CME Testifies On President's Working Group Report

A recent report by the President's Working Group (PWG) on Financial Markets to overhaul U.S. risk management markets "unjustifiably tilts the playing field against existing exchanges," according to testimony from the Chicago Mercantile Exchange (CME) presented today to Congress on behalf of Chairman Scott Gordon. In the same testimony, Gordon praised the efforts of Commodity Futures Trading Commission Chairman William Rainer to streamline existing exchange regulations, noting that they "bring regulatory burdens into line with regulatory needs." Although Gordon was supportive of the recommendations of the PWG to bring greater legal certainty to over-the-counter markets, he said to do so without concurrent regulatory reforms for futures exchanges was counterproductive and unfair. "The call for greater legal certainty for a bilaterally negotiated swap contract, which we support, has been converted into a demand for the exclusion from the Commodity Exchange Act of [unregulated] exchange traded and cleared financial futures," he said. 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 must adopt new laws regulating the futures industry by September 30, when the existing Commodity Exchange Act expires. "Our goal was equivalent regulatory treatment for functionally equivalent trading facilities, clearing houses and intermediaries," Gordon said. "We are disappointed that our efforts to create a fair and level playing field have not been heeded." One example of regulatory disparity between exchange and over-the-counter markets suggested by the report is in the area of single stock futures contracts, Gordon said. He noted that while the report suggests legalizing single stock futures for unregulated markets, it said nothing about lifting an 18-year-old "temporary" restriction on such contracts at regulated exchanges. "There is no principled reason to support unregulated, over-the-counter trading in a product while refusing to permit identical products to trade in a well regulated, price-transparent and liquid environment provided by the CME," Gordon said. The CME chairman's testimony was presented to the U.S. Senate Committee on Agriculture, Nutrition and Forestry at a hearing on the recent report of the President's Working Group (PWG). 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 over-the-counter markets in which parties privately negotiate risk transfer agreements. According to Gordon, the PWG Report also fails to spell out reforms that will help U.S. exchanges better compete in international markets. "While the Working Group recognizes the regulatory disparities and blurred product distinctions that handcuff U.S. futures exchanges in today's competitive global market, the Report does almost nothing to address those issues," Gordon said.