CME Chairman Presents House Testimony On President's Working Group Report

Regulatory reform of U.S. over-the-counter (OTC) derivatives markets must be accompanied by concurrent reforms for U.S. futures exchanges to assure "rationalization of regulation for the entire financial services industry," according to Congressional testimony presented today by Chicago Mercantile Exchange (CME) Chairman Scott Gordon. During a hearing of the U.S. House Subcommittee on Risk Management, Research and Specialty Crops, Gordon also praised the efforts of Commodity Futures Trading Commission Chairman William Rainer and numerous members of Congress to streamline and modernize existing exchange regulations. The hearing was held to review a recent report issued by the President's Working Group on Financial Markets (PWG). Gordon, accompanied to the hearing by CME President and Chief Executive Officer Jim McNulty, said while he was supportive of the PWG's effort to clarify the regulatory status of OTC markets, the Report strayed from its initial mission. "The Report begins with a conservative call for legal certainty for OTC swaps. It veers from that simple principle to a radical realignment of markets and regulators by redefining a swap to include standardized, cleared, futures contracts traded on exchanges regulated by the Securities and Exchange Commission or by bank regulators," he said. That realignment, Gordon said, fails to address the regulatory disparity suggested by the PWG report in its recommendation for legalizing single stock futures traded in unregulated markets, while not calling for a reversal of an 18-year-old "temporary" restriction on such contracts at regulated exchanges. Gordon said failure to reform futures industry regulation could potentially drive U.S. futures business overseas. Over the past year, the CME has worked with the Chicago Board of Trade and the New York Mercantile Exchange to change the underlying philosophy of financial services regulation as Congress prepares to rewrite laws governing the risk management industry. Congress is expected to adopt new laws regulating the futures industry by Sept. 30, when the Commodity Exchange Act expires. The PWG was appointed in late 1998 by President Clinton to study ways to reform U.S. risk management markets in the wake of turmoil in international financial markets during the summer of 1998. The PWG principally focused on OTC markets in which parties privately negotiate risk transfer agreements. Today's hearing followed last week's hearing of the U.S. Senate Committee on Agriculture, Nutrition and Forestry, during which the CME offered similar testimony.