In Senate Testimony, Nymex Chairman Expresses Concern Over Disparities in President's Working Group Report

New York Mercantile Exchange Chairman Daniel Rappaport today testified before the Senate Committee on Agriculture, Nutrition, and Forestry, expressing disappointment that "while recommending additional regulatory relief for over-the-counter (OTC) markets, the report (on OTC derivatives and the Commodity Exchange Act by the President's Working Group on Financial Markets) does not directly address the long-standing regulatory dilemmas faced by U.S. futures exchanges. He stated, "The report recognizes the regulatory disparities and blurred product distinctions that unduly restrict U.S. exchanges in today's competitive global market, but does almost nothing to address those issues. "Congress should make reforms to the CEA for exchange markets at the same time that it undertakes amendments to the CEA pertaining to the OTC market. The need for regulatory relief for regulated U.S. futures exchanges is at least as urgent, if not more so, as the need for legal certainty for the OTC market." For example, Mr. Rappaport cites a recommendation by the working group that the CEA be amended to allow physical commodities to be traded electronically without Commodity Futures Trading Commission (CFTC) regulation under certain circumstances. Mr. Rappaport said, "The working group, by suggesting that excluded swaps be permitted to be traded on electronic trading systems, is asking Congress to create explicit statutory preferential regulatory treatment for one type of financial instrument, swap agreements, over an equivalent financial instrument that is already trading on a regulated exchange...Derivatives that are labeled as futures and are traded on centralized electronic trading systems should receive the same regulatory treatment as derivatives that are labeled as swaps and are also traded on centralized electronic trading systems." Mr. Rappaport said that his exchange, as the world's largest physical commodities market, was also particularly concerned over the report's recommendation that Congress create a statutory exclusion from the CEA for bilateral swap transactions between sophisticated counterparties, but would limit that exclusion to financial commodities without finite supplies. He said it is more appropriate to review each commodity and its characteristics on a case-by-case basis. He stated, "A number of exchange-traded futures contracts, such as the light, sweet crude oil futures contract, are highly liquid contracts that are traded almost exclusively by sophisticated institutional traders. For such contracts, there is a critical need to balance regulatory burdens with the regulatory objectives to be achieved from such regulation. "The working group suggests that (financial commodities) products are not susceptible to manipulation, do not implicate concerns about customer abuses, and therefore do not need to be regulated by the CFTC. These same characteristics also apply to a number of futures and options contracts now trading on futures exchanges regulated by the CFTC. Fundamental fairness and due process require that like economic products traded between the same types of counterparties receive comparable regulatory treatment. Thus, these futures and option contracts also should be should eligible for the same light-handed regulatory treatment." On the report's recommendation to eliminate the CFTC's exclusive jurisdiction of futures contracts, Mr. Rappaport testified, "We would suggest that consistency in regulatory treatment is advanced if one regulator is charged with sole jurisdiction for futures contracts; the CFTC has served in that role for a sufficient period as to develop real expertise with regard to such products. Therefore, we believe that the CFTC is well-positioned to offer consistency in regulatory treatment and could thus diminish the likelihood of creating further regulatory disparities and the competitive disadvantages resulting from such disparities." In conclusion, Mr. Rappaport urged Congress to "provide urgently needed flexibility to exchanges to develop and provide innovative risk management products and trading methods, and to support harmonization of the regulatory structure over foreign boards of trade offering instruments with pricing impact in United States commerce."