In testimony before the U.S. Senate Committee on Agriculture, Nutrition and Forestry, Duffy said, “In the judgment of CME, the Commodity Futures Modernization Act of 2000 represents successful landmark legislation that materially and beneficially transformed the nation’s futures markets. The CFMA’s reduction of high cost regulation has been an unqualified success, making futures trading more efficient and useful to a wide range of customers.”
Duffy told the Committee that the upcoming reauthorization process offers a valuable opportunity to fine tune that statutory regime based on industry experience gained since the CFMA’s enactment. “The first area in need of fine tuning involves retail foreign exchange futures,” he said. “There have been massive continuing frauds against retail customers in the over-the-counter FX market. A loophole in the Act permits unregistered, known offenders to sell foreign currency futures to naïve, retail customers. This loop hole can and should be closed.
“Compounding this problem is the recent, unfortunate decision of the 7th Circuit Court of Appeals in CFTC v. Zelener. The court adopted an extremely narrow definition of “futures contracts.” The rule permits OTC dealers to easily offer futures-like contracts to unsophisticated customers, without CFTC jurisdiction or registration requirements. As noted in recent testimony by acting CFTC Chairman Brown-Hruska, this retail fraud has spread from foreign currency scams to heating oil and orange juice. This can and should be stopped by closing the loop hole created by Zelener.”
Duffy said the second area in which the CFMA needs to be modified deals with Single Stock Futures. “Inter-exchange competitive concerns combined with regulatory and legislative turf contests ended the hope for this product before it was launched. It is time to let futures exchanges trade the product as a pure futures contract and to let securities exchanges trade it as a securities product.”
He added, “Let the relevant exchanges deal solely with their respective regulator, whether the CFTC or the SEC, which is what I believe the Congress initially intended in 2000 in authorizing single stock futures. I would urge the Committee to prevail upon the respective regulatory agencies to eliminate all undue regulatory impediments.”
Duffy concluded his remarks by reiterating CME’s long-standing opposition to fungibility of contracts, which would force derivatives exchanges that innovate and pioneer new contracts to freely give up the benefits of their investment in innovation to their competitors. He said, “That idea is utterly contrary to every viable economic principle that has made the U.S. economy work. I will be pleased to explain why self-regulation in the futures industry works; how our corporate governance meets the highest standards; and why the rule making process under the CFMA is not broken.”
Chicago Mercantile Exchange Inc. (www.cme.com) is the largest futures exchange in the United States. As an international marketplace, CME brings together buyers and sellers on CME® Globex® electronic trading platform and on its trading floor. CME offers futures and options on futures primarily in four product areas: interest rates, stock indexes, foreign exchange and commodities. The exchange moved about $1.5 billion per day in settlement payments for 2004 and managed $44.1 billion in collateral deposits as of Dec. 31, 2004, including $3.1 billion in deposits for non-CME products. CME is a wholly owned subsidiary of Chicago Mercantile Exchange Holdings Inc. (NYSE: CME), which is part of the Russell 1000® Index.
