WRITTEN STATEMENT of
JAMES J. BOWE, PRESIDENT (Given by Mr. Walter Hines, Vice President)
COFFEE, SUGAR & COCOA EXCHANGE, INC.
Before the COMMITTEE ON AGRICULTURE, NUTRITION, & FORESTRY
UNITED STATES SENATE
on February 11, 1997
Mr. Chairman, this written statement supplements my oral testimony presented
before the Committee today regarding S. 257, a bill to amend the Commodity
Exchange Act. The Coffee, Sugar & Cocoa Exchange commends your efforts
to develop a more efficient, fair and cost effective regulatory framework
for U.S. futures markets and other risk management products.
We support the Consolidated Testimony of U.S. Exchanges, which was submitted
for today's hearing record, with one reservation. That reservation relates
to the position taken on Section 4 of the Bill. We explain our reasons
in this statement.
In addition, we believe that the provisions to streamline contract market
rule submissions in Sections 7 and 9 of the Bill are most important. We
would like to suggest some modifications to those sections that would help
to reduce delays in rule approvals and in the initiation of trading in
new contracts.
Sections 7 and 9 -- Contract Market Desicinations and Rule Submissions
One very difficult problem that S. 257 tackles is streamlining the process
for contract market designations and rule submissions. Sections 7 and 9
of the Bill take important steps to eliminate unnecessary and lengthy Commodity
Futures Trading Commission ("CFTC") review of new contracts and
exchange rules, thereby reducing regulatory costs and bureaucratic delays.
We would like to focus on the timetable presented in both sections for
proceedings conducted by the CFTC to disapprove a new product or a rule
submitted by an exchange.
Among other things, Section 7 establishes new procedures for rules submitted
to the CFTC by an exchange on new products and contract terms and conditions,
and Section 9 establishes new procedures for other types of exchange rules
that must be submitted to the CFTC. In both cases, new products may be
introduced and rules can be made effective within 10 business days after
submission to the CFTC, unless the CFTC notifies the exchange that it intends
to review the submission for possible disapproval. If disapproval proceedings
are not completed within 120 days after receipt of the rule, then the exchange
may trade the product or make the rule effective.
The problem is that the CFTC may still disapprove the product or the rule
any time after the 120-day deadline has passed. This would force an exchange
to revoke the rule and, in the case of a new product, cease trading. In
our view this is not a reasonable or workable outcome. It would be highly
risky to begin trading a new contract or enforcing a new rule when the
120 days are up, without a final determination by the CFTC. If an exchange
were to initiate trading and then had to stop under these circumstances,
or to enforce a rule that was later disapproved, it would be inviting litigation,
and it would be creating serious problems for its members and market users.
Indeed, it is unlikely that anyone would trade in a market clouded by that
type of legal uncertainty.
Therefore, we believe a firm deadline for completion of a disapproval proceeding
should be set in Sections 7 and 9, and the discretion for the CFTC to disapprove
the product or the rule after that date should be eliminated. We emphasize
that this would not diminish the CFTC's plenary authority over contract
markets, their rules and the products they trade. Under section 8a(7) of
the Act, the CFTC is authorized to alter or supplement contract market
rules. The CFTC can first request specific changes in writing and, after
providing opportunity for a hearing, the CFTC may order the exchange to
make specific changes, if it concludes that change is necessary or appropriate.
Furthermore, if a market emergency develops, the Commission can forthwith
order an exchange to take corrective action under Section 8a(9). Thus,
eliminating the power to continue disapproval proceedings beyond the deadline
would not compromise the CFTC's ability fully to regulate the market.
In addition, we suggest that the deadline for disapproval proceedings be
shortened to 60 days. The Summa[y and Discussion accompanying the Bill
states that a purpose of both Sections 7 and 9 is to "compress the
time available for agency review." The CFTC estimates that on average
it completes action on new contract submissions within 90 days and that
two-thirds of other rule submissions are processed in 10 days. So it would
seem that compressing the time-frame to 60 days is reasonable and feasible.
Section 4 -- Foreign Futures With U.S. Delivery Points.
The Exchange has a special interest in Section 4 of the Bill because, unlike
other U.S. exchanges, all of the commodities delivered under our Exchange's
most heavily traded contracts are produced outside of the United States.
We are unique in that all deliveries under our largest contract - the