore. We're probably too costly. Probably too costly in terms of regulation, and they don't look to us anymore. And we're really burdened by this heavy competition. And at one point in time we're not going to be here; we're not going to be able to come to Congress. We need some relief if we're going to keep this industry here, in the United States in an exchanged-driven regulated type world.
The second problem is the changing customer base. The customer has become economically and technologically literate. The customer can draw information and do analysis like never before. They want to be involved in the marketplace, and they're being accommodated by many in the over-the-counter market. And we're having trouble accommodating them because of the morass of regulations, orders and rules, under which we have to live. And these customers are being solicited by the over-the-counter participants, and if I were they I would do the same thing.
I can show you something that I took out of a magazine that's entitled, ''Would You Like to Link to Our Web Site?'' And what this does is it's a no charge service on a Web site for over-the-counter derivative world to link to their Web site to introduce them to the myriad of dealers and brokers that are out there, that will deal for these retail customers and others through a Web site in the over-the-counter market.
So it's gotten to the point where now it's an Internet excursion to trade over-the-counter outside of the exchanges. And these are basically two of the central problems that we're having in terms of competition. And then when I read the vision statement or part of the vision statement, where it says, for the years 1997 to 2002 the CFTC will preserve and promote the vital role of America's commodity markets, and the role they play in establishing fair prices for goods and services, and managing risks of production marketing and distributions in the world economy; and I look at the actual statement and how they're going to address this, I see more on surveillance and compliance than anything else. If surveillance and the compliance is that important, and it is important, nobody is doing the compliance and surveillance in the over-the-counter market, and they're harvesting the market share from us, and doing it very quickly over the last few years.
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Futures markets are really burdened with massive regulation. I'm not saying that the regulation is totally unnecessary; we need regulation. The whole marketplace needs regulation. But somehow we've got to come together with the over-the-counter market, in terms of regulating it properly, and in terms of having a type of regulation that nurtures us, rather than being adversarial. If exchanges are essential gear in the global machinery, we must avoid the corrosive sand of excessive regulation, otherwise we're not going to be able to progress and continue to innovate.
The CFTC vision statement really didn't deal with either one of those problems, and it didn't deal with another problem that the chairman of the Board of Trade just addressed, and that's the cost benefit analysis. There's nothing in this statement that addresses what you tried to put in your legislation; a cost benefit analysis provision. If someone is left unreigned, they just develop regulation after regulation, rule after rule, and order after order, without the cost attendent to that regulation, it will go unchecked, and destroy our industry. So cost benefit analysis should be a critical component of any vision statement, and it wasn't involved in that statement in any way or form.
So what should we do? I believe that there has been a lot of dialog with the CFTC, much more so in the last year than ever before. I think what she would do, is we should sit down and look at that landscape that we're going to be dealing with over the next 10 years, and develop a strategy so that industry can be made competitive, and at the same time accomplish the CFTC's regulatory goals. Let's knock the darn barnacle off of our backside, and allow us to continue to progress and to innovate.
You tried, Chairman Ewing, to do that in your legislation, and I think your bill did an extraordinary job addressing the issues in a very short period of time. And I think we ought to go back to that drawing board, and go back to your legislation and try to move forward. Thank you very much.
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[The prepared statement of Mr. Sandner appears at the conclusion of the hearing.]
Mr. EWING. Thank you, Mr. Sandner.
Mr. Thompson
STATEMENT OF PATRICK THOMPSON, PRESIDENT, NEW YORK MERCANTILE EXCHANGE
Mr. THOMPSON. Thank you, Mr. Chairman. We also have written testimony which we would like to submit for the record.
I don't want to belabor the points that my colleagues from Chicago have made, because I think we have fairly broad agreement among our constituency in the exchange community, that what we need to do is to have the ability to innovate within this industry.
We searched throughout the release by the CFTC, which covers some 25 pages, for some indication that the CFTC were going to be addressing these issues. And while I would agree with Mr. Sandner that we've had a very good open dialog for the past year with the CFTC about these issues of innovation, the concerns that we had was whether or not those issues would be addressed in some way in the 5-year plan. And through that 25 pages we searched and searched; we came up with one quote that seem to indicate a recognition that the exchanges need to have the power to innovate. And that quote is in point 4, and it says, ''provide exemptive, interpretative, or other relief as appropriate, to foster the development of innovative transactions, trading systems, and similar arrangements.''
The difficulty with that is that is one sentence in 25 pages. Throughout the rest of the release we see great plans for international cooperation for further development of risk management systems, surveillance systems, and the like, and a very detailed point-by-point exposure of the CFTC's plans in those areas. However, when we go to the area of the document that speaks about providing exemptive or interpretative relief for innovative purposes, we find not one solid plan that has been laid out before us that the CFTC is even considering at this point.
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So our concern is, while there has been some lip service paid to it—and certainly I think the dialog has been collaborative with the CFTC—my concern is that there just is not a willingness within the agency to carry out on exactly what we've been asking for, and that the legislation that we talked about last year, and spent an awful lot of time working with the CFTC, members of this committee, and the like, in hoping to get some kind of relief, that just is not going to come about. My concern is that there is not a willingness within the agency to consider these issues.
I'll give you one quick example, and then I'll pass the microphone to my colleague. We, about a year and a half ago—submitted a rule amendment to the CFTC which would permit exchange of futures for swaps to occur on the exchange. We believe that this would be an opportunity for us to draw ourselves closer and be able to service better the over-the-counter markets and the swaps industry to bring our markets closer together; to enhance that relationship.
It's very much akin to an already existing transaction that is permitted on the exchanges, and has been permitted by rule and regulation for years, called an exchange of futures for physicals, which allows non-conforming physical deliveries to occur within the exchange rules in a non-competitive transaction. And EFS was to mirror fully the procedures and the safeguards that already existed for the approved rules of exchange of futures for physicals.
We have had that rule now down at the CFTC for almost a year and a half. We understand that some time before the end of the year—I've been told in November—that it will possibly be published in the Federal Register. So we're looking at, even if action is taken at some point in a timely manner, possibly the first quarter of 1998 for some CFTC action on this.
That will be nearly 2 years from the time that we submitted this rule to the CFTC for approval. And I think those types of innovative rules are the types that my colleagues and I are talking about. We do believe that proper regulation, segregation of funds, position reporting—those types of things that are just good business—are proper forms of regulations. But innovative techniques that are designed to try to take advantage of market opportunities to draw markets closer together, to tighten the relationship between markets, are things that we need, and we're just not being able to accomplish them in a timely way so that we can respond to the needs of our members and the customers, who are very supportive of the EFS concept, because it will allow that over-the-counter market to be drawn more closely, and utilize the advantages of futures, and regulated futures trading that we provide.
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We hope that those things can be carried through, but we don't see that willingness on the part of the CFTC to be able to grapple with innovative issues, and allow our markets to grow, and to compete with the over-the-counter markets and the foreign exchanges. EFSs are already in existence and being widely utilized on our main foreign competition—the International Petroleum Exchange of London—and they already exist on other exchanges in the United States.
I can't understand why this issue would be one that is going to take nearly 2 years to resolve so that we can be able to compete, and also to compliment the over-the-counter market. So I use that example for exactly what I think my colleagues and I are talking about. We need to be able to move a lot more quickly, without a regulatory structure and foundation, and whole framework around us that really prohibits us from being able to take advantage of the opportunities that exist in the marketplace for us. Thank you very much.
[The prepared statement of Mr. Thompson appears at the conclusion of the hearing.]
Mr. MORAN [presiding]. Mr. Thompson, thank you.
Ms. Tippins.
STATEMENT OF JEAN TIPPINS, VICE PRESIDENT, ADMINISTRATION, NATIONAL FUTURES ASSOCIATION
Ms. TIPPINS. Thank you. My name is Jean Tippins, and I'm vice president of administration for National Futures Association. With me in the row behind here is Karen Wuertz, who is NFA's special projects manager. I would like to thank you for the opportunity to appear here today, and present our views on the CFTC's vision and strategies document.
As you know, NFA's mission is to ensure market integrity through effective and efficient self regulation. NFA has been around for 15 years, and although we've been a successful organization, we're currently undergoing a self examination, primarily under Karen's leadership, similar to the process the Commission must have gone through to produce its vision and strategies document.
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We are undergoing a top to bottom review of what we do and how we do it. The purpose is the same as the Government Performance and Results Act that prompted the Commission's effort, to make sure that we're focused everyday on what's important and what we're trying to accomplish. The point isn't just to put words on paper, but to achieve a change in attitude. We must constantly look for smarter ways to work. The Commission has to take the same approach.
My comments on the proposed plan are more general than specific. Certainly, I can't disagree with the Commission's stated strategic goals or objectives. We all are in favor of meeting our customers' needs by protecting market users and the public, and fostering open, competitive, and financially sound markets. The trick is to figure out how to do that.
At NFA we've realized that if you want to meet your customers' needs, you need to listen to your customers. Over the years we've relied heavily on member input in developing our rules and policies, and will continue to do that through our fairly extensive network of committees. But we also will strive to have more involvement by market users in NFA's rulemaking process.
The Commission should do the same. I think the Commission recognizes that it needs an ongoing dialog with both the industry it regulates and the public it serves, on a wide range of regulatory issues. Although that point is mentioned in the document, I feel it has to be a real focal point for the Commission's plans for the next 5 years; it has to become a routine way of doing business. Receiving that sort of input means more than putting proposals out for comment in the Federal Register. There are plenty of ways for the Commission to establish that sort of dialog.
The Commission is reviving the Financial Products Advisory Committee, which should be an excellent way to hear from the industry and market users on a wide range of issues involving regulatory relief. The Commission should continue to convene round table discussions, which bring together a number of outside experts to discuss one particular issue. But there should be some sort of follow-up mechanism. Perhaps that group should be reconvened at some point to hear what progress has been made on the issue they discussed.
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NFA can help by inviting the commissioners and commission staff to the town hall meetings we hold around the country from time to time. We've found them to be a great way for us to talk with our members face to face. We can also help by inviting the commissioners and staff to attend meetings of the various committees we set up to tackle specific regulatory issues.
Another general observation I would offer on the Commission's document involves accountability. An organization is more likely to accomplish a goal if the tasks to do so are specifically defined, if completion dates are set, and if it is held accountable to someone to meet those dates. To really meet its goals of creating a culture of innovation, adaptability, and responsiveness, the Commission has to impose that sort of accountability.
I'm not suggesting certainly that the Commission can or should in this document identify specific tasks it will complete in the next 5 years to create that culture, but the Commission has set annual goals with performance indicators. If those goals aren't met, then the staff should be answerable to the Commission, and the Commission to this committee.
Finally, I should point out that NFA recognizes the efforts the CFTC has already made to listen to the industry, and to respond to an ever-changing marketplace. Your proposal to amend the Commodity Exchange Act sparked a lively discussion on a number of important issues, and I think the Commission has recently shown a real responsiveness in a number of areas.
The use of the Internet by CPOs and CTAs; electronically delivery of statements by FCMs and IBs; electronic filing of disclosure documents and financial statements with regulators; and further delegations to NFA of a responsibility, are all issues in which the Commission has shown a willingness to change. NFA is confident that kind of dialog, sparked by your bill, will be continued, and we look forward to helping the Commission in any way that we can. Thank you.
[The prepared statement of Ms. Tippins appears at the conclusion of the hearing.]
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Mr. MORAN. Ms. Tippins, thank you.
Mr. Thompson, yours and Ms. Tippins was the only full testimony I heard, so I'll direct what questions I have initially to you, and hopefully Chairman Ewing will be back with questions that he may have more broadly to the panel. But I'd be glad to have responses from any of you.
I'm interested in knowing—you talked about a reluctance and slowness in CFTC's response to your suggestions and to your time frame, was an example of what you experienced.
I was curious, first of all, whether you think it's a reluctance to change or just a slowness. Does it just take a long time to get what you want or to have your ideas considered, or is just a reluctance, or is it both?
Mr. THOMPSON. It's hard really to categorize, but I would say this; that the whole issue which we addressed during the—in considering the bill last fall, was one in which we thought, that the way to approach rulemaking was really to allow exchanges outside of that normal scope of what we would call the core regulatory rules; the rules that cover financial surveillance, market surveillance, and market integrity issues; good business issues frankly, coming out as regulations. But outside of that core regulatory structure that the issue of prior approval by the regulatory was something that we thought has really sort of lost its place in the commodity industry.
And basically what we propose, because we believe that it was appropriate to allow exchanges to have the freedom to put rules in place, and allow them to be able to conduct their business, and to do new and innovative transactions, without having to seek prior CFTC approval.
Now what that really means for us is the opportunity to respond quickly to changing market conditions. As new ideas and innovations are introduced that we are able to respond and to be able to put those into place, unless for some reason they would violate one of the core regulatory purposes of the CFTC.
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What happens in that whole process of prior approval is that we begin to examine all of what might happen, what might go wrong, what possibly could occur that might in some way injure the marketplace, without in any way quantifying the probability of that occurring, the cost benefit of not having this regulation in place. And so the prior approval process by its own very nature is just a difficult process to get through, because the analysis is always about what is going to be wrong potentially as opposed to what is being done that's right. Whether or not it's a pervasive attitude at the Commission is difficult for me to comment on.
I have heard good things in the past year that the Commission is willing to consider things; I just haven't seen the action yet that really backs it up in a broad way. We've had many discussions once again, but again, the issue is action as opposed to discussion.
Mr. MORAN. Do you attribute the problems in either reluctance or slowness at the staff level or at the Commission level, or both?
Mr. THOMPSON. I would say it occurs at both.
Mr. MORAN. And is there an explanation for why you think this occurs?
Mr. THOMPSON. I don't have a good one. I do want to share with you a bit of the other side of the EFS example though.
Swaps are an exempt transaction right now. In 1992 Congress passed legislation that gave the Commission exemptive authority over certain off exchange transactions that might be futures transactions. Within a month or two after that legislation was passed, the CFTC exempted swaps from coverage of the act under certain conditions.
Interestingly, that transaction, which the Commission believes as an exempt transaction, exempt from their regulation, is the precise transaction that we're hoping to draw the link between our regulated markets and an unregulated market. Concerns were expressed to us that the Commission was concerned, that by bringing that unregulated transaction onto the exchange, there may be some unspecified injury to the marketplace. And that's what we're sitting around talking about right now, is something that nobody's yet been able to define the concern about.
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Draw that parallel to the EFPs that exist today. We're an energy exchange; we trade crude oil, heating oil, gasoline, natural gas. These are unregulated markets. They have regulations certainly for environmental purposes, and they have industry practices as to how delivery is made and the like. But in the end, those already unregulated transactions, which are transacted by unregulated parties are part of the fabric of our market right now. There has to be an attitude change to allow those types of innovative transactions. Once again, taking an unregulated transaction and allowing it to be translated with a regulated transaction is already being done. I simply for the life of me don't understand why it's such a difficult public policy issue to get over that it takes 2 years to get by.
Mr. MORAN. Mr. Sandner.
Mr. SANDNER. I agree with everything Pat has said, but I think I can give a little additional explanation of what's happened.
If you go back 20 years and you really look at the act, the CEA, this agency was supposed to be an oversight agency. As often happens with all agencies over time, it becomes more like the CEO of the industry that they're supposed to oversee. The agency begins to micromanage. And that's a mindset and a change—it's a subtle change over many years, but once it gets embedded it's very hard to reverse. And that's what's happened over 20 years.
When we talk about rule approval and orders, and regulations, if you approach that with a mindset that becomes so embedded of micromanagement, and becoming the chief executive officer of your exchange through the agency here in Washington, it's really really difficult to move forward, and it's hard to change that mindset when it just didn't happen overnight; it took years for it to grow into that.
And so now, when we're in a—and we've not tolerated it, we've testified against it, but now we're in a competitive juggernaut, where we're not going to be able to survive if it continues like that. And to Chairman Born's credit, I think she's done some things that says, I'd like to change that mindset, but I can't just completely eradicate it, and just become purely oversight in terms of substance. And therein lies the problem.
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So when they exempt this over-the-counter market, it becomes a pretty easy thing to do when you say, you know what, if we bring it under us, and we apply the mindset that we have grown into over the last decade, and micromanage it, we're becoming the CEOs over that entire huge over-the-counter market, and we can't do that so we're going to exempt it. So we'll just continue with this mindset that we have over this industry, that we've got control of and we understand, and it's hard therefore to change it.
And everything that happens under that mindset—a long time; 2 years to get something done—is this try to answer every conceivable question that anybody can ask about economic justification for this initiative by the exchange. And you know what? You can play that game for 10 years, trying to come up with questions, and then try to answer them—question, answer; question, answer—and you get nothing done.
The issue is micromanagement as opposed to oversight. And if somehow the agency could just step back and say, let's become an oversight agency, and allow these industries and these exchanges to innovate and to progress, and to compete in this global market place, we'll all ultimately be a lot better off.
Mr. MORAN. Well, I detect a common theme between the hearings on the reauthorization of the Act and the testimony today. A lot of what I heard earlier this year is what I'm hearing again today.
My line of questioning was designed to try to figure out whether there's just legitimate differences of opinion about what direction CFTC should go versus there's an agency that is lackadaisical, not interested in change. And so I was trying to figure out if this is something new, and what the motivation might be for the problems that you've experienced in seeking change.
