Chicago Exchanges Seek Fair Regulatory Treatment In Unified Reform Plan Presented To Congress

Leaders from the Chicago Board of Trade and the Chicago Mercantile Exchange suggested to Congress today a unified and comprehensive approach for regulatory reform that will allow U.S. futures exchanges to compete in modern global markets. In testimony before the U.S. House Subcommittee on Risk Management and Specialty Crops, the exchanges outlined their five-point plan to revise the Commodity Exchange Act so that U.S. exchanges can compete on a level playing field with foreign exchanges and over-the-counter markets. The current regulatory regime is outmoded and out of touch, the exchanges said, and they asked Congress to update the laws when it considers reauthorization of the Commodity Futures Trading Commission this year. CBOT Chairman David P. Brennan, testifying with CBOT President and CEO Thomas R. Donovan, said, "The Chicago exchanges support legislation to preserve the U.S. as the world's leader for both exchange-traded and OTC derivatives. To do that, U.S. exchanges need fair competition and regulatory parity, and the OTC market needs legal certainty. Government has an important oversight role, but oversight should not be confused with overkill." CME Chairman Scott Gordon said, "The competitive consequence of over-regulation of U.S. futures markets in the era of international electronic exchanges is staggering. Our plan eliminates the regulatory disparities that increase costs to derivative market users and distort competition among markets." The CBOT and CME have five basic principles for reauthorization. Each is part of a comprehensive solution. 1. Exchange regulation should be modernized by increasing exchange autonomy, eliminating prior approval requirements and transforming the Commodity Futures Trading Commission into a supervisory, oversight agency - The Commission's power to control and/or prescribe contract terms, trading rules and procedures for derivative exchanges should be limited to remediation of statutory violations. 2. Access to financial exchange markets should be expanded for customers of banks and broker-dealers that trade other derivative contracts - Today, employees of banks or broker-dealers offer business customers different forms of OTC derivatives, including swaps. However, if they want to offer exchange-traded products to those same customers, the employees must run a gauntlet of CFTC registration and fitness requirements. The proposal would allow those employees to offer exchange-traded products without any additional registration required. 3. The product restrictions in the Shad-Johnson Accord should be removed, subject to certain conditions - The Shad-Johnson Accord, adopted in 1982 to restrict the trading of sector-based stock index and single stock futures, unfairly hampers futures exchanges' ability to compete. While futures on many stock indexes in the U.S. are banned today, investors can use securities options on the same stock indexes domestically. Foreign exchanges also have no restrictions. Seven foreign exchanges now offer nearly 200 single stock futures contracts. Total volume in 1998 exceeded two million contracts, and, so far in 1999, one million contracts have been traded at the seven exchanges. Even former CFTC Chairman Phil Johnson, co-author of the accord, conceded during an industry roundtable in February that the restrictions are outmoded. To address concerns regarding insider trading, the SEC would enforce the same prohibitions for futures on equity products to the same extent it does for security options. 4. All entities performing exchange-like functions - trade execution or clearing - should be similarly regulated - All derivative contracts that are not privately negotiated would need to be traded through a registered exchange, or what would be re-named a qualified Execution Facility to describe more accurately its function today. Clearinghouses for all derivatives, whether or not privately negotiated, would be subject to separate oversight under the CEA to protect against systemic risk and to promote financial integrity. Most entities acting as dealers in privately negotiated derivatives would not be subject to CFTC regulation since they are subject to oversight by either banking regulators or the SEC; otherwise unregulated dealers would be subject to CFTC oversight. 5. Privately negotiated, over-the-counter derivative instruments should be granted legal certainty through exclusion from the Commodity Exchange Act - All derivative contracts that are privately negotiated would be excluded from the Commodity Exchange Act and would be excluded from CFTC jurisdiction.