NYMEX Chairman Testifies Before Congress on CFTC Reauthorization

New York Mercantile Exchange Chairman Daniel Rappaport testified before Congress Commission (CFTC), stressing the need for more uniformity in regulatory oversight between over-the-counter (OTC) and exchange trading and between foreign and U.S. exchanges. In testifying before the subcommittee on risk management and specialty crops of the House of Representatives Committee on Agriculture, Mr. Rappaport said the Exchange's position is that 'Congress should require regulation of derivatives markets by a federal regulatory agency only to the extent strictly necessary to achieve specified public policy objectives and only where other means of achieving such objectives, such as private market regulation, would be inadequate to achieve these objectives.' He said, 'The solution to the issue of 'regulatory parity' between exchanges and the OTC marketplace does not lie in an attempt to re-regulate the OTC markets, which appear to have adequate private market regulation to address the public policy objectives.' Instead, Mr. Rappaport encouraged the CFTC to use the exemptive authority granted by Congress to exchange-traded transactions 'with the same creativity and vision that it has displayed for OTC products.' Mr. Rappaport stated, 'Congress should eliminate the Commission's authority for prior review of contract terms and conditions, as well as rules and procedures not related to its core regulatory interests and replace it with authority to seek remediation of statutory violations by regulated exchanges.' He said the prior review is unnecessary because an exchange's self-interest will ensure detailed and thorough processes. 'If an exchange develops contracts that are not well-conceived or drafted,' he said, 'its credibility will quickly erode. In addition, if an exchange offers contracts that are susceptible to manipulation, its own members are as likely as any member of the public to suffer from such manipulation. Furthermore, through its clearing function, the exchange puts its own capital on the line.' He said that the Exchange's experience has been that detailed CFTC review of terms and conditions of new contracts has provided 'marginal, if any, value and adds cost, uncertainty, and delay to the roll-out of new contracts.' Instead, the Exchange recommends that the extent of CFTC-mandated jurisdiction over contract markets be founded on and limited by its primary statutory duties: to ensure financial integrity, market integrity, price transparency, and customer protection. Mr. Rappaport said these reforms would return the CFTC to its historical role as a true oversight agency, and support product innovation, while encouraging businesses to use transparent markets. Mr. Rappaport also stated his exchange's position that the place of foreign exchanges' electronic terminals in the United States can raise regulatory concerns which parallel those experienced by the copper market following the opening of London Metal Exchange copper warehouses in the United States. 'In assessing the level of regulation that should apply to a foreign board of trade's activity in the U.S., the Commission's review should distinguish between those products offered by a foreign board of trade which are delivered in the U.S. or are settled by reference to prices derived from U.S. markets and those which are not,' he said. Finally, Mr. Rappaport expressed concern over the CFTC intention to seek statutory disqualification for traders who entered into settlements with their exchanges five or more years ago. He said, 'Floor members who are the subject of exchange investigations may enter into settlements based upon consideration of a number of factors, including litigation costs. Therefore, as a matter of due process and fundamental fairness, we would suggest that the Act be amended to provide that settlements entered into between a member and an exchange could not be used as prima facie evidence in a statutory disqualification proceeding. Instead, the underlying facts should be established through an appropriate evidentiary proceeding.'