And is this any different than it was in the past? Has this difficulty increased with the current commissioners, or is this just a result of the changes in the market that require these issues to be addressed more quickly?
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Mr. ARBOR. If I may, the Chicago Board of Trade has had that same problem—petitioned by one of its member firms for an exchange for futures for swaps. A big international bank was trying to engage in the exchange of over-the-counter options for futures, and I understand that was turned down by the Commission. They were servicing a very important customer, a government agency that was basically in control of the exports out of a very big country in Asia. So that's caused us some problems too, so we had the same problem the Nymex Exchange had.
We had a more significant problem. We've been trying to achieve links throughout the world, and we recently opened up a link with the London International Futures Exchange, which I described an exchange that beat our volume in September. And the way we run things at the Chicago Board of Trade is we have Gantt charts, and everything has to be done by a prescribed amount of time.
Unfortunately the regulatory approval from the CFTC wasn't obtained on this very important issue until the eve of the link. Some quarters feel that it was one of the reasons the link hasn't worked so well because of the uncertainty caused by the last minute approval of the link agreement. As a matter of fact, we had our president—our chief executive officer, Tom Donovan—the board instructed him to write a letter to the CFTC, urging them to approve this link because we were about to open it in just a couple of days. And at the last minute they did approve it. But you can't have that kind of an approval process because businesses have to have an adequate time to prepare for the opening and launch of a contract.
So, that's just a specific example. I've been chairman of the Chicago Board of Trade for 4 1/2 years. I can't comment too much on what went on before, but I think it's probably just like it has been, maybe a little worse because the Commission was without a chairman for a long period of time. We now have a new chairman, and we're happy about that. And hopefully the new chairman will organize the Commission in a more efficient manner.
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Mr. MORAN. Mr. Arbor, thank you very much. Mr. Chairman, thank you.
Mr. EWING [presiding]. Thank you, Congressman, for filling in. We're doing this tag team here as they do votes, to help all of you along.
I know Mr. Thompson has to catch a plane. Is that at 2:30?
Mr. THOMPSON. We can stretch it, Mr. Chairman.
Mr. EWING. All right. You jump in here and answer any of these questions you want to.
A question I would have for all of you, if you felt that you had the opportunity to comment on the plan. Was there ever a call made? Did any staff talk to your staff? Was there ever any kind of a contact outside of what was in the Federal Register?
Mr. ARBOR. Not that we know about at the Chicago Board of Trade, no.
Mr. SANDNER. To my knowledge, no, and we were somewhat chagrined over that because we thought we're a major stakeholder in this, and that dialog would have been something very beneficial to both sides to try to arrive at a product that makes sense to everyone. But we saw it in the Federal Register, and then if I'm correct—and I know Chairman Born is not on this panel, but I would perfectly welcome a correction on this. But we were told—it went in the register and we had 30 days then to comment on it, without any prior dialog whatsoever, and it surprised us. Maybe we shouldn't have been surprised, but it surprised us. And we understand that there was a unanimous commissioner vote on it 15 days later. And so that was 2 weeks before we even had a chance to really comment on it. So we were sort of out of the loop the entire time, which I don't think what was expected in the 1993 provision to do these kinds of things.
Mr. EWING. Mr. Thompson.
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Mr. THOMPSON. Mr. Chairman, one thing. We I think experienced the same thing. We did not have a specific discussion with the CFTC to my knowledge on the creation of the strategic plan. But one thing I would point out is, we've obviously had a lot of dialog with the CFTC over the course of the past year. The issues that we were hoping to have addressed, we're pretty sure through our dialog as well as the dialog with the other exchanges—that I know the CFTC at the commissioner and staff levels had—that our positions were very clear, and there were certain things that we believed that the CFTC, either through the statute and the discussions that we had last year, or through this plan, through a change again in the mindset of the CFTC, that those views would come to the floor. And as I had pointed out earlier, as we searched through the document to look for some reference to and some elaboration on issues of innovation and deregulation, we really only found one area, one sentence, without any specifics of an action plan or ideas, or things that the Commission intended to do to try to foster innovation, and try to deal with the concerns that we'd expressed to them.
So, while we weren't directly consulted on it, certainly I do believe that the Commission understood our views, and as we said in our prepared remark, we don't believe that they've been adequately addressed in the strategic plan.
Mr. EWING. As a moderator between sides that may not always agree, I guess my next question in fairness should be, did any of your organizations submit written suggestions as to what should go in the plan?
Ms. TIPPINS. NFA did not submit written suggestions to go in the plan, but like Mr. Thompson, I think that we have very good lines of communication with the Commission. We frequently have dialogs with them, however, we did not specifically comment on this plan.
Mr. ARBOR. We were not invited, nor did we submit to any comments on the plan.
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Mr. SANDNER. And we weren't aware in advance that the plan was being introduced, so there wasn't really sufficient time when it went into the Federal Register for us to submit our response.
Mr. DONOVAN. Mr. Chairman, we didn't submit comments ahead of time, because quite frankly we really were expecting that the strategic plan would address the issues that were put forth when we addressed the Commodity Exchange Act in hearings before your committee and Senator Lugar's.
And I have to tell you, it's with a deep sense of frustration and disappointment that I viewed the strategic plan. Because when I read it, I had really hoped that it would really show an agency somewhat like a space ship, to take us into the future, and one that would address the global concerns and the frustrations that each of us has expressed in our testimony before this panel. And quite frankly, when I read it, I really felt like I was riding in a Model-T, looking in a rear view mirror. Because I don't see it addressing the concerns of the future. There was no discussion of regulatory structure of the future.
The business today has gone from an agricultural business to a financial business; the over-the-counter market is growing by leaps and bounds. And to me it was a blueprint for the status quo. I thought it totally lacked vision.
Mr. EWING. A major concern that I think all of you mentioned—and I apologize for not being here when all of you gave your oral testimony—is the idea of competitiveness in the world market situation. And I believe that concern has been raised last week, that only 3 of the 21 activities for goal 3 were related to fostering competitive markets; only 3 of 21.
Help us understand how you believe the CFTC could do a better job in this area. How could the agency better structure their activities to totally foster a more competitive markets?
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We'll start with you, Ms. Tippins.
Ms. TIPPINS. I think that the CFTC can delegate more responsibilities to the industry, and rely more on self regulation, and try to structure itself strictly as an oversight agency in as many areas as possible. And I think that one way the industry could respond to changes much more quickly is to accomplish as much as possible through self regulation.
Mr. THOMPSON. I have similar thoughts on that, but I do think in a concrete way what we've been stressing over the past year or so in the debate about the changes to the act, is that the issue of CFTC prior approval of rules and of contracts is something that should be considered passe at this point. Self regulation is another way of saying it, but allow the exchanges to publicly publish their rules, to make sure that the market is well aware of what the ground rules as they trade on those contract markets; but allow the exchanges to use their own business judgment and the judgment of their membership to be able to foster their practices and rules, an contracts, without the oversight or intervention—without the intervention of the CFTC in designing those business rules.
Mr. SANDNER. Mr. Chairman, while you were gone, part of that answer I had given, and I'll just quickly summarize that part of it. Twenty-some years ago the philosophy of regulation was that the CFTC should exercise oversight responsibility. And in subtle ways, over many years it became one of micromanagement and becoming the CEO of our exchanges. And that has performed a terrible disservice to us in trying to move forward. So I would like to rewind that tape, and go back to where it's supposed to be, and that is, oversight, and then allow us to innovate and allow us to compete.
That is not happening in its pure sense. I think we should be able to sit down with the CFTC. If they really would welcome the idea of changing the mindset from one of adversarial posture to one of ''Hey, this is a business; let's try to nurture it. Let's see what we can do together to nurture this business so that you can compete in the world marketplace.''
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If there was an allegiance to a nurturing attitude, I think we could sit down and develop a strategy to compete in this caldron of competition throughout the world. And each exchange has different competitive landscapes that they would like to probably address with the CFTC, so it isn't necessarily one size shoe fits each exchange.
In order to get that out it has to be done through dialog, and the incentive and motivation of all the parties to that dialog to try to raise the tide for all of us in this industry that we created in the United States of America a couple of hundred years ago. We created the financial futures world in 1972, which is only 25 years ago, and now the world has copied us, not only through exchange activity around the world, but through the over-the-counter market. And we're sitting here laboring under massive competitive disadvantage. And somehow we've got to change the mindset at the CFTC.
You tried to do that through legislation with the stroke of a pen, and forced that change; but if you could get that change in the persona of the institution at the CFTC, I think we could sit down, develop a strategy, where at the end of the day we could begin to thrive once again.
Mr. ARBOR. Mr. Chairman, if the exchanges are going to remain competitive, we need simply two words: regulatory parity. And that was best described by Chairman Sandner in a previous hearing, when he talked about two swimming pools, and one swimming pool had a lot of restrictions, and the other didn't. And the question was raised, where would people go to swim? They would go to the swimming pool with less regulations.
And that's exactly what's happening to our business. Even though the exchanges' volume is up this year, the over-the-counter markets and the foreign exchanges' volume is up a lot more, partly because they have less regulation, and they have a more friendly regulatory environment.
And the very heart of this, I think, is the need for a cost benefit analysis that should be made in every rule and every regulation that the exchange community has to suffer. The over-the-counter market has none, but these rules that we have to endure and these regulations that we have to endure should be subject to a rather stringent cost benefit analysis to see if the rewards are worth the extra cost. And I think the way to do that is to take a look at the seven legislative proposals that were put forth by the exchanges in a very historic accord, most of which are incorporated in your bill and Senator Lugar's bill. And if that could be incorporated in the strategic plan, I think it would allow the exchanges to remain competitive.
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Mr. EWING. Ms. Tippins, you indicated in your comments that your association prospered when it did a good job for its members.
Do you believe that same rule applies for the CFTC and the people they regulate?
Ms. TIPPINS. I'm not sure I quite understood your question. The CFTC could also prosper——
Mr. EWING. No. Let me rephrase it. You talked that your members in your association did well when you did a good job for them in your administration. And I was relating that to the CFTC being in tune with the people they regulate, working together.
Won't the CFTC—I don't want to lead you in this question. Their chance for success might be greater if there's a matter of being in tune with the people being regulated?
Ms. TIPPINS. And I would definitely agree with that. I think particularly under Chairman Born, the CFTC has made clear that it would like to have an ongoing dialog with the industry. I think for the industry and the CFTC to develop a relationship of a partnership rather than an adversarial relationship is definitely the way to go, and I think the industry certainly has a much better chance to thrive if the CFTC is closely attuned to what the industry's concerns and issues are.
Mr. EWING. Thank you.
Mr. Thompson, I believe that you kind of related to in your testimony the fact that, where exchanges are compelled to operate in a regulatory regime that favors transactions outside of the centralized market, and outside the scope of the regulatory structure.
Is it your opinion that that will happen if the CFTC does not address the situation that we have in the current markets, with some being much more heavily regulated?
Mr. THOMPSON. I do think that over time that's potentially the result that we're facing. I'd like to try to draw a distinction if I could.
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In the over-the-counter markets there is very little regulation, and we rely upon the good business practices and risk management that is provided within the organization itself.
Mr. EWING. Pardon me?
Mr. THOMPSON. At the exchange where we believe, first of all, we provide the greatest price transparency in the energy markets that exist today. We provide the greatest market surveillance, the greatest financial integrity, underlying all these transactions, one would think that the CFTC would want to funnel as many transactions as possible into a forum like that, and to try to generate the greatest liquidity possible, so that the transparency even becomes more and more compelling.
By overburdening us with regulation we have the difficulty—is that business is being pushed away from the exchanges. We certainly serve a very valid purpose, but it's very important to try to create as much of that business coming through an exchange environment that has proper financial regulation, and creates that mechanism where the price transparency is the best in the world. And I do think that by having this two-tiered system, where there's virtually no regulation whatsoever versus one that is heavily regulated is going to have that effect over time that many transactions will go off the exchanges and into that environment.
I'm not saying that that non-regulated environment is bad per se. Generally, the participants in the over-the-counter markets regulate themselves quite well. And that's kind of the theme that we're trying to espouse here, is that there is a great deal of self regulation that works for this industry, and that we're prepared to take on our own because it's just good business practices. However, the time lags that are involved in getting prior approval of regulations, of getting contracts approved; the time and money that gets spent on that, and then the regulatory burdens that are placed on participants in this market versus participants in the over-the-counter markets are going to have the effect—and I think we can already see evidence that they've had the effect—of driving business from the exchanges and into alternative markets.
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Mr. EWING. I have the feeling that the issues are somewhat drawn here, and that as part of the regulated community you feel that maybe more attention could have been given—certainly could have been given to some new and innovative ideas that you have expressed to your regulator.
I would like to go into just a few other questions on a little different matter, but I guess I would leave this part by saying, I hope that you won't feel it's too late to submit that. I mean, you can still submit your comments to the CFTC. They'll be available to us in the committee, and I think it could advance the dialog that I hope 1998 will bring for your industry and the regulators, so that hopefully before the next year's over, we'll all be down here cheering for the same piece of legislation, both the regulated and the regulator, to put us at the forefront of the markets, not only in America, but in the world. And I would encourage you to do that.
Going on. I wanted to ask a question about your circuit breakers, and how you felt they worked in the recent market fluctuation.
Mr. SANDNER. I think they worked extraordinarily well. I was an opponent of circuit breakers a number of years ago. I was chairman in 1987, when what people called the crash occured, the market broke at our exchange about 26, 27 percent, and the actual cash market about 22 percent. I believe in a free market.
However, I changed my mind after I had done the analysis on circuit breakers and what they would provide. I found that there were tremendous gaps in liquidity when a market moves precipitously, well beyond the bands of what anybody expected. It gives people an opportunity to do two things; one to collect themselves and to catch up, and two, to analyze some data to get some orders in which would increase liquidity at those levels, where there would have otherwise been a void because people didn't even have time to get the orders in to create the liquidity.
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So I bought into it, and I am extremely happy that I bought into it as a chairman back then, and as being chairman today, and what happened yesterday.
So the circuit breakers worked extremely well. I was on the phone on a number of occasions with the chairman of the New York Stock Exchange, Dick Grasso, and he felt that they worked extremely well at his exchange.
Now that isn't to say that we're going to go back and analyze in a more empirical way, the data that we have over the next few days to see what actually happened just prior to the market hitting the circuit breaker, and just after we opened up the market again. But at this point in time I will tell you that I'm 100 percent satisfied with what the circuit breakers provided for us at our exchange.
Mr. EWING. Pat.
Mr. ARBOR. Yes, Mr. Chairman. The circuit breakers work perfectly, and if we had had circuit breakers in place 10 years ago when the stock market break of 1987 occurred, I think we would have the same orderly calmness that we had during this 2-day turmoil. The problem that we had 10 years ago is that the market shut down; the rules were changed in the middle of the game. And that caused panic 10 years ago, and that caused all kinds of rumors about impending problems with certain companies.
That did not occur this time because well in advance there was very published, well noticed demonstrations made, that if the market declined by prescribed amounts, the market would shut down. So everyone knew the rules of the game, and a certain calmness came into the market.
They worked well. They worked well at the Chicago Board of Trade in our new Dow Jones contracts, and critically they were coordinated with all the other exchanges; with the New York Stock Exchange, with the CME and with the CBOE, so they worked very very well.
Mr. EWING. Mr. Thompson, do you have——
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Mr. THOMPSON. We were luckily uninvolved in that yesterday.
Mr. EWING. Did your computer systems keep up with the volume?
Mr. ARBOR. Yes, at the Chicago Board of Trade they did. Indeed, we had a record volume day. On our after-hours electronic trading system project—on Monday evening we traded 164,000 contracts on our after-hours electronic computer trading system, and that system worked just fine. And during the day all our systems were in good order, and our clearing corporation—our AAA credit rated clearing corporation—paid and collected $3.1 billion in margin money, pay and collect money without any problems.
Mr. EWING. Were there any glitches in the overnight clearing process?
Mr. SANDNER. None whatsoever.
Mr. ARBOR. As I said, our project day trading, traded a record amount of volume. On Monday night when the turmoil started occurring in Southeast Asia, there was this flight to quality coming into our Treasury bond contracts at the Chicago Board of Trade, and they worked perfectly fine.
Mr. SANDNER. If you'd like me to comment.
Mr. EWING. Yes, please.
Mr. SANDNER. Because we had overwhelming amount of activity—we weren't overwhelmed by it, but an extreme amount of activity in our S&P 500, which is really the benchmark for the institutions. So the big institutions really were in the market in numbers. And as a matter of fact we had a $3.7 billion transfer of monies for pays and collects after the first day. And then yesterday after the up occurred, we had $2.5 billion transfer of monies.
But the systems work flawlessly; the back office system, the money wire systems—Michael Moscow on the Chicago Federal Reserve kept the Federal Reserve open so that the money transfers could be made. The banks were able to expedite the money transfers, which is a critical part of all of this, in terms of the trading activity. So the back office systems worked flawlessly, the computer systems, the matching systems, and overnight trade and the electronic systems. But more importantly, the actual trade never broke down on the open outcry system at the Chicago Mercantile Exchange, and I'm certain at the Chicago Board of Trade it didn't either; which it was really a critical component of all this, because there have to be people there to provide so people can have ingress and egress to the marketplace, and there have to be people there to execute the orders in a timely fashion, and in a very good fashion. And that all happened without a hitch for the last couple days.
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Mr. THOMPSON. Mr. Chairman, if I could do a plug for my colleagues here, we at the exchange had the monitor the activities because of the fact that we have many overlapping members, and what happens in Chicago often finds its way back to New York.
So we were monitoring those activities, and I think—again, this is a system that was put in place by the exchange without any regulatory requirement. Intra-day margin calls were made, and by the end of the day, nearly $4 billion—before sundown, $4 billion had been transferred—accounted for the entire full day's move on the intra-day margin call that occurred. So even before everyone went home that night, we were all well aware that the markets moved and the financial impact of that had already been absorbed in the system, and all the banking transactions had occurred and locked up for the evening.
Mr. SANDNER. I just would like to add one respect, I didn't go home the last 2 nights.
Mr. THOMPSON. Nor did I get to go home.
Mr. SANDNER. And nor did I go home in 1987.
Mr. EWING. Well, I happened to be out in the country taking care of some farm business, and didn't realize the world was shaking around me until later—it would have been of course a very exciting place to be. I'm sure you had a couple of very tiring days.
I would just close by saying that, Chairman Greenspan appeared before our Joint Economic Committee this morning, over on the Senate side, and I asked him several questions.
One, I asked him about the automatic circuit breakers, and a little yes, maybe no. He wasn't strongly opposed or against. Then I asked him, if we had the privilege of trading on futures on individual stocks, if that might have been affected by the market. He ran for cover, and decided he didn't want to answer that one. But in the end, I said I would throw him a softball, and ask him if he was concerned. And we were talking about more global things about the competitiveness of our markets, and the regulatory part, and the future. And he said, yes. And of course I think most of you know that he has some support for the legislation pending in both the House and the Senate. The hearing was positive though on the soundness of our markets and of the economy in America.
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I am going to go and vote, and I would excuse this panel, and thank you very much for your time. And I hope that you will respond to the CFTC with your ideas, and we'll move forward.
The second panel—if they would get ready to come up, and I'll be back in just a few short minutes. Thank you all very much.
[Recess.]
Mr. EWING. Ladies and gentlemen, thank you for waiting and welcome to the second panel of our two-part bifurcated hearing today.
We have Ms. Susan Keith, senior director of pubic policy, National Corn Growers Association, also representing the American Farm Bureau Federation, American Soybean Association, National Association of Wheat Growers, and the National Cotton Council of America; Mr. John Damgard, president of the Futures Industry Association; John G. Gaine, president, Managed Funds Association; James H. Lindau, chairman of the National Grain Trade Council; Kendall Keith, president of the National Grain and Feed Association; and Paul J. Gregory, president of the National Introducing Brokers Association.
Welcome, and we'll start with you, Susan.
STATEMENT OF SUSAN KEITH, SENIOR DIRECTOR, NATIONAL CORN GROWERS ASSOCIATION
Ms. SUSAN KEITH. Thank you, Mr. Chairman. And thank you for the opportunity to present a collective agricultural perspective on the strategic plan of the Commodity Futures Trading Commission.
I believe it is safe to say that most of our organizations have not spent a great deal of time monitoring implementation of the Government Performance and Results Act. This hearing has helped to focus our attention on the important role of the GPRA, in improving the efficiency of Federal agencies.
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When Federal agencies are challenged to plan for measurable results-oriented goals, they will undoubtedly improve their interactions with the public at large, and particularly with their constituents. We can all benefit from a Federal Government that functions better.
Our initial response to the CFTC's strategic plan is quite favorable. We fully support the mission of the Commodity Futures Trading Commission to protect market users and the public from fraud, manipulation, and abusive practices related to the sale of commodity futures and options; and to foster open, competitive, and financially sound commodity futures and options markets.
The members of our respective organizations insist upon market integrity as the most important role for the CFTC. We believe that is the mission of the CFTC to protect public market users from fraud and other criminal and abusive trade practices. Efforts to protect market users will also serve to assure that the price discovery role of futures markets will operate free of manipulation.
We also recognize the importance of maintaining an open and competitive environment in which markets operate. The CFTC must maintain a careful balance of appropriate regulation to protect market users in the general public, while allowing the markets to remain competitive in a global environment for futures and options markets.
To achieve their mission, the CFTC identified three strategic goals covering the marketplace, market users, and the futures market environment. We agree that the first goal of the CFTC should be to foster the development of a marketplace which properly carries out its role in price discovery and risk transfer by accurately reflecting supply and demand conditions in a setting that is free from disruptive activities.
The CFTC's second goal, to protect market users through compliance activities is appropriate, and should be implemented through aggressive enforcement and market oversight. The CFTC's third goal in ensuring a sound trading environment closes the regulatory loop by facilitating the development of a flexible regulatory environment which relies heavily on self regulation, but supported with active intervention when necessary.
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We want to raise some concerns about the ability of the CFTC to achieve these strategic goals. First is the question of resources available to carry out the Commission's regulatory responsibility. CFTC highlights several resource issues in their strategic plan, including the recruitment and retention of qualified professionals, and remaining abreast of current technology. Obviously both of these resource needs are critical to the ability of the CFTC to meet its mission.
The complexity of commodity futures regulatory compliance work requires the expertise of highly skilled professionals in law, economics, financial audit, and market operations. The CFTC must be competitive in recruitment and retention of qualified professionals, with the authority to pay qualified professionals at premium pay levels.
Second, resource issue is the need to stay abreast of technology. Technological advances can greatly improve the efficiency of most enterprises, especially when complex data must be quickly and thoroughly analyzed. CFTC must have the resources to maintain and enhance this technological infrastructure. Commission staff must have the resources to stay current with the technological advances at the exchanges, and in the global marketplace. Adequate technological resources will enable the Commission to strengthen the regulatory oversight and compliance activities without imposing unnecessary burdens on the industry.
CFTC's strategic plan specifically acknowledges the changing environment for production agriculture. Consistent with the provisions of the Federal Agriculture Improvement and Reform Act, the CFTC, together with the U.S. Department of Agriculture, will design and implement a risk management education program. This effort should encourage producers to evaluate their risk management needs, and assist those producers seeking risk management services. The education effort should expand general knowledge about markets and their operations. Well informed public is the first line of defense against fraudulent sales and trading activities.
Finally, we urge the CFTC to continue to protect the interest of the pubic; more specifically the interest of producers because they provide oversight to the agricultural commodities futures market and contracts. We cannot overstate the importance of the role that futures markets play relative to price discovery for grains, oilseeds, livestock, fibers, and other agricultural commodities. We believe that the CFTC does have an important role in the contract approval process. The CFTC must ensure that contract design proposals will not create circumstances which will lead to market disruption or manipulation.
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In summary, we support the Commodity Futures Trading Commission's strategic plan. However, the plan is the first step, the real challenge is implementation and results. We encourage Congress to provide adequate resources to enable the CFTC to fulfill their oversight responsibility for commodity futures and options markets in an effective and flexible manner.
Thank you for giving us the opportunity to present these comments.
[The prepared statement of Ms. Keith appears at the conclusion of the hearing.]
Mr. EWING. Thank you, Susan. And John, welcome.
STATEMENT OF JOHN DAMGARD, PRESIDENT, FUTURES INDUSTRY ASSOCIATION
Mr. DAMGARD. I am John Damgard, president of the FIA, and pleased to appear before you today to discuss the CFTC's strategic plan, as required by the Government Performance and Results Act.
FIA is a national trade association of the exchange-traded futures and options industry. FIA's members include approximately 60 of the largest future commission merchants in the United States. We estimate that our members affect more than 80 percent of all customer transactions executed on the U.S. futures markets; we are the customer.
Among our associate members are representatives from virtually all other segments of the futures industry; exchanges, commodity pool operators, commodity trading advisors, legal and accounting firms, and a number of other organizations.
It is important that the Results Act require agencies to consult with stakeholders in establishing their strategic plans. The Commission's document is a good first step. The FIA will continue to review the plan, and raise issues of interest to the industry so that they can be incorporated into the Commission's policies and goals.
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When I appeared before this subcommittee earlier this year, I discussed areas where the industry was seeking regulatory relief. I explained that the FIA had been encouraging the Commission to support initiatives that recognize the needs of sophisticated market participants, and enhance the efficiency of exchange markets. I also made recommendations designed to reduce what the industry considers to be excessive regulations of FCMs. I mentioned seven areas where change was needed, and I asked the committee to encourage the Commission to act on those items.
Because this hearing focuses on how well the Commission responds to stakeholders, I will give you a report on where we stand on our efforts.
In a recent speech at Fordham University Chairperson Born promised to review whether to permit certain non-competitive off-floor transactions, and whether to permit post-order allocation of bunched orders of sophisticated customers with their consent.
Both of these initiatives are examples of areas where the CFTC can reduce regulatory supervision because it's not necessary for the protection of sophisticated market participants. Movement on these issues is important in making the U.S. markets competitive with OTC and non-U.S. markets. They are at the very top of our list.
In addition, the Commission has published proposed rules that would amend the current broker disclosure obligations for institutional users of the markets. I expect that with some small changes the FIA will be able to support this initiative enthusiastically.
In the Fordham speech, Ms. Born also promised to consider adding certain categories of liquid and readily marketable investments to the list of instruments appropriate for the investment of segregated customer funds.
I would like to discuss one other issue that came up during the hearings on your bill, Mr. Chairman, that I believe requires the Commission's attention, and that is the need to be more legal certainty to the trading of equity swaps in the United States. Recognizing that equity derivatives raise jurisdictional issues with the SEC, and competitive issues with securities and futures exchanges, I believe the CFTC could play a leadership role to help find an acceptable solution to this problem. This would be in the best interest to U.S. financial markets, and I would encourage the Commission to add this to its list of priorities.
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I would like to offer two suggestions on how the Commission can incorporate stakeholders' views in the development of future plans, an area where the GAO suggested some improvements might be in order.
The committee may not aware that there is no process through which the CFTC can be forced to review or change its existing rules. Although there is a process by which the public can formally request a change in the rules, the decision to consider such changes is entirely at the Commission's discretion.
Trading rules, financial rules, disclosure rules, registration rules, and others, need to be constantly reviewed in light of the changes in the United States and in the international marketplace. A meeting with the Financial Products Advisory Committee, Agricultural Advisory Committee, and other advisory committees, are a good way for the industry to communicate with the Commission. I support the advisory committees, and I strongly recommend that the Commission meet with them on a regular basis.
Along these same lines, because of the dynamic nature of the financial industry, market participants often come to the Commission to review the applicability of futures regulations to particular users of financial transactions. The Commission has used written no action letters to provide guidance in these instances, and we support that approach.
The Commission has also organized industry round tables to educate itself about industry trend. The technology round table that the Commission held last year in Chicago was particularly well done.
We are just beginning to see the changes that the Internet is making. I would encourage the Commission to continue holding round tables on technology issues, to keep the regulatory structure current.
Historically, the CFTC has sought the FIA's input on key issues because we have immediate access to market participants through our divisions; the Operations Division, the Law and Compliance Division, the Technology Division, and the Risk Management Division.
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Particularly before implementing major changes in the rules, the Commission's consulted with practitioners on how the industry would be impacted. For example, in order to comply with Congress' direction to implement risk assessment rules for holding companies, the CFTC asked the FIA to set up meetings with operations staff from all sizes and types of futures brokers to discuss the type of information firms were already preparing for other regulators. Before even drafting rule, the CFTC had the benefit of input from over 20 firms.
We intend to continue to offer the Commission access to our members, who can provide extensive knowledge about the needs of the institutional and retail customers, in addition to the workings of the market. I look forward to working with the subcommittee as you consider this strategic plan. Thank you very much.
[The prepared statement of Mr. Damgard appears at the conclusion of the hearing.]
Mr. EWING. Thank you.
Mr. Gaine.
STATEMENT OF JOHN GAINE, PRESIDENT, MANAGED FUNDS ASSOCIATION
Mr. GAINE. Mr. Chairman and members of the subcommittee, my name is John Gaine. I'm president of the Managed Funds Association. MFA appreciates the opportunity to provide testimony to you on the CFTC's strategic plan, as developed under the Results Act.
Mr. Chairman, when you were kind enough to invite us to appear here in recent weeks with the Commission's strategic goal, I'm afraid that was my first introduction to the Results Act. I did not follow that in 1993, nor 1994, nor 1995, nor 1996. In doing some research in legislative history I found it very interesting, and probably a very good long-lasting piece of legislation that will affect a lot of benefits, but I will admit quite candidly when I first got into it some of the terminology and things was a little difficult to get hold of.
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And over the weekend I was reading the New York Times business section, and they had an interview with Dr. Myron Scholes, who just won the Nobel Prize in economics. And we was talking about his service as a member of the board, and how he wanted to improve the member of the board of a mutual fund. And they asked him, what are his interests. He said, ''My interests are improving service.''
And in reading one part of that interview, it hit me. I think this is what the Results Act is about. And in response to a question Dr. Scholes asked—can you give me an example. He said ''I got interested in customer service many years ago. As a director you get reports on customer service, and there's always a tendency to measure inputs, and not necessarily to measure outputs.''
What I mean is, you get a lot of statistics, like how many calls the fund company received, and how long it takes to answer them. But you don't get at how the customer feels about the call. So trying to figure out ways to measure the output—satisfaction—is something I was interested in as a board member.
I think that's what we're doing here today, and I think that's what the Results Act is about, and I think it's a very healthy exercise for the industry, for this committee's involvement, and for the CFTC.
I am submitting my testimony for the record, and I will just make a few brief comments.
MFA is a national trade association of more than 690 members. We represent the managed futures hedge funds and fund to funds industry. Our members are participants in both the over-the-counter markets and the designated contract markets, both in the United States and overseas.
As managers of funds provided by their clients, MFA's members act as purchasers of futures industry services, and also the indirect beneficiaries of market protection rules under the Commodity Exchange Act. Thus, those sections of the act and those activities of the Commission that regulate the functioning of or participation in the markets have an important impact on our membership.
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We are heavily regulated by a number of regulators, both governmental and self regulatory, and there's been no greater advocate of the elimination of unnecessary burdensome or duplicative regulation than MFA. Accordingly, we're delighted to be here today.
The goals of the Results Act promote efficiency and accountability in Federal Government agencies and programs are in important. We strongly support them. The discipline and introspection involved in developing a 5-year strategic plan will serve to direct the Commission's focus and the allocation of resources. We note favorably that the Commission has included for each of its primary goals the following desired outcome; appropriate level of regulation.
The Commission has also included the related activity; review and adapt regulations to the evolving conditions and changes in the industry. The Results Act requires that agencies solicit and consider the views and suggestions of those entities potentially affected by or interested in such a plan.
In the recent past MFA has offered numerous views and suggestions to the Commission, either in response to requests for input from the Commission, or spontaneously. Some of MFA's recommendations have in fact already been implemented. We note that the Commission is reinstating the Financial Products Advisory Committee under the chairmanship of Commissioner David Spears. In the past, this advisory committee, along with other advisory committee, has been an invaluable vehicle to communicate and develop the views and suggestions of the affected industry to the Commission. We strongly support reinstatement of FPAC.
Chairperson Born in her testimony before you last week, stated that one of the Commission's top priorities this year has been to ensure that the agency is responsive to the competitive challenged facing the U.S. futures industry and its customers; while at the same time preserving important customer protections and market safeguards.
In my view, this statement sets forth in general terms the major challenge the Commission needs to address in its work. For much of the constituency I represent, competitive fairness or level playing fields are complex and difficult goals. As I pointed out, my membership is heavily regulated by a number of regulators. Regulations of one regulator can sometimes create competitive imbalances; regulations of several regulators can create sometimes duplicative and even inconsistent regulations.
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It is accordingly with great interest I noted in the CFTC's strategic plan, that the Commission will work at the Federal level with the President's working group on financial markets to further regulatory consistency. The Commission will likewise involve itself with state and foreign regulators.
The Commission is our primary regulator, and should appropriately be the lead agency in promoting competition and consistency through regulations, yet maintain public protections. The Commission's recognition that we have a two-tiered marketplace of which the trading volumes and investment dollars are predominantly institutional, is a great step forward in achieving a healthy, competitive marketplace.
Our membership needs access to customers as well as access to markets without unnecessary regulatory obstacles. On the one hand exchanges should be able, subject to Commission oversight, to fashion their markets and rules in ways that take into account this two-tiered marketplace, and thus be attractive and competitive avenues for institutional trading. On the other hand, MFA's membership should have access to customers to trade in treasury amendment and other over-the-counter markets on a reasonable, competitive, regulatory basis.
Commission action in the swaps exemption, rule 4.7 and proposed rules changes to rule 1.55, are all examples of this. We think these are examples of the Commission's willingness to review and adapt regulations to the evolving conditions and changes in the industry. We believe the Commission by word and deed is demonstrating its concurrence for the above general thoughts, which MFA believes are fairly encompassed in the Commission's plan. We look forward to continue working with the Commission toward these goals.
I might add, Mr. Chairman, that your recent work and the work of your committee, in connection with possible amendments of the Commodity Exchange Act have served to further the goals of the Results Act, and focusing attention on the appropriate role of the Commission as a regulator, you and your staff are to be commended. I look forward to answering any questions you might have.
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[The prepared statement of Mr. Gaine appears at the conclusion of the hearing.]
Mr. EWING. Thank you very much.
Mr. Lindau.
STATEMENT OF JAMES LINDAU, CHAIRMAN, NATIONAL GRAIN TRADE COUNCIL
Mr. LINDAU. Mr. Chairman, I am Jim Lindau, and I appear before you today as chairman of the National Grain Trade Council. I'm also president and chief executive officer of the Minneapolis Grain Exchange, and earlier in my career I was in charge of the Pillsbury Company's grain merchandising business. I spent nearly 35 years working in areas related to commodity markets and marketing. With me is Bob Petersen, who is president of the National Grain Trade Council.
The Council appreciates this opportunity to share with you its views on the CFTC's strategic plan. The United States has developed an intricate, pervasive regulatory structure for exchange-traded futures and options. Today's hearing provides an opportunity to examine the philosophy behind this regulation. Alan Greenspan, the chairman of the Federal Reserve Board, mused on the virtues of self regulation in a speech he made earlier this year, and I'd like to quote portions of the speech.
I've never lost sight of the fact that Government regulation can undermine the effectiveness of private market regulation, and can itself be ineffective in protecting the public interest.
Going on:
The real question is not whether a market should be regulated, rather it is whether government intervention strengthens or weakens private regulation, and at what cost.
He said further:
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As we move into a new century, the market stabilizing, private regulatory forces should gradually displace many cumbersome, increasingly ineffective Government structures. This is the likely outcome, since governments by their nature cannot adjust sufficiently to a changing environment, which too often veers in unforeseen directions.
The U.S. futures markets have enough regulation and enough regulators. As an exchange officer I have difficulty describing my exchange or any exchange as a self-regulated organization, but that in fact is what we were intended to be. The National Grain Trade Council believes that any forward look by the CFTC should embrace Chairman Greenspan's idea that ''stabilizing private regulatory forces'' should gradually displace many cumbersome, increasingly ineffective Government structures.
I'm not here today to suggest that we do away with the CFTC; I'm here to say that the National Grain Trade Council believes the current regulatory structure is in need of change. We believe a wholesale review of the regulatory framework is important to the long-term health of the risk management marketplace. We'd like to see more clarity between the responsibilities of the CFTC, the National Futures Association, and the exchanges.
The current system tends to promote duplication of effort in areas of audits and investigations in particular. Market participants are frustrated with a system that results in identical investigations, undertaken separately by the exchanges and by the CFTC.
Now that I've touched on the nature of the marketplace and the need for reforming the current regulatory structure, let me turn to a few comments about the CFTC's strategic plan.
The CFTC has looked to the Commodity Exchange Act in identifying its mission as: ''to protect market users and the public from fraud, manipulation, and abusive practices related to the sale of commodity futures and options; and to foster open, competitive, and financially sound commodity futures and options markets.''
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As councilmembers read through the balance of the agency's strategic plan, they come away with a feeling of uneasiness. Let me highlight a few general concerns by our members.
First, clarity. We'd like to see more clarity in exactly how the CFTC sees its role. We believe the CFTC needs to focus on its core responsibilities—deterring fraud and manipulation—and doing the best possible job it can in those areas. Clarity has many virtues. A clear goal can lead to clear assignments, clear assignments in turn can result in greater accountability, and accountability leads to increased efficiency.
Expansiveness. Our sense is that the strategic plan has an expansive view of the CFTC's future. We worry when a Government agency relies a great deal on words like ''promote'' and ''foster.'' We worry that a lack of clarity could mask an expansive agenda that will require more resources, funding and staff, with few benefits.
The nature of this strategic plan reminds many council members of the plans they prepare to grow their businesses. Government, though, is not a business. While businesses need to grow to be successful, the same logic does not hold true for Government regulation. In fact, the definition for success in Government could include downsizing, and how to do more with less.
Over-regulation. We need to guard against unnecessary regulation, which by definition creates an economic drag, by imposing higher costs for doing business. More regulation is not always the correct answer. Regulation needs to be clearly targeted and focused.
The CFTC's strategic plan, the issue which brings us here today, presents a good opportunity to first take a broad look at the changing nature of futures and options markets, and those who participate in the market. The Council believes changes in the regulatory structure are needed to streamline regulation, and minimize duplication of effort. We acknowledge that the CFTC has had a full complement of commissioners for only about a year, therefore the opportunity to gain input from users, and particularly those recommended by the Council, may have been limited. However, our views were exhaustively presented, at hearings on H.R. 467 before this very subcommittee. We're disappointed that more of those views were not incorporated in the CFTC 5-year plan.
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We recommend the agency take a fresh look at its plan, bearing in mind the testimony already presented at congressional committees, as well as Chairman Greenspan's observations on the virtues of self regulation. Thank you for your time.
[The prepared statement of Mr. Lindau appears at the conclusion of the hearing.]
Mr. EWING. Thank you, Mr. Lindau.
Mr. Keith.
STATEMENT OF KENDALL KEITH, PRESIDENT, NATIONAL GRAIN AND FEED ASSOCIATION
Mr. KENDALL KEITH. Mr. Chairman, the National Grain and Feed Association represents a large proportion of the commercial hedgers that use futures markets, particularly the grains and oils contracts. We have a long history with the CFTC. We supported the establishment of the CFTC as an independent regulatory body when it was created in 1974. We have remained supportive of an independent CFTC since that time.
We believe the draft, vision and mission statements of the CFTC's strategic plan appear to be consistent with the mandate of Congress. There's no question that there is a strong need for continued oversight of the regulations of futures and options markets. We understand the CFTC's statements concerning also the need to maintain or enhance its data collection, technology, and human resource capabilities. We generally agree that they need these.
But while agreeing with much of the strategic plan, we also have some concerns that I would like to highlight today.
We believe this strategic plan could be strengthened by greater clarity in the division of roles and responsibilities of the CFTC and the various SROs, self regulatory organizations, including both the exchanges and the National Futures Association. The CFTC and its staff will never be as efficient in performing some regulatory functions as private markets. Markets and market conditions can change very quickly, and those most directly involved in those markets will have access to the most current and relevant information. We would urge the CFTC to aggressively pursue participation by the SROs in helping to define these roles.
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We also have some concerns that this strategic plan not be used to justify an expanded role or mission created by the CFTC. Both the following issues are at stake. No. 1, how much regulation is adequate; and No. 2, which regulatory functions should be performed by the CFTC.
While a regulated exchange in our view must remain a meaningful term in the context of protection offered by the U.S. Government, there has to be periodic critical reviews of CFTC activities to assess need, benefit and cost.
We still see the primary role of the CFTC to protect the public interest from fraud, market manipulation, and abusive sales practices. They should however also be looking for the least intrusive ways to regulate the markets. We look to this committee to ensure that the document is used, first and foremost, as a tool for better management at the CFTC. Thank you.
[The prepared statement of Mr. Keith appears at the conclusion of the hearing.]
Mr. EWING. Thank you, Mr. Keith.
Mr. Georgy.
STATEMENT OF PAUL GEORGY, PRESIDENT, NATIONAL INTRODUCING BROKERS ASSOCIATION
Mr. GEORGY. Chairman Ewing, I am Paul Georgy, president of Allendale. Thank you for inviting me to comment on the strategic plan developed by the CFTC, and submitted to Congress for the years 1997 through 2002. I'm appearing here today on behalf, and as president, of the National Introducing Brokers Association, the NIBA.
The NIBA is a professional organization of futures brokers. Our membership include introducing brokers whose primary business focuses on price risk management programs for the farming industry, as well as those who specialize in financials, metals, energies, and other commodities. Many of our members offer crop insurance or buy and sell cash grain, as well as transacting futures and option business. All of our members are required to pass a national examination to be licensed, periodically undergo ethics training, be registered by the CFTC and the National Futures Association, and are subject to frequent audits by regulators.
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The NIBA was not consulted by the Commission before they developed their strategic plan. Instead, the plan appears to be quite general and more descriptive of functions and methods currently in use at the Commission. While we recognize it is impossible to anticipate each event the Commission will be faced with in the coming years, and the response needed to deal adequately with those events, we know past years have brought hot issues to the Commission, which were dealt with slowly, ineffectively, or not at all.
The NIBA believes the Commission should work more closely with its industry participants when enacting policy and making major decisions. This could be done through the use of more roundtables, public hearings, or small discussion groups. This communication will assure the industry it is responsive to change, that changes are necessary and cost effective, and the registrants are continuously being monitored for compliance. Public trust in the marketplace as a whole will be strengthened and everyone will benefit.
The Commission also is slow to act in dealing with the non-registrant who commits an abuse. The Commission feels an entity or person who is not registered with them or the NFA cannot be prevented from defrauding the public. This argument is analogous to allowing a person who drives an automobile without license, and has an accident to continue to drive, because the licensing body has no authority over them. Obviously this is ridiculous and should not be happening in our industry because ultimately the entire futures and option industry suffers.
The NIBA believes Congress should empower the Commission with the authority, and the jurisdiction to do the job, and to hold it accountable. As one example of how slow the Commission can be to respond to disaster in making, we can look to the commonly called hedge to arrive contracts transacted in the bread basket of our Nation.
They hesitated to shut down the offenders, partially because they did not know if these contracts fell within the definition of futures, and were therefore subject to their jurisdiction. Not until many farmers and grain elevators experienced financial ruin did the Commission finally issue a position paper.
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By the year 2002 there will be many more products available to the U.S. investing public, such as derivatives and contracts traded on foreign exchanges. The Commission must know it has the right, the power, and the finances, and the duty to regulate trading in these markets for the protection of the public.
The Commission essentially states in its strategic plan it is doing the best it can with the financial and personnel resources it has. The NIBA believes Congress should review the responsibilities and duties of the Commission, and bring its funding into line with all other regulatory bodies. Then the Commission can attract and keep the best employees, can remain current with technological advances, and can provide our industry with a highly professional level of regulation. At the same time, we believe the Commission could economize on its resources if it allowed registrants such as exchanges to run and improve their business with minimal interference.
It should be the job of the industry registrants to provide innovative effective methods for the public to use the marketplace. It should be the job of the Commission to see that these methods are developed for the good of the public. It should be the job of the Commission to act swiftly to enforce the guidelines set by Congress. It should be job of the Commission to be more responsive to enacting policies and procedures which allow better communication with its registrants.
In conclusion, the NIBA believes that the Commission must be accountable for its actions, and thus operate like a business in a business environment. The Commission must be empowered with the authority to act swiftly in regulatory issues of registered and non-registered individuals. The Commission should be more responsive to the objectives of the industry participants, and enact policies and procedures which allow for better communication with its registrants and other participants, so that we may meet our common goal of providing the public with the most professional service we can. Thank you for the opportunity.
[The prepared statement of Mr. Georgy appears at the conclusion of the hearing.]
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Mr. EWING. Thank you to all of the panel, and to Mr. Georgy for your comment.
This question is to any or all members on the panel. I'd like to know when you were first made aware of the Results Act plan by the CFTC, and if you were, or you know of any of the groups you represent, were ever consulted about input on their planning?
Ms. SUSAN KEITH. I'll start off, Mr. Chairman. Your staff made me aware of the plan, and that was after it had been published in the Federal Register, so I of course had the opportunity to see it there, and had not seen it. But that was the first time I was made aware of the plan, and I believe that is also true for the organizations that I represent here today.
Mr. DAMGARD. Well, I'm way ahead of the game. I found about it earlier this year, but I have a general counsel who is back and forth to the CFTC all the time. So she obviously learned of it from a member of the CFTC staff.
Mr. GAINE. I learned of it upon publication in the Federal Register, but as I said in my testimony, the same input maybe was gotten from us, perhaps in connection with your hearings, Mr. Chairman, on the legislative revamping, and other initiatives formally and informally of the Commission, seeking out where are we going in the—actually, the 5-year Results Act plan. But I think substantively the issues and facts to be gathered in response—some of the exchanges, would have served the same purposes.
Mr. LINDAU. I can't remember exactly if I heard it first as mentioned from one of the CFTC commissioners, or from my director of compliance, but it was approximately at the same time that it was published in the Federal Register.
Mr. KENDALL KEITH. We saw it in the Federal Register, and commented on it.
Mr. GEORGY. We learned it from a member of your staff.
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Mr. EWING. Mr. Keith, did you say you did comment on it?
Mr. KENDALL KEITH. Yes, we did.
Mr. EWING. You did submit it?
Mr. KENDALL KEITH. Yes.
Mr. EWING. OK, you get an ''A''.
That was my next question, did any of the other groups that are represented by the panel here know of submit anything for the record for CFTC?
Mr. DAMGARD. We did not formally comment on the study, but we have worked with the Commission steadily on the seven items that I mentioned in my testimony.
Mr. LINDAU. We didn't comment directly because shortly after we saw the Federal Register, you invited us to testify here, we started preparing for this instead.
Mr. GAINE. We didn't comment on the Results Act. As I said in my testimony, it's an important piece of legislation. My members are more interested in the Commodity Exchange Act, and we have commented and continue to comment on that.
Mr. GEORGY. We did not comment on it; we prepared for this hearing.
Mr. EWING. Mr. Damgard, did any of your comments get included in the plan, any of your suggestions?
Mr. DAMGARD. My memory's not good enough to remember what was in the plan, but we have worked steadily on such things as the Commission's attitude towards pre-arranged trading, as a way in which some of the member firms of the FIA can actually use the future markets.
Right now a firm such as a Morgan Stanley will receive a buy or a sell order, of such size that there will not be the kind of capital available on the floor of the exchange among the locals to take it—for Morgan Stanley to do that business. In the securities business they are able to transact those kinds of negotiations with other firms that have the capital, and then cross those trades on the floor. We believe that markets in the United States would be enhanced dramatically, if in fact rules were changed to permit these types of cross-trades.
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Mr. EWING. In the first part of this hearing when the Commodity Futures Trading Commission testified, they indicated that they had taken numerous actions since 1997 to streamline and modernize their regulatory regime, including fast track procedures, new procedures for allocation of customer orders, new rules on risk disclosure, and electronic transmission of certain documents.
Would any of you care to comment about these changes and revisions that they made, and are they addressing problems that you see or feel would benefit your agency or your group?
Mr. LINDAU. Mr. Chairman, taking off my National Grain Trade hat and putting on my Minneapolis Grain Exchange hat, I would say that they have definitely made a significant difference in our relationship with the CFTC. There's a clear difference in their, the current commission's, approach to rulemaking and rule changing. Remember of course, we're a small exchange. We don't have the world-shaking issues that the Chicago exchanges may have, but the response and interaction that we've had with the CFTC, under the fast track conditions, has been a significant improvement.
Mr. EWING. Good. That's very good.
Mr. GAINE. Mr. Chairman, I would agree, that in order allocation, taking into account the technology of electronic media, and applying that to my membership, a recent delegation by the Commission of disclosure document review authority to the NFA. There's been a quickening of the pace, I think to put it mildly, of getting a done a lot of ideas that have been kicking around for some period of time.
Back to my testimony, this to me is reviewing and adapting regulations to evolving conditions. And this is one of the problems. We have technology growing, we have globalization, and the Commission can't be—as my brothers at the exchanges seem to mention frequently—2 years, 3 years or 4 years behind. And they've got to be almost current, which is hard to do in the Government. But I personally see in recent times a very much quickening of the pace.
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Mr. EWING. Do you believe in reviewing the plan that's been put out, that there is enough forward thinking, strategic planning in the plan that it will serve as a good basis for future operation of the Commission?
Mr. DAMGARD. As I said in my testimony, I think it's a very fine first step, but by the same token I think that strategic plans and mission statements are only part of the story. I think that the Commission should be judged on the basis of how they perform, and obviously a strategic plan and a mission statement can't necessarily take into account something that's going to develop tomorrow. So, I would rather not have the Commission waste too much of its resources on writing mission statements and plans, but rather addressing the real needs of the industry.
Mr. LINDAU. I'd react about the same way. I think that the mission statement is a fine academic analysis of where they might go. It does not recognize all of the things that the exchanges and the industry have spoken to the CFTC about, in terms of treating the exchanges more like a business entity—the exchange to be the CEO rather than the CFTC.
Second, we have a great deal of concern about the expansiveness, the use of ''promote and foster.'' We see that as going beyond their role as regulators into something that we exchanges should be doing.
Mr. GEORGY. I just want to say that I agree with both of those comments. I mean I think it's an excellent plan to start from. We need to break it down into more specifics, and look at it specifically and how we're going to attack some of these problems as they've brought up.
Mr. EWING. I think one of the major ideas behind this legislation—and I wasn't here when it was passed—is to foster communication between the regulator and the regulated, between those who are served by the Commission, and the members of the Commission and the staff there.
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Some of you have talked about the plan. Do you think this is an adequate beginning point for that type of dialog?
Mr. GEORGY. Yes, I think it is, Mr. Chairman. I think this procedure is somewhat new to all of us. And I would say it's somewhat general, but I don't know if anybody could predict 3 years or 4 years from now what our financial markets are really going to look like. So what would be necessary from my point of view would be a template, or a vehicle, or the Commission's attitudes toward adapting regulations to change, be they on contract markets or over-the-counter, be they domestic or in Hong Kong, you've got to have that attitude that things are changing very rapidly, and have the leadership from the top, down through staff, to be able to adapt. Otherwise, this is again, what the exchanges point out frequently.
And I think I see that; I see that more. I was general counsel there in 1977, so I go back a little bit with the agency. I see a much more responsive attitude than even we did, and we thought we were near perfect.
Mr. LINDAU. I would add that I agree, that it's an excellent first step. And I'd go beyond that to say that in the last year there has been intense interest on the part of the current CFTC commissioners to find out what we're really doing. They've even come out to Minneapolis of all places to talk to us about our concerns, and discuss with us the way they're operating. So, though the plan may not be perfect, I certainly would give them credit for good intentions.
Mr. DAMGARD. Mr. Chairman, I think we share a concern that U.S. markets stay very competitive. But I think we do need to point out in fairness, that 10 years ago these were virtual monopolies, and foreign exchanges that have developed in the last 10 years have developed on the basis of coming to the United States, studying what we've done, and what we've done very well. And in many instances those markets are not inhibited by such things as the politics of the locals, deciding whether or not open outcry is a superior way to trade than electronic trading.
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I know the Chicago exchanges complain about how they're losing market share, and probably some of that's legitimate. When you look at the amount of economic activity outside the United States versus futures traded outside the United States, and then the amount of economic activity inside the United States is a percentage of the futures traded here, you'll see that U.S. exchanges are dominant.
But I do think that there is a structural problem. I think that the leaders of the exchanges are very much in touch with what that problem is, and the example most recently of LIFFE, outstripping the Chicago Board of Trade for one month in volume, really has very little to do with competition. They're not trading the same products. LIFFE's competition is Germany, and the DTB and LIFFE trade the same product. One is traded electronically, where nobody's in the pit. There are no clerks, there are no errors. There is an electronic order matching system that allows the Bund to trade in Germany, and that has just eclipsed the volume of that contract which originally was much larger in London.
So, I don't think it's quite fair to always blame the regulator for loss of market share, or for an inability to respond to competition. We are in the process of working with the two Chicago exchanges to form a real partnership among the clearing members, the real customers of those exchanges, and we are working on a new clearinghouse in Chicago—unified, not one. Our industry can't afford to have a clearinghouse next to every exchange; we just can't tolerate those kinds of inefficiencies.
In the options business there's one clearinghouse that goes about doing its business the way a utility would do the business, and the same is true in the securities industry. And in the futures industry we continue to be able to sustain these inefficiencies, and I believe that more than anything that the Commission is doing is hindering our ability to stay competitive in world markets.
Mr. EWING. Anyone else have a comment on that?
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[No response.]
In all fairness to the CFTC, I don't want anybody to go away today thinking that I thought that they should have all the elements of my legislation, or the Senate legislation, or what some of the exchanges wanted in their plan. If they did then we probably would have passed those bills out a number of months ago, and we wouldn't maybe even have to be here.
I think the bottom line that I continue to get at today, is the need for both the regulated and the regulator, and those with an interest in what's going on between the regulated and regulator, to have dialogs, to have input from all of your organizations, even those of you who have expressed some concerns about your relationship with the CFTC or some of the actions they've taken—I think it's very important that those be submitted to the agency for their consideration. And I hope that if you haven't submitted your ideas for this plan, don't take it as another bureaucratic document to be laid on the shelf, but as an opportunity to express your views for ways that we can improve our system.
And I would just ask any of you, if you have a comment on that, if you feel that that's something that you can accomplish.
Mr. DAMGARD. I for one, thank you very much for having this hearing, and making that opportunity available to all of us.
Ms. SUSAN KEITH. Mr. Chairman, I think the fact that Chairman Born has been here, and I've watched her take extensive notes, I'm sure there's a great deal of interest in the comments that were presented for this hearing. And again, I thank you for bringing it to our attention, and getting us focused on the need to stay involved, and help our agencies serve interests better.
I think as production agriculture, we look at the activities of the exchanges somewhat differently than the financial community. We're more comfortable with the way things are, and are somewhat nervous about a less regulated future. And I think that was perhaps part of our reluctance to fully embrace your legislation. And trying to strike that balance of being competitive in global financing markets, and yet meeting the needs of production agriculture to have price discovery that farmers are comfortable with; that they can trust the forces of supply and demand that work on the markets, and finding that balance I think is what is the real challenge before all of us perhaps in the next 5 years.
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Mr. EWING. Well, I think that we have made some headway with our hearings, and I appreciate all of your input, those of the first panel and Chairperson Born for being here. I know that she does listen, and I would hope that we'll continue this effort with this plan, and use it as a vehicle for keeping our regulating body up to the most finally tuned organization possible to work with all of the industry.
Thank you all very much.
[Whereupon, at 3:35 p.m., the subcommittee was adjourned subject to the call of the Chair.]
[Material submitted for inclusion in the record follows:]
Statement of Patrick Arbor
Good afternoon, Mr. Chairman and members of the subcommittee. I am Patrick Arbor, Chairman of the Chicago Board of Trade. I am accompanied today by Thomas R. Donovan, our president and chief executive officer. We welcome this opportunity to offer the Board of Trade's views on the Commodity Futures Trading Commission's strategic plan. Our comments will generally focus on the draft published in the Federal Register on September 15, 1997, since that is the only version the CBOT as a stakeholder in the performance and results process was given for comment.
The Board of Trade is a strong proponent of strategic planning. Earlier this decade, we too implemented such a discipline to focus our resources on the critical issues necessary to ensure the CBOT's ongoing viability in today's markets. Each year the Board of Trade goes through a rigorous evaluation of the current environment, reformulating our strategic plan in light of our customers' needs, market developments and competitive challenges. While time consuming and demanding, it is worthwhile. It allows us to be more focused, efficient, and ultimately, more effective, in positioning the Board of Trade as a preeminent financial institution well into the next century.
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Federal agencies, too, can benefit from a properly designed and executed strategic plan, just as the Government Performance and Results Act intends. I commend you and the subcommittee for the attention you are focusing on the Commission's ability to develop such a plan since it should provide the backdrop for ongoing interaction between the agency and the U.S. risk management industry as well as between the Commission and Congress in its oversight role. The CBOT outlined its general reactions to the CFTC's draft plan in the attached October 20, 1997 comment letter.
For any organization, the first critical step in developing a successful plan is to define the environment in which the organization exists. Just as the Board of Trade needs to understand and be responsive to our customers' needs, the Commission, too, must identify, understand and be responsive to the needs of the markets under its jurisdiction.
Given that this committee and the CFTC's Senate oversight committee have been exploring the realities of today's global risk management market for close to 2 years, it is ironic that the Commission's plan fails to respond to that debate. Instead, the Commission has turned a deaf ear to the very vocal concerns of the U.S. futures exchanges. For instance, changing trends and cost concerns have dramatically reshaped the world financial markets, yet the CFTC's strategic plan fails to even mention the concept of cost-benefit analysis for regulation and ignores, to a great extent, the development of electronic trading systems. Omission of these topics from the strategic plan demonstrates a lack of recognition that costly and outdated regulation works to drive business away from the U.S. exchanges to alternative market places. Those over-the-counter and overseas exchanges are very real alternative markets and they severely threaten the long term vitality of U.S. exchange markets, which, in turn, threatens our ability to provide the economic benefits of risk management and price discovery.
Important questions should be asked about the Commission's plan as a result. Why has the Commission failed to address global competitive issues in the strategic plan when there is such widespread understanding that the current U.S. regulatory structure puts the U.S. futures exchanges at an unfair competitive disadvantage? Why does the Commission ignore the radical upheaval in futures regulation created as a result of the CFTC's own use of the exemptive powers granted in 1992 and the February 1997 Supreme Court decision in the Dunn case? The CFTC plan doesn't acknowledge that futures contracts in the U.S. are now being traded legally in non-exchange environments. That major change should affect the CFTC's strategies over the next 5 years. It certainly impacts the CBOT's. Yet there isn't any identification of that as an issue and no resulting CFTC activity responds to the results. For instance, there is no indication that the agency monitors compliance with terms of the 1993 swap exemptions or looks at proprietary electronic trading systems.
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In our comment letter, we recommend several changes to correct the plan's failure to address competitive concerns. First, the Commission should expand its mission statement. It should incorporate within its mission a role ''to promote the long term vitality of the U.S. futures markets''. Second, the Commission should adopt as an objective that it will ''Promote the competitive strength and long term vitality of the U.S. futures markets globally through reassessment of the current regulatory structure and elimination of costly, outdated or unnecessary regulation.'' Finally, the Commission should set out a plan to undertake an immediate and thorough reevaluation of its current regulatory structure to achieve this mission and objective, with full industry participation.
A related concern is that the Commission has not defined its mission and objectives regarding the over-the-counter markets. For example, the plan is silent on what role, if any, the Commission sees for itself in regulating the over-the-counter markets for commodity options, yet it is currently contemplating lifting the ban on agricultural trade options. As the Commission defines its strategic mandates, now is the time to describe how the Commission rationalizes these as well as other developing risk management tools within a common regulatory structure. The Commission should also address how it plans to respond to growing interest in using exchange-style clearing systems for over-the-counter derivatives transactions, which could also have implications for market users who rely on the Commission's Part 35 exemption for swaps.
The broad scope of the agency's mission needs to be recognized as the first step in strategic planning. Without that recognition, the plan cannot define the Commission's intended role and responsibilities and will offer little value to the Commission in identifying its required activities during the budget process or as the Commission decides how to allocate its limited resources.
The plan also ignores the importance of self-regulation. The exchanges offer time-tested self-regulatory protections, yet this is not acknowledged in the plan. The exchanges are strongly motivated by self-interest to act as responsible SROs in all areas of our business activities, ranging from contract design to offering efficient and competitive markets that are free from abuse. If we do not fulfill our regulatory responsibilities, we could damage our reputation and lose business. Self-regulation is effective. It allows the Commission to devote its limited resources to activities outside the reach of the self-regulatory processes. The Commission, however, has ignored the model of self-regulation subject to Commission oversight that is a cornerstone of the Commodity Exchange Act. To the contrary, the Commission sets out in the strategic plan a number of surveillance activities that duplicate the very functions that the exchanges perform. Such duplication of effort is not in keeping with the spirit of the Government Performance and Results Act.
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Finally, we would like to address the Commission's role in international initiatives through its new Office of International Affairs. The Board of Trade supports the Commission's efforts to promote regulatory coordination among foreign regulators through its participation in the International Organization of Securities Commissions and other international groups. Through these efforts, the Commission can seek to resolve regulatory conflicts across jurisdictions, eliminate anti-competitive barriers and promote market efficiency. Importantly, these efforts provide the Commission an opportunity to learn more about foreign regulatory structures, including processes developed to meet global needs in other markets. This dialogue with other regulators could possibly provide a mechanism to improve the U.S. structure, just as foreign regulators will learn more about the U.S. model.
The CFTC strategic plan, however, is silent on how the Commission plans to involve industry participants in its international projects. This silence raises significant concerns, especially in light of the precedent of minimal industry consultation demonstrated by the Commission in developing its strategic plan—a process in which industry consultation was required by law. Industry participants should have input into any Commission initiative to establish common regulatory standards across jurisdictions, just as they do domestically through the public comment process for Commission rulemaking. The Commission should identify as part of its broad strategy how it intends to consult with interested parties during the formative stages of its international projects. This becomes especially important since Chairperson Born, during her appearance before the Subcommittee last week, identified as a CFTC goal to increase the level of regulation for the markets abroad.
The Chicago Board of Trade believes the strategic plan developed by the Commission is the beginning of an important and ongoing process, a process which should be interactive with stakeholders as the authors of the Government Performance and Results Act intended. A key to accomplishing that, is developing an accurate and up-to-date understanding of the market environment which exists within the global risk management industry. The Commission must reevaluate its existing regulatory structure in response to the trends reshaping the financial markets and the competitive challenges they pose to the U.S. futures industry, or the Commission, too, will struggle with its own viability as the U.S. exchanges it regulates become smaller and less competitive.
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CHICAGO BOARD OF TRADE
November 3, 1997
Congressman Thomas Ewing
Chairman, Risk Management and Specialty Crops Subcommittee
1301 Longworth House Office Building
Washington, DC 20515
DEAR CHAIRMAN EWING:
I would like to take this opportunity to correct some testimony I provided during your October 29, 1997 hearing on the Commodity Futures Trading Commission's strategic plan which was produced in response to the requirements of the Government Performance and Results Act.
In the questioning, you asked several questions of the first panel of witnesses regarding whether various opportunities to comment on the CFTC's strategic plan had occurred. Unfortunately, I misunderstood your question regarding the timing of when we were contacted and how we were contacted. I want to clarify that the Chicago Board of Trade was not offered any opportunity to comment on the plan while it was being drafted. The CBOT did, however, submit a 10-page letter in response to the Federal Register request for comments. I included that letter as an attachment to my written testimony which I hope will be in the record of the hearing.
I apologize for any inconvenience this misunderstanding might have caused and hope that the record can accurately reflect the Chicago Board of Trade's actions on this matter.
Sincerely,
PATRICK H. ARBOR
Testimony of John G. Gaine
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Mr. Chairman and members of the subcommittee: My name is John G. Gaine and I am president of the Managed Funds Association (MFA). MFA appreciates the opportunity to provide testimony to you on the Commodity Futures Trading Commission's strategic plan as developed under the Government Performance and Results Act of 1993.
The MFA, a national trade association of more than 690 members, represents the managed futures, hedge funds, and fund of funds industry. MFA membership is composed primarily of financial and commodity trading advisors, pool operators and trading managers who are responsible for the discretionary management of the vast majority of the estimated $28 billion currently invested in managed futures, as well as significant amounts invested in hedge funds and other financial and commodity-linked investments. MFA membership also includes the sponsors, investment managers and brokers for substantially all of the financial and commodity pools marketed on either a public or private basis in the United States.
Our members are participants in both the over-the-counter markets and the designated contract markets. As managers of funds provided by their clients, MFA's members act as purchasers of futures industry services and thus are the indirect beneficiaries of market protection rules under the Commodity Exchange Act. Thus, those sections of the Act and those activities of the Commission that regulate the functioning of, or participation in, the markets have an important impact on commodity pool operators and commodity trading advisors as representatives of their clients.
The business operations of MFA members are subject to regulation under the Act by the Commission and, pursuant to delegation of certain regulatory functions under the Act, by the industry's self regulatory organization, the National Futures Association. The Act regulates the business activities of commodity pool operators and commodity trading advisors through registration, disclosure, recordkeeping and reporting requirements and regulates the activities of the commodity brokers and commodity exchanges through which their trades are executed and cleared. The NFA regulates the sales, promotional, registration and operational activities of these entities. Each of the exchanges also regulates trading activities on their markets. In addition, the offer and sale of interests in commodity funds are subject to both the Securities Act of 1933, requiring registration of interests sold publicly and mandating disclosure requirements, and the Securities Exchange Act of 1934, as well as each of the 50 states' securities laws. In short, both the activities of our members and the products they offer are more stringently regulated than any other product in the world. There has been no greater advocate of elimination of unnecessary, burdensome or duplicative regulation of our markets than the MFA. Accordingly, we are delighted to be here today.
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The goals of the Results Act to promote efficiency and accountability in Federal Government agencies and programs is an important one. We strongly support it. The discipline and introspection involved in developing a five-year strategic plan will serve to direct the Commission's focus and the allocation of resources. We note favorably that the Commission has included for each of its primary goals the desired outcome: Appropriate level of regulation. The Commission also included the related activity: Review and adapt regulations to the evolving conditions and changes in the industry.
The Results Act requires that agencies solicit and consider the views and suggestions of those entities potentially affected by or interested in such a plan. In the recent past, MFA has offered numerous views and suggestions to the Commission either in response to requests for input from the Commission or spontaneously. Some of MFA's recommendations have, in fact, already been implemented. We note that the Commission is reinstating the Financial Products
Advisory Committee under the Chairmanship of Commissioner David Spears. In the past, this advisory committee (along with other advisory committees) has been an invaluable vehicle to communicate and develop the views and suggestions of the affected industry to the Commission. We strongly support reinstatement of FPAC.
Chairperson Born in her testimony before you last week stated that one of the Commission's top priorities this year has been to ensure that the agency is responsive to the competitive challenges facing the U.S. futures industry and its customers while at the same time preserving important customer protections and market safeguards.
In my view, this statement sets forth in general terms the major challenge the Commission needs to address in its work.
For much of the constituency I represent, ''competitive fairness'' or ''level playing fields'' are complex and difficult goals. As I pointed out, my membership is heavily regulated by a number of regulators. Regulations of one regulator can sometimes create competitive imbalances. Regulations of several regulators can create sometimes duplicative and even inconsistent regulations. It is, accordingly, with great interest I noted in the CFTC's strategic plan that the Commission will work at the Federal level with the President's Working Group on Financial Markets to further regulatory consistency. The Commission will involve itself similarly with state and foreign regulators.
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The Commission is our primary regulator and should appropriately be the lead agency in promoting competition and consistency through regulations yet maintain public protections.
The Commission's recognition that we have a two-tiered market place—of which the trading volumes and investment dollar are predominantly institutional is a great step forward in achieving a healthy, competitive market place.
Our membership needs access to customers as well as access to markets without unnecessary regulatory obstacles. On the one hand exchanges should be able , subject to Commission oversight, to fashion their markets and rules in ways that take into account this two-tiered marketplace—and thus be attractive and competitive avenues for institutional trading. On the other hand, MFA's membership should have access to customers to trade in Treasury Amendment and other over-the-counter markets on a reasonable, competitive regulatory basis. Commission action in the swaps exemption, Rule 4.7 and proposed rule change to Rule 1.55 are all examples of this. We think these are examples of the Commission's willingness to ''review and adapt regulations to the evolving conditions and changes in the industry.''
We believe the Commission by word and deed is demonstrating its concurrence with the above general thoughts which MFA believes are fairly encompassed in the Commission's strategic plan. We look forward to continue working with the Commission toward these goals. I might add, Mr. Chairman, that your recent work and the work of your Committee in connection with possible amendments to the Commodity Exchange Act have served to further the goals of the Results Act in focusing attention on the appropriate role of the Commission as a regulator. You and your staff are to be commended.
Statement of Paul J. Georgy
I am Paul Georgy, president of Allendale, Inc. Thank you for inviting me to comment on the strategic plan developed by the Commodity Futures Trading Commission and submitted to congress for the years 1997 through 2002. I am appearing hear today on behalf of and as president of the National Introducing Brokers Association.
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The NIBA is a professional organization of futures brokers. Our membership includes introducing brokers whose primary business focuses on price risk management programs for the farming industry, as well as those who specialize in financials, metals, energies and other commodities. Many of our members offer crop insurance, or buy and sell cash grain as well as transacting futures and option business. All of our members are required to pass a national examination to be licensed, periodically undergo ethics training, be registered by the CFTC and the National Futures Association (NFA) and are subject to frequent audits by regulators.
The NIBA was not consulted by the Commission before they developed their ''strategic plan''. Instead the plan appears to be quite general and more descriptive of the functions and methods currently in use at the commission. While we recognize it is impossible to anticipate each event the Commission will be faced with in the coming years and the response needed to deal adequately with those events, we know past years have brought ''hot issues'' to the commission which were dealt with slowly, ineffectively or not at all. The NIBA believes the commission should work more closely with industry participants when enacting policy or making major decisions. This could be done through the use of more roundtables, public hearings or small discussion groups. This communication will assure the industry is responsive to change, the changes are necessary and cost effective, and the registrants are continually being monitored for compliance. Public trust in the market place as a whole will be strengthened and everyone will benefit.
The commission also is slow to act in dealing with the ''non-registrant'' who commits an abuse. The Commission feels an entity or person, who is not registered with them or the NFA, can not be prevented from defrauding the public. This argument is analogous to allowing a person who drives an automobile without licenses and has an accident, to continue to drive, because the licensing body has no authority over them. Obviously, this is ridiculous and should not be happening in our industry because ultimately the entire futures and options industry suffers.
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The NIBA believes Congress should empower the Commission with the authority and the jurisdiction to do its job and hold it accountable. As one example of how slow the commission can be to respond to a disaster in the making, we can look to the commonly called ''hedge-to-arrive'' contracts transacted in the breadbasket of our nation. They hesitated to shut down offenders partially because they did not know if these contracts fell within the definition of ''futures'' and were therefore, subject to their jurisdiction. Not until many farmers and grain elevators experienced financial ruin did the Commission finally issue a position paper. By the year 2002 there will be many more products available to the U.S. investing public such as derivatives and contracts traded on foreign exchanges. The Commission must know it has the right, the power, the finances and the duty to regulate trading in these markets, for the protection of the public.
The Commission essentially states in its ''strategic plan'' that it is doing the best it can with the financial and personnel resources it has. The NIBA believes Congress should review the responsibilities and duties of the Commission and bring its funding into line with all other regulatory bodies. Then the Commission can attract and keep the best employees, can remain current with technological advances and can provide our industry with a highly professional level of regulation. At the same time, we believe the Commission could economize on its resources if it allowed registrants such as the exchanges to run and improve their business with a minimum of interference. It should be the job of the industry registrants to provide innovative, effective methods for the public to use the market place. It should be the job of the Commission to see that these methods are developed for the good of the public. It should be the job of the Commission to act swiftly to enforce the guidelines set by Congress. It should be the job of the Commission to be more responsive by enacting policies and procedures which allow better communication with its registrants.
In conclusion, the NIBA believes that:
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The Commission must be accountable for its actions, thus operate like a business in a business environment.
The Commission must be empowered with the authority to act swiftly in regulatory issues of registered or non-registered individuals.
The Commission should be more responsive to the objectives of the industry participants and enact policies and procedures which allow for better communication with registrants and other participants, so that we may meet our common goal of providing the public with the most professional service we can.
Thank you for the opportunity to appear before you today in behalf of the NIBA. We are ready to participate in any further meetings or assist in any way on this matter.
Testimony of Kendell Keith
The NGFA is the national nonprofit trade association of about 1,000 grain, feed, and processing firms that own and operate 5,000 facilities that store, handle, merchandise, mill, process and export more than two-thirds of all U.S. grains and oilseeds utilized in domestic and export markets. Founded in 1896, the NGFA's members include country, terminal, and export elevators; feed mills; cash grain and feed merchandisers; commodity futures brokers and commission merchants; processors; millers; and allied industries. The NGFA also consists of 36 affiliated state and regional grain and feed associations whose members include more than 10,000 grain and feed companies nationwide.
We appreciate the opportunity the Risk Management and Specialty Crops Subcommittee has given our organization to comment on the Commodity Futures Trading Commission's strategic plan which is mandated under the Government Performance Review Act.
The NGFA represents a large proportion of commercial hedgers who use future markets for pricing and risk management. As such, our organization takes an active interest in oversight of regulated exchanges. We supported the establishment of the CFTC as an independent regulatory body when it was created in 1974. We have remained supportive of an independent CFTC since that time and have actively participated in many regulatory proceedings undertaken by the agency. Most recently, we have taken particular interest in delivery issues that can affect cash and futures market convergence and have urged the CFTC to lift the current ban on agricultural trade options to enable the marketplace to provide additional risk-management tools to commercial firms and farmer-customers.
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As the Federal Agriculture Improvement and Reform Act moves U.S. agricultural policy into more open and free markets, the utilization of, and need for, effective risk-management tools will be even more important. Thus, we believe the interest in futures and options markets—and the regulatory environment in which they function—will expand among agricultural organizations.
Overview of CFTC Strategic Plan
The draft vision and mission statements of the CFTC's strategic plan appear to be consistent with the mandate of Congress. The NGFA concurs in, and supports, the mission: ''to protect market users and the public from fraud, manipulation, and abusive practices related to the sale of commodity futures and options, and to foster open, competitive and financially sound commodity futures and options markets.'' The question is, then, what approach or mechanisms will the CFTC use to achieve this vision.
There is no question that there is a strong need for continued oversight of the regulation of futures and options markets. An organized and effective CFTC should play a key role as oversight regulator in this regard to safeguard the integrity of the marketplace.
Further, we commend the CFTC for articulating the following key agency goals: covering the marketplace, market users and the futures market environment. We agree that the number one goal of the CFTC should be to ensure the development of a properly functioning marketplace which fulfills its role in price discovery and risk transfer by accurately reflecting supply-and-demand fundamentals and is free from corrupt or unduly disruptive activities. The CFTC's second goal—to protect market users through compliance activities—is appropriate and should be implemented through enforcement authority and market oversight. The CFTC's third goal—ensuring a sound trading environment—closes the regulatory loop by facilitating the development of a flexible regulatory environment that relies on self-regulation, but is supported with active intervention when necessary.
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We understand the CFTC's statements concerning the need to maintain or enhance its data collection, technology and human resource capabilities. The complexity of commodity futures regulatory oversight requires expertise from professionals with formal legal, economic and financial-management training. While sufficient education is needed, the agency also needs the resources to retain a reasonable staff tenure. Experience is needed for the CFTC to make proper judgments as to when and how it should exercise its oversight authority.
The NGFA is also pleased that the CFTC's strategic plan continues to place a positive focus on the role and necessity of market price discovery. From an agricultural perspective, it is impossible to understate the importance of the role futures markets play in determining price discovery for grains, oilseeds, livestock, fiber and other agricultural commodities. In focusing on the three outlined goals, the CFTC will ensure that fair and adequate price discovery will continue to be a cornerstone of the domestic exchanges.
Finally, we support the CFTC document's recognition of the need to continue to oversee the entire market structure and ensure a ''level playing field'' for market participants. The CFTC's statutory mandate is clear. If domestic markets are to grow and expand, the primary focus of the Commission must continue to serve as a disinterested third party that sets the ground rules for those wishing to participate in the markets.
Areas of Concern with CFTC strategic plan
While agreeing with much of the ''strategic plan,'' the NGFA also has some concerns. Recent legislative initiatives considered by Congress were directed at redefining the level of regulation needed by the CFTC, how much and what types of regulations should be managed by self-regulatory organizations (SROs), and whether, in fact, the overall level of regulation might be reduced without significantly lessening the protections offered to market users.
In an April 21, 1997 editorial in the Journal of Commerce, Federal Reserve Chairman Alan Greenspan offered some sage advice on market regulation that we believe is very appropriate to futures market regulation. Mr. Greenspan stated: ''It is important to recognize that no market is ever truly unregulated, in that the self interest of market participants generates private market regulations. Counterparties thoroughly scrutinize each other, often requiring collateral and special legal protections; self regulated clearing houses and exchanges set margin and capital requirements to protect the interests of the members.'' Thus, there is a financial self-incentive for markets to self-regulate to a large extent, with or without the presence of a governmental overseer. Reliable market performance and guaranteed contract performance are features of organized exchanges that attract new customers and retain existing ones.
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The CFTC strategic plan falls short of accepting this concept. The document's Summary of Outcome Objectives and Activities for goals one and two do not reference or mention the existence of self-regulatory organizations, let alone their importance. Goal number 3 only reference SROs in the context of reviewing and auditing the adequacy of recordkeeping, financial practices and existing SRO enforcement activities. Even more unsettling, this particular section on SROs ends with the recommendation that the CFTC conduct direct audits of clearing organizations and all market participants to ensure compliance with existing rules. While rigorous review is an important feature of the regulatory process, the NGFA is concerned that this provision would lead to the duplication of a number of existing SRO activities which, in turn, would lead to increased costs and decreased efficiencies.
In his opinion piece, Greenspan went on to say: ''Thus the real question is not whether a market should be regulated. Rather, it is whether government intervention strengthens or weakens private regulation and at what cost.'' We agree with this assessment. Unless the oversight agency properly defines how it will function and which regulatory functions are clearly delegated to SROs, the overall regulatory structure will not make optimal use of resources.
We believe this ''strategic plan'' could be strengthened by greater clarity in the division of roles and responsibilities of the CFTC and the various SROs—the exchanges and the National Futures Association. At a time when the CFTC has scarce resources to oversee growing futures markets, greater clarity of roles should lead to more efficient utilization of manpower. Greater clarity could also avoid duplicative efforts where the CFTC and SROs are performing the same functions.
The CFTC and its staff will never be as efficient in performing some regulatory functions as private markets. Markets and market conditions can change quickly and those most directly involved in those markets will have access to the most current and relevant information. We would urge the CFTC to aggressively pursue participation by the SROs in helping to add greater clarity to these roles. More clearly defined lines of regulatory responsibilities should lead to better performance and accountability.
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The CFTC strategic plan also needs more input from the entire regulated community. As the General Accounting Office noted in its testimony, ''the draft plan was made available to stakeholders late in the process. As a result, the plan reflects limited consultation with stakeholders. Also the plan does not discuss how the CFTC will incorporate stakeholders' views in the development of future plans.''
We also have concerns that this ''strategic plan'' not be used to justify an expanded role, or ''mission creep,'' by the CFTC. Both of the following issues are at stake: (1) How much regulation is adequate; and (2) which regulatory functions should be performed by the CFTC. Duplication is not just a waste; it can be counterproductive if ''excessive'' market oversight leads to sloppy self-regulatory operations. At its worst, it can have the unintended effect of slowing or even reversing market growth.
The issue of how extensive CFTC oversight has to be to carry out the mandate of Congress is a matter that Congress itself should judge. Markets are becoming more sophisticated. While a ''regulated'' exchange must remain a meaningful term in the context of protection offered by the U.S. government, there should be periodic critical reviews of CFTC activities to assess need, benefit and cost.
Conclusion
The performance document concept set in motion by the Government Performance Review Act was long overdue. It is valuable to the regulated community to have government agencies periodically undertake the process of developing such a document. In the case of the CFTC, this document is a good start.
Of course, like all first drafts, it can use some additional work. The CFTC should take steps to utilize the input of the regulated community and market stakeholders in further developing the plan. Producer groups, agribusinesses, traders, end users and the exchanges themselves must be able to provide input into the development of this document, which will guide the regulatory activities of the Commission.
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It is also important that this document not become a blueprint for uncontrolled agency growth. We look to this Committee to ensure that the document is used, first and foremost, as a tool for better management.
Testimony of James H. Lindau
Mr. Chairman and members of the subcommittee: Good afternoon. I am James H. Lindau and I am chairman of the National Grain Trade Council, on whose behalf I appear before you today. I am also president and chief executive officer of the Minneapolis Grain Exchange and earlier in my career I was in charge of The Pillsbury Company's grain merchandising business. I have spent nearly 35 years working in areas related to commodity marketing and markets.
The National Grain Trade Council is the national trade association representing futures markets and their commercial market participants, making it a unique voice in discussions over the regulation of futures and options. The Council's membership includes boards of trade, grain exchanges, national trade associations, grain merchandisers, processors, futures commission merchants, transportation firms, and banks.
It is a pleasure to have the opportunity to share with you the Council's views on the Commodity Futures Trading Commission's strategic plan. This plan was published in the Federal Register of September 16, 1997, as the CFTC sought input from industry stakeholders in accordance with the Government Performance and Results Act. The Council's testimony will first review the nature of the marketplace today for futures and options. We will then share our recommendations for change in the nation's regulatory structure for futures and options. I will close with a review of the CFTC's strategic plan.
Before delving into the subject of today's hearing, which is the CFTC's strategic plan, I think it is worthwhile to first step back and look at the broader picture.
Today's Marketplace
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The trading environment for futures and options has changed considerably since the first futures contract began trading in 1859 and since the passage of the Grain Futures Act in 1922. Up through the 1960's and 1970's, futures markets were primarily used for agricultural products such as corn, soybeans, wheat, and so forth. The world changed in 1977 when the Chicago Board of Trade began trading in U.S. Treasury Bonds. Today, agricultural futures and options represent 19 percent of the total volume of futures and options.Futures and options volume attributed to the categories of grains and oilseeds, food and others, and livestock and meat totaled 94,264,379 contracts for the 1996 calendar year. Total futures and options volume traded in 1996 was 499,375,963. traded on United States exchanges.
The volume in today's futures and options markets is dominated by financial instruments and the nature of those who use the market has also changed. While the industry has always tried to develop a broad retail-type business, the reality is that most market users are large sophisticated users. Market volume attributed to the retail trade is only about 5 percent. The agricultural markets provide the best examples. Today, perhaps 5 to 10 percent of the Nation's agricultural producers have used futures and options to manage their risks. That may not necessarily be all bad. The key element for producers is price discovery—knowing that the price they hear quoted in market reports is arrived at in a fair and open environment. Most producers rely on their local country elevator for advice and marketing assistance. That local elevator who buys the producer's grain usually turns around and offsets his risk in the cash market with futures or options.
In the exchange-traded financial markets, the nature of the participants is even more striking. More and more people are turning to investment management professionals. Over the last decade, from 1986 through 1996, the amounts of money under management has grown from less than $2 billion to nearly $26 billion. These sophisticated users are continually in search of better, more efficient, and more cost-effective ways to use the market. This search has yielded a new array of risk management tools including swaps and other over-the-counter products.
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So, as we discuss the CFTC's strategic plan we should keep in mind that the nature of the market place and the market user have changed a great deal. What implications does this hold for the nation's regulatory structure for risk management instruments?
National Regulatory Structure
Futures and options trading on exchanges in the United States is regulated by at least one of three entities. Trading of standardized futures and options contracts are subject to self-regulation by the exchanges that provide these markets. The National Futures Association handles much of the regulation of futures industry professionals, including such items as registration, retail sales practices, business conduct and financial standards.
The United States has developed an intricate, pervasive regulatory structure for exchange-traded futures and options and today's hearing provides an opportunity to examine the philosophy behind this regulatory structure.
Alan Greenspan, the chairman of the Federal Reserve Board mused on the virtues of self-regulation.Greenspan, Alan, op-ed *The Virtue of Self-Regulation,* Journal of Commerce, April 21, 1997. Copy attached. in a speech he made earlier this year. I would like to quote portions of the speech:
''I have never lost sight of the fact that government regulation can undermine the effectiveness of private market regulation and can itself be ineffective in protecting the public interest.
The real question is not whether a market should be regulated. Rather, it is whether government intervention strengthens or weakens private regulation, and at what cost.''
As we move into a new century, the market stabilizing private regulatory forces should gradually displace many cumbersome, increasingly ineffective government structures.
This is the likely outcome since governments, by their nature, cannot adjust sufficiently to a changing environment, which too often veers in unforeseen directions.
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I am not here today to suggest that we should do away with the Commodity Futures Trading Commission. I am here to say that the National Grain Trade Council believes the current regulatory structure is in need of change. We believe a wholesale review of the regulatory framework is important to the long-term health of the risk management marketplace. The key to success is achieving a framework under which there is a rationalization of regulation that reduces duplication and adds integrity to the system. It should be a framework where the cost of regulation is not a deterrent to hedging business risks in commodities or financial instruments.
The Council believes there are four key aspects to regulating futures, options, and over-the-counter derivatives: (1) Federal oversight; (2) minimal duplication of effort; (3) efficient, but meaningful regulation; and (4) some measure of parity in the regulation of similar on and off-exchange instruments.
Federal Oversight: I firmly believe the role of the CFTC should be one of Federal oversight and that exchanges should continue to be the front line regulator of the markets. There is no question that there is a legitimate role for regulation in the marketplace. Regulation can bring a measure of confidence in the use of the market. However, regulation for the sake of regulation misses the point. There is some concern that a number of CFTC regulatory requirements are imposed without any regard to the market cost. The Council recommends that to better rationalize regulation, the role of the Federal regulator should be targeted to oversight functions. Conceptually, such a framework would limit the role of the CFTC in areas like registration, reparations, and arbitrations.
Minimizing Duplication of Effort: The Council believes it is time to change the regulatory structure so it does not foster and encourage duplication of effort between the private and public regulators. We would like to see more clarity between the responsibilities of the CFTC, National Futures Association, and the exchanges. The current system tends to promote duplication of effort in areas of audits and investigations and contract design, in particular. Market participants are frustrated with a system that results in identical investigations undertaken separately by the exchange and the CFTC. Audits and investigations are time consuming and costly for all. Separate, but identical actions only magnify those costs and create confusion. Ideally, the front line of audit and investigation authority should lie with the self-regulatory organizations and the CFTC would have strong authorities overseeing exchange enforcement performance. For self-regulation to work, there must be confidence in the system that would require a careful examination of the authorities and responsibilities of each of the regulatory entities.
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Efficient, But Meaningful Regulation: The Council believes some steps can be taken to streamline the regulatory structure and yield efficient, but meaningful regulation. Rationalizing regulatory efforts, making them more efficient, should not lower customer safeguards. Toward that end, the CEA should specify the requirements for obtaining and maintaining a contract market designation. The Federal regulatory agency, in turn, should be given adequate disciplinary tools to give contract markets an incentive to maintain strict compliance with the charter for contract market designation. With those authorities in place, certain functions could be left to the self-regulatory organizations or the NFA. More clarity in the agency's role would help achieve this goal.
Regulatory Parity: Council members believe the regulatory structure needs to treat comparable instruments with some level of equity. The growth of exchange and non-exchange markets worldwide is testimony to the fact that risk management markets continue to grow and can take place anywhere. There remains a difference in the regulatory scrutiny of on and off-exchange products. There should be more clarity that allows exchange markets to respond to demand and design contract alternatives for the market and open competition.
Mr. Chairman, as I reflect on these four points it underscores the need for legislation to clarify many of the suggestions which are crucial to developing an appropriate strategic plan. We compliment you for your hard work earlier this year in bringing H.R. 467 before the Subcommittee. I hope this legislation will be a priority for you when the second session of the 105th Congress convenes next year.
We believe liquid, efficient exchange markets are vital to the economic well-being of the nation.
We cannot as a society jeopardize the future for exchanges with unnecessary costs. The pressures facing futures exchanges were illustrated by a recent news article.Lucchetti, Aaron, *Futures Firms Weigh Starting New Trade Plan,* Wall Street Journal, August 29, 1997. which reported that a group of brokerage firms is considering launching a new electronic-trading system to compete against the exchanges' large financial futures contracts. The brokerage firms say their discussions are a gesture to the Chicago exchanges that the exchanges need to address costs and technology. Specifically, the article says the brokerage companies are calling on exchanges to reduce clearing and trading fees, which make up between 30 and 50 percent of the brokers' external costs. This clearly demonstrates the severe cost pressures facing the entire industry.
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Another major challenge for exchanges is the burgeoning trade in off-exchange, over-the-counter financial products that often mirror futures contracts. The pressure on exchanges to meet such competitive challenges and to keep costs low show why they are interested in reforming the current regulatory structure.
As an exchange CEO, let me say I don't think it is in the nation's best interest to see the Minneapolis Grain Exchange or the Chicago Board of Trade or the Kansas City Board of Trade go the way of the Chicago Stockyards or the Kansas City Stockyards.
The CFTC's strategic plan
Now that I have touched on nature of the marketplace and the need for reforming the current regulatory structure, let me turn to a few comments about the CFTC's strategic plan.
The CFTC has looked to the Commodity Exchange Act in identifying its mission as: ''To protect market users and the public from fraud, manipulation, and abusive practices related to the sale of commodity futures and options, and to foster open, competitive, and financially sound commodity futures and option markets.''
As Council members read through the balance of the agency's strategic plan they come away with a feeling of uneasiness. Let me highlight a few general concerns that our members have voiced.
1. Clarity. We would like to see more clarity in exactly how the CFTC sees its role. We believe the CFTC needs to focus on its core responsibilities—deterring fraud and manipulation—and doing the best possible job it can in these areas. Clarity has many virtues. A clear goal can lead to clear assignments. Clear assignments in turn can result in greater accountability. And, accountability leads to increased efficiency.
2. Expansiveness. Our sense is the strategic plan has an expansive view of the CFTC's future. We worry when a government agency relies a great deal on words like ''promote'' and ''foster''. We worry that a lack of clarity could mask an expansive agenda that will require more resources—funding and staff—with few benefits.
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The nature of the strategic plan reminds many Council members of the plans they prepare to grow their business. Government, though, is not a business. While businesses need to grow to be successful, the same logic does not hold true for government regulation. In fact, a definition for success in government could include downsizing and how to do more with less.
3. Overregulation. We need to guard against unnecessary regulation which, by definition, creates an economic drag by imposing higher costs for doing business. More regulation is not always the correct answer. Regulation needs to be clearly targeted and focused.
The CFTC's strategic plan, the issue which brings us here today, presents a good opportunity to first take a broad look at the changing nature of futures and options markets and those who participate in the market. The Council believes changes in the regulatory structure are needed to streamline regulation and minimize duplication of effort.
We respect the effort the Commodity Futures Trading Commission has invested in its strategic plan. We recommend the agency take a fresh look at its plan bearing in mind Chairman Greenspan's observations on the virtues of self-regulation. We believe the plan must provide greater clarity, limit the tendency toward expansiveness, and guard against overregulation.
Statement of R. Patrick Thompson
Mr. Chairman, and members of the committee, my name is R. Patrick Thompson. I am President of the New York Mercantile Exchange (NYMEX or the Exchange). NYMEX is the world's largest exchange for the trading of energy and metals futures and options contracts. On behalf of the Exchange, I wish to thank you for the invitation to participate in today's hearing on the Commodity Futures Trading Commission (CFTC or the Commission) strategic plan ''Vision and Strategies for the Future: Facing the Challenges of 1997 through 2002.''
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We strongly support your efforts, as the committee with oversight over the Commodity Exchange Act (Act), the CFTC, and our self-regulatory operations, to exercise your responsibility to re-examine the role and impact of Federal regulation of commodities markets and how the regulatory agency interacts with and responds to the industry and general public.
As you have heard during the debate surrounding the Commodity Exchange Act legislation over the past year, the risk management/price discovery business has undergone a dramatic evolution over the last 10 years. In the case of energy, the growth of the over-the-counter markets, commodity swaps, Brent oil ''forwards,'' or other new instruments was the driving force that led to the dramatic change in commodity oversight that the most recent legislative revisions to the Act, the 1992 amendments, embodied. No longer were all ''futures contracts'' required to be executed on or subject to the rules of a contract market. Under the 1992 legislation, the CFTC was granted the authority to exempt from the exchange trading requirement, agreements and transactions that may otherwise have been subject to the Act. The CFTC exercised that exemptive authority shortly after the passage of the 1992 amendments, and, as a result, the growth of the over-the-counter markets has greatly accelerated. The Commission's exemption procedures amounted to a dramatic granting of ''regulatory flexibility'' to the OTC marketplace.
While it is not the purpose of this hearing to discuss and debate particular legislation, the experience of the Exchange based on legislative and market changes over the past few years forms the foundation for our observations on the Commission's strategic plan. In the legislative debate of the past year, great (and, we believe, appropriate) emphasis has been placed on the need for the market oversight (position limits, large trader reporting and surveillance) that the centralized markets provide. In that regard, we believe that the CFTC's statutory role is appropriate and beneficial in areas that provide oversight and uniform standards aimed at protecting the ongoing financial integrity (such as minimum capital requirements, financial audits and segregation of customer funds), market integrity (such as speculative position limits and large trader reporting), trade practice integrity (such as anti-fraud provisions), and international cooperation (information sharing among the Commission's foreign regulatory counterparts) in the marketplace. Indeed, we believe the CFTC's focus should be on preventing fraud and manipulation of the markets, and that the agency should focus its efforts on correcting deficiencies in these areas. The emphasis placed by the Commission's plan in this area is appropriate and, as we have said in previous testimony before this committee, we see no need to alter that situation.
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However, the current state of the marketplace is one in which exchanges are compelled to continue to operate in a regulatory regime that, in essence, favors transactions that are conducted off of centralized markets and outside of the scope of the regulatory structure. NYMEX strongly believes that the U.S. exchanges provide the deepest, most liquid markets—that, in turn, create the most efficient price discovery and risk shifting for the financial products traded on them. We strongly suggest that Congress and the CFTC, in determining the appropriate regulatory environment for these markets, should use all means to assure that such transactions can be executed without undue cost or regulatory delay, on the centralized markets where the exchanges can conduct their market, financial, and trade practice integrity oversight. That belief, and the current regulatory dichotomy under which exchanges must operate forms the backdrop for our observations on the Commission's strategic plan.
As we examined the strategic plan, it became apparent that the core theme of the document was a continuation of the ''status quo,'' with a laundry list of operational obligations, but failing to address the need to remove regulatory hurdles which hamper exchange responses to market driven product needs. From the perspective of a regulatory agency with established procedures, that is understandable, but from the standpoint of a market challenged by global competitors, with the need to respond quickly to a demanding customer base, the strategic plan places little emphasis on what the Exchange views should be a primary strategic focus—regulatory flexibility—to reduce the regulatory burden on product and market initiatives that do not pose a regulatory threat, but respond to a market driven need.
The strategic plan, on page 18, addresses the issue of regulatory flexibility as Point 4 under Outcome Objective 3 of Goal No. 3, ''Foster open competitive, and financially sound markets.'' Point 4 in the strategic plan states under the activity section that the CFTC is to ''Provide exemptive, interpretive, or other relief as appropriate to foster the development of innovative transactions, trading systems, and similar arrangements.''
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CFTC Chairperson Born has spoken often in public and before this committee on the need to examine and identify regulatory burdens and streamline the regulatory process. Ironically, the strategic plan provides no detail in this area, nor does it imply a commitment by the CFTC do so. In fact, the direct experience of the Exchange in seeking Commission approval of innovative rules and procedures has been one of frustration. The turnaround time statistics frequently provided by the Commission on contract and rule submissions belie the reality. The average is kept low by the large number of routine filings that exchanges are still required to make. In those instances, the CFTC may review them quickly, and the short time frame demonstrates that there was little or no need for their input because the exchange had properly thought through, and crafted the rule amendment so as not to contravene the Act or the Commission's regulations. What gets lost in the averaging process are the number of times that the CFTC delays innovative rule proposals or forces them to be re-crafted and thereby diminishes their value. An example of CFTC's regulatory inflexibility regarding innovative rule proposals is embodied in a proposal by NYMEX to adopt post close trading procedures geared to allow for the filling of unfilled customer orders which were executable during the closing range period of the market. The post close trading rule was submitted to the CFTC on September 30, 1992. Over the next year, the CFTC sent the rule back to NYMEX three times with additional questions and raised additional issues. While the CFTC did not reject the submission outright, the ongoing process of having to answer more and more rounds of questions led NYMEX to cease efforts on that particular proposal. The Exchange then modified its post close trading proposal and submitted it in the form of a renumbered rule to the Commission in June, 1993. A new series of questions and responses between NYMEX and the CFTC ultimately resulted in the approval of the modified rule in September, 1993, a year after it was originally submitted to the Commission.
A more recent example of hampering innovation lies with an application currently pending before the Commission regarding a rule to allow for an exchange of futures for swaps (EFS), whereby market participants could, after agreement, exchange positions in the futures market with swaps positions. The rule is similar in form and concept to a current process allowing for the exchange of futures for physical (EFP) positions, where market participants can exchange futures positions for the physical commodity. The Exchange's proposal would include the same audit, monitoring, and surveillance procedures as those currently in place with the EFP process. The first submission of the proposed rule occurred on June 11, 1996. After a series of questions and discussions with the Commission, a revised submission was made on February 22, 1997. It is our understanding that the Commission intends to publish the rule in the Federal Register in mid-November for a public comment period. At best, the Commission will act in the first quarter of 1998--more than a year and one-half after the original submission.
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Earlier this year, the Commission implemented a new ''fast-track'' rule review procedure that applies to proposed new rules and to amendments to existing rules that do not relate to contract terms and conditions. Under the new procedures, rule changes that meet form and content requirements will be deemed approved or will be permitted to be put into effect without approval ten days after receipt of the submission, unless the Commission extends review to 45 days (or 75 days in the case of rules published for comment in the Federal Register) or the exchange agrees to another, specified review period. The Commission could extend the review period from 10 to 45 (or 75) days if it determined within 10 days of receipt of the submission that the rule proposal raised ''novel or complex issues'' or was of ''major economic significance.'' Thus, the same problems previously identified with regard to Commission staff review of contract terms and conditions apply with equal force here as well. Regulatory review can be delayed based upon a unilateral finding by the Commission that a rule proposal raises novel or complex issues, a situation which we have repeatedly experienced firsthand, and the ability to remit a rule proposal because the submission did not anticipate every question that conceivably could be raised by Commission staff. The tendency to embark on an often tortuous process of ''what ifs'' is grossly inefficient, an obstacle to market response time, and perhaps most importantly, a burden not shared by exempted OTC markets.
Conclusion
Mr. Chairman, you and the members of this committee are to be commended for your diligence in fulfilling your oversight responsibilities. This hearing is a clear demonstration of your interest and commitment. In a government with a two year congressional election cycle and a four year presidential election cycle, some might question the ''shelf life'' of a 5-year strategic plan. Indeed, our OTC competitors operate on a substantially shorter time frame. However, the planning exercise can be valuable in highlighting agency priorities and identifying areas which may need more emphasis. In the case of the Commission's strategic plan, we believe it is the latter.
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Over the past year, CFTC staff and Commissioners have met with Exchange officials on numerous occasions to discuss views on the need for meaningful regulatory flexibility—views which logically should appear in the strategic plan. The failure of the plan to address that need in a meaningful and measurable way is disappointing. While we are appreciative of their willingness to discuss the issues, we believe the strategic plan—which ostensibly should represent Commission priorities—falls far short of addressing a key area of the futures industry's most pressing need. Congress and the CFTC must provide the flexibility to exchanges to innovate—to continue to serve the commercial needs of the community, whether oil producers, refiners, farmers, or financial institutions—with or without a five year plan.
Mr. Chairman and Members of the Committee, NYMEX thanks you for your consideration and pledges its full support to work with you and your staff to address these issues and any others that may be of concern to you. Thank you very much.
Testimony of Susan Keith
Good afternoon, Mr. Chairman, and thank you for the opportunity to present a collective agricultural perspective on the strategic plan of the Commodity Futures Trading Commission. I believe it is safe to say that most of our organizations have not spent a great deal of time monitoring implementation of the Government Performance and Results Act of 1993. This hearing has helped to focus our attention on the important role of the GPRA in improving the efficiency of Federal agencies. When Federal agencies are challenged to plan for measurable, results-oriented goals, they will undoubtedly improve their interactions with the public at large and particularly with their constituents. We can all benefit from a Federal Government that functions better.
Our initial response to the CFTC strategic plan is quite favorable. We fully support the mission of the Commodity Futures Trading Commission: ''To protect market users and the public from fraud, manipulation, and abusive practices related to the sale of commodity futures and options, and to foster open, competitive, and financially sound commodity futures and option markets.''
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The members of our respective organizations insist upon market integrity as the most important role for the CFTC. We believe that it is the mission of the CFTC to protect public market users from fraud and other criminal and abusive trade practices. Efforts to protect market users will also serve to assure that the price discovery role of futures markets will operate free of manipulation.
We also recognize the importance of maintaining an open and competitive environment in which the markets operate. If the markets are not financially successful, they will not continue. The CFTC must maintain a careful balance of appropriate regulation to protect market users and the general public while allowing the markets to remain competitive in a global environment for futures and options markets.
To achieve their mission, the CFTC identified three strategic goals covering the marketplace, market users and the futures market environment. We agree that the first goal of the CFTC should be to foster the development of a marketplace which properly carries out its role in price discovery and risk transfer by accurately reflecting supply and demand conditions in a setting that is free from disruptive activities. The CFTC's second goal, to protect market users through compliance activities, is appropriate and should be implemented through aggressive enforcement and market oversight. The CFTC's third goal, ensuring a sound trading environment, closes the regulatory loop by facilitating the development of a flexible regulatory environment which relies heavily on self-regulation, but supported with active intervention when necessary.
We want to raise some concerns about the ability of the CFTC to achieve these strategic goals. First, is the question of resources available to carry out the Commission's regulatory responsibility. The CFTC highlighted several resource issues in their strategic plan including the recruitment and retention of qualified professionals and remaining abreast of current technology. Obviously, both of these resource needs are critical to the ability of the CFTC to meet its mission. The complexity of commodity futures regulatory compliance work requires the expertise of highly-skilled professionals in law, economics, financial audit and market operations. The CFTC must be competitive in recruitment and retention of qualified professionals with the authority to pay qualified professionals at premium pay levels.
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The second resource issue is the need to stay abreast of technology. Technological advances can greatly improve the efficiency of most enterprises, especially when complex data must be quickly and thoroughly analyzed. The CFTC must have the resources to maintain and enhance its technological infrastructure. Commission staff must have the resources to stay current with the technological advances at the exchanges and in the global marketplace. Adequate technological resources will enable the Commission to strengthen their regulatory oversight and compliance activities without imposing unnecessary burdens on the industry.
The CFTC strategic plan specifically acknowledges the changing environment for production agriculture. Consistent with the provisions of the Federal Agriculture Improvement and Reform Act, the CFTC together with the U.S. Department of Agriculture will design and implement a risk management education program. This effort should encourage producers to evaluate their risk management needs and assist those producers seeking risk management services. The education effort should expand general knowledge about markets and their operations. A well-informed public is the first line of defense against fraudulent sales and trading activities.
Finally, we urge the CFTC to continue to protect the interest of the public, and more specifically the interests of producers, as they provide oversight to the agricultural commodity futures markets and contracts. We cannot overstate the importance of the role that futures markets play relative to price discovery for grains, oilseeds, livestock, fibers and other agricultural commodities. We believe that the CFTC does have an important role in the contract approval process. The CFTC must ensure that contract design proposals will not create circumstances which will lead to market disruption or manipulation.
In summary, we support the Commodity Futures Trading Commission's strategic plan. However, the plan is the first step, the real challenge is implementation and results. We encourage Congress to provide adequate resources to enable the CFTC to fulfill their oversight responsibility for commodity futures and options markets in an effective and flexible manner.
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Testimony of Jean W. Tippins
Chairman Ewing, distinguished members of the subcommittee, ladies and gentlemen.
My name is Jean Tippins and I am vice president—administration of National Futures Association. I would like to thank you for the opportunity to appear here today to present our views on the CFTC's Vision and Strategies document which was recently published in the Federal Register. Obviously, this document is very important for all of the witnesses you will be hearing from. Where the Commission is planning to go in the next 5 years and how it plans to get there will have a real impact on all of us in the futures industry.
Although all of the witnesses you will hear from have a keen interest in this document, I think our perspective at NFA will be quite a bit different from everyone else's for two reasons. The first stems from our unique position within the industry. NFA is something of a hybrid'a cross between the exchanges and trade associations, on the one hand, and the Commission on the other. Like the exchanges and the trade associations, NFA is a membership organization and, like them, we rely heavily on our Members' input to shape our policies and direction. In our fundamental purpose and focus, though, we are much more like the Commission. NFA is purely a regulatory body. We do not operate any markets and do not engage in any commercial activity. Our sole mission is to ensure market integrity through effective and efficient regulation.
The second reason we may have a different point of view on the Commission's Vision and Strategies document is that we are currently going through a similar process at NFA. NFA has been around for 15 years now and by all accounts has been a very successful organization. That kind of success can lead to complacency, and complacency is something we just can't afford. We are currently undergoing a top to bottom review of what we do and how we do it. The whole purpose is the same as the Government Performance and Results Act that prompted the Commission's effort to make sure that we are focused every day on what's important and what we're trying to accomplish.
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The point is not to produce a document but to change an attitude. Everyone at NFA has to recognize that even though we are a regulator, we have customers we have to satisfy. Our customers are the market participants who look to us for protection and our Members who look to us for fair, consistent and efficient regulation. Like any other enterprise, our success depends on doing a good job for those customers. That requires that we constantly look for smarter ways to work. In our audits, for example, we can't blindly perform each and every audit step for each and every firm just because we've always done it that way. We have to find ways to tailor each audit to the potential problem areas of each particular firm. The Commission has to take the same approach in its work, whether auditing a registrant or doing a rule enforcement review of an SRO. A regulator which loses that kind of customer focus becomes a bureaucracy, and neither NFA nor the CFTC can afford to let that happen.
My comments on the proposed plan are more general than specific. Certainly, I can't disagree with the Commission's stated strategic goals or objectives. We are all in favor of meeting our customers' needs by ''protecting market users and the public'' and ''fostering open, competitive and financially sound markets.'' The trick is figuring out how to do that.
At NFA we have realized that if you want to meet your customers' needs you need to listen to your customers. Over the years we have relied very heavily on Member input in developing our rules and policies, and we will continue to do that through our fairly extensive network of committees. We have to do a better job, though, of including market users in that process. Although we have always had plenty of public representatives on our Board, even before Congress required it, we can and will have more involvement by market users in NFA's rulemaking process.
What's true at NFA is also true at the Commission. I think the Commission recognizes that it needs an ongoing dialogue with both the industry it regulates and the public it serves on a wide range of regulatory issues. Although that point is mentioned here and there in the document, I think it has to be a real focal point for the Commission's plans for the next 5 years'it has to become part of the routine way of doing business.
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Receiving that sort of input means more than putting proposals out for comment in the Federal Register. There are plenty of ways for the Commission to establish that sort of dialogue:
(The Commission is reviving the Financial Products Advisory Committee, which should be an excellent way for the Commission to hear from both the industry and market users on a wide range of issues involving regulatory relief;
(The Commission should continue to convene roundtable discussions which bring a number of outside experts to discuss one particular issue, but there should be some sort of follow up mechanism. Perhaps, that same group should be reconvened at some point to hear what progress has been made on the issue they discussed.
(NFA can help by inviting the Commissioners and Commission staff to the town hall meetings we hold around the country from time-to-time. We have found them to be a great way for us to talk to our Members face-to-face, to tell them what we are working on at NFA and, more importantly, to hear from them on what we should be working on. We would be happy to include the Commission in those meetings;
(We can also help by inviting the Commissioners and Commission staff to attend meetings of the various committees we set up to tackle specific regulatory issues. We always try to keep the Commission posted on what we are doing, but I am sure it would be helpful for the Commission to have one more way to hear firsthand from the industry the types of problems the industry is dealing with. And it wouldn't hurt to have one more way where the industry can hear from the Commission on its perspective.
The second general observation I would offer on the Commission's Vision and Strategies document involves accountability. Organizations are just like people in one way. The organization is much more likely to accomplish a goal if the tasks to do so are specifically defined, if completion dates are set and if it will be held accountable to someone if those dates aren't met. To really meet its goal of creating a culture of innovation, adaptability and responsiveness, the Commission has to impose that sort of accountability.
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I am certainly not suggesting that the Commission can or should in this document identify the specific tasks it will complete in the next 5 years to create that culture. Five years is a very long time, and none of us has the crystal ball you would need for that job. But the Commission can set shorter term goals which specify tasks and deadlines which have been assigned to specific groups or individuals. If those goals aren't met, then the staff should be answerable to the Commission and the Commission should be answerable to this Committee.
Finally, Mr. Chairman, I should point out that NFA recognizes the efforts the CFTC has already made to listen to the industry and to respond to an ever changing marketplace. Your proposal to amend the Commodity Exchange Act sparked a lively discussion on a number of important issues, and I think the Commission has recently shown a real responsiveness in a number of areas. The use of the Internet by CPOs and CTAs, electronic delivery of statements by FCMs and IBs, electronic filing of disclosure documents and financial statements with regulators, and further delegations of responsibility to NFA are all issues in which the Commission has shown its willingness to change.
NFA is confident that the kind of dialogue sparked by your bill will be continued because of the Government Performance and Results Act that required the Commission to issue its five-year plan. We look forward to helping the Commission ''be all that it can be'' in any way we can.
Testimony of John M. Damgard
Mr. Chairman and committee members, I am John Damgard, president of the Futures Industry Association, and I am pleased to appear before you today to discuss the CFTC's strategic plan as required by the Government Performance and Results Act.
FIA is the national trade association of the exchange-traded futures and options industry. FIA's members include approximately 60 of the largest futures commission merchants (FCMs) in the United States. We estimate that our members effect more than eighty percent of all public customer transactions executed on U.S. futures markets. Among our associate members are representatives from virtually all other segments of the futures industry: exchanges, commodity pool operators, commodity trading advisors, legal and accounting firms.
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It is important that the Results Act requires agencies to consult with stakeholders in establishing their strategic plans. The Commission's document is a good first step. The FIA will continue to review the plan and raise issues of interest to the industry so that they can be incorporated in the Commission's policies and goals.
When I appeared before the subcommittee earlier this year, I discussed areas where the industry was seeking regulatory relief. I explained that the FIA has been encouraging the Commission to support initiatives that recognize the needs of sophisticated market participants and enhance the efficiency of exchange markets. I also made recommendations designed to reduce what the industry considers to be excessive regulation of FCMs. I mentioned seven areas where change was needed and I asked the Committee to encourage the Commission to act on those items. Because this hearing focuses on how well the Commission responds to its stakeholders, I will give you a report on where we stand in our efforts.
In a recent speech at Fordham University Law School, Chairperson Born promised to review whether to permit certain non-competitive, off-floor transactions and whether to permit post-order allocation of bunched orders of sophisticated customers with their consent. Both of these initiatives are examples of areas where the CFTC can reduce regulatory supervision because it is not necessary for the protection of sophisticated market participants. Movement on these issues is important in making the U.S. markets competitive with OTC and non-U.S. markets; they are the top items on our list.
In addition, the Commission has published proposed rules that would amend the current broker disclosure obligations for institutional users of the markets. I expect that, with some small changes, the FIA will be able to support this initiative enthusiastically. In the Fordham speech, Ms. Born also promised to consider adding certain categories of ''liquid and readily marketable investments'' to the list of instruments appropriate for the investment of segregated customer funds by FCMs and clearinghouses. The list of instruments has not been revised for at least 25 years and maybe longer. I hope that we will be able to see tangible progress on these four issues very soon. I also hope that the Commission will soon agree to address the three remaining issues we raised in our earlier testimony.
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I would like to discuss one other issue that came up during hearings on your bill, Mr. Chairman, that I believe requires the Commission's attention, and that is the need to bring more legal certainty to the trading of equity swaps in the United States. Recognizing that equity derivatives raise jurisdictional issues with the SEC and competitive issues with securities and futures exchanges, I believe the CFTC could play a leadership role to help find an acceptable solution to this problem. This would be in the best interest of the U.S. financial markets and I would encourage the Commission to add this to its list of priorities.
I would like to offer two suggestions on how the Commission can incorporate stakeholders' views in the development of future plans, an area where the GAO suggested some improvements might be in order.
The Committee may not be aware that there is no process through which the CFTC can be forced to review or change its existing rules. Although there is a process by which the public can formally request a change in the rules, the decision to consider such changes is entirely at the Commission's discretion. Trading rules, financial rules, disclosure rules, registration rules and others need to be constantly reviewed in light of changes in the US and international markets. Meeting with the Financial Products Advisory Committee, Agricultural Advisory Committee and other advisory groups are a good way for the industry to communicate with the Commission about rules and practices that need attention. They are also a good way for the Commission to keep in touch with trends and views among end users. I support the use of Advisory Committees and I strongly recommend that the Commission meet with them on a regular basis.
Along the same lines, because of the dynamic nature of the financial industry, market participants often come to the Commission to review the applicability of futures regulations to particular users or financial transactions. The Commission has used written ''no action'' letters to provide guidance in these instances. I understand the Commission is in the process of reviewing its use of these letters. I believe that the ''no action'' process is a good way to provide relief and I encourage its continued use.
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The Commission has also organized industry roundtables to educate itself about industry trends. The Technology Roundtable the Commission held last year in Chicago was particularly well done. I cannot overstate the impact changes in technology are having on the futures industry. A recent article in Business Week highlighted how important it is for regulators to keep abreast of technology. According to the article, the job description for market regulators has undergone a dramatic rewrite recently. Far from being eagle-eyed guards who block experimentation, regulators who earn high marks from the industry do so by adjusting regulation to take maximum advantage of the efficiencies created by technology. We are just beginning to see the changes the Internet is making. I would encourage the Commission to continue holding roundtables on technology issues to keep the regulatory structure current.
Historically, the CFTC has sought the FIA's input on key issues because we have immediate access to market participants through our divisions: the Operations Divisions, Law and Compliance Division, Information and Technology Division, and the new Financial Risk Management Division. Particularly before implementing major changes in the rules, the Commission has consulted with practitioners on how the industry would be impacted. For example, in order to comply with Congress' direction to implement risk assessment rules for holding companies, the CFTC asked the FIA to set up meetings with operations staff from all sizes and types of futures brokers to discuss the type of information firms were already preparing for other financial regulators that the Commission might share without imposing additional reporting obligations. Before even drafting proposed rules, the CFTC had the benefit of input from over 20 firms. We intend to continue to offer the Commission access to our members who can provide extensive knowledge about the needs of the institutional and retail customers in addition to the workings of the markets.
I look forward to working with the subcommittee as you consider the CFTC's strategic plan.
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Testimony of James J. Bowe
Mr. Chairman, I am James Bowe, president of the Coffee, Sugar & Cocoa Exchange, Inc. I appreciate this opportunity to testify before the subcommittee on the 5-year strategic plan developed by the Commodity Futures Trading Commission to comply with the Government Performance and Results Act of 1993.
At today's hearing, however,I would like to focus on two important points.
First, the strategic plan does not take into account that the self-regulatory functions of futures exchanges are critical to the maintenance of open and competitive markets. For example, goal No. 3 states that the CFTC will ''foster open, competitive, and financially sound markets'' and one of the objectives is to ''promote and enhance effective self-regulation of the commodity futures and option markets.'' Currently, the activity list for goal 3 concentrates on the CFTC monitoring and checking exchange functions. It should also include responding in a timely manner to exchange requests for regulatory relief, and identifying and eliminating CFTC functions that duplicate the functions effectively carried out by exchanges.
As another example, under the Strategy sections of the plan, the CFTC identifies a host of entities—from State, local, Federal and international regulators to agricultural and financial services groups—with which it consults. Noticeably absent are any specific efforts to engage in consultations with futures exchanges—even though fostering and overseeing these markets is what the CFTC claims as its primary mission.
Second, under goal No. 1, the CFTC states that it will ''protect the economic functions of the commodity futures and options markets.'' Two objectives are listed under this goal:
1. Foster futures and options markets that accurately reflect the forces of supply and demand for the underlying commodity and are free of disruptive activity; and
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2. Oversee markets which can be used effectively by producers, processors, financial institutions, and other firms for the purposes of price discovery and risk shifting.
For both of these objectives, the CFTC states that one activity it will perform is to ''conduct timely review of contract market designation applications and changes to applications to determine if they are economically viable and do not pose a likelihood of disruption in the cash, futures, and options markets.''
We do not believe that the Commodity Exchange Act gives the CFTC authority to determine whether a contract proposed by an exchange is ''economically viable.'' This would assume that the CFTC, or its staff, is in a position to make a decision for an exchange about whether it is worthwhile to invest in developing the market for a particular new product. Such business decisions are in the domain of the exchange, as it consults with its members and researches the new market. If the CFTC believes that it has the authority to determine the economic viability of contracts, Mr. Chairman, we would respectfully ask Congress to clarify that this is not the case.
In addition, although the Act requires CFTC approval of rules governing contract terms and conditions, we do not agree that the CFTC staff can determine any better than an exchange whether a contract will pose a ''likelihood of disruption in the cash, futures, and options markets.'' Exchanges perform extensive research and analysis and consider many alternatives before deciding which terms and conditions are appropriate for a contract. In the case of a new contract, it is simply not feasible for an exchange to propose a new product for trading that has not been thoroughly vetted with the relevant industry, which for an agricultural product would include producers, processors and merchants.
Much of the time spent by the CFTC staff in reviewing an application for designation or contract rules involves double checking the exchange's work. Sometimes, the CFTC staff will decide that the exchange must change certain terms and conditions, even though there are justifiable reasons for disagreement by the exchange.
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Thus far, the CFTC has not been willing to use its authority to make significant changes in the contract designation and rule approval processes. Even though the CFTC enacted so-called fast-track rules earlier this year that would shorten the time for processing some new contracts, this would only apply to contracts that are nearly identical to, or are options on, existing ones. For any innovative product, exchanges are still subject to a prolonged review.
As you are well aware, Mr. Chairman, this is an issue that we have discussed with the CFTC many times and that we have formally commented on before this Subcommittee and during the rulemaking process. We support the approach taken in the legislation that you introduced, H.R. 467, which would eliminate the requirement for prior approval of new contract market rules by the CFTC. Instead, an exchange would submit its rules to the CFTC and, unless the CFTC identified potential violations of the Act, CFTC regulations or the public interest and decided to initiate disapproval proceedings, the exchange could initiate trading in 15 days.
Under the Results Act, as a government agency develops its strategic plan, it is directed to solicit and to consider ''the views and suggestions of those entities potentially affected by or interested in such a plan.'' While the CFTC was working on its strategic plan, it was well aware of exchange concerns about the duplicative reviews and delays inherent in the contract market designation and rule approval processes. Thus, there was ample opportunity for the CFTC to be responsive to exchange suggestions. Going forward, we encourage the CFTC to consider meaningful and significant improvements to restore the balance between self-regulation by exchanges and Federal oversight by the CFTC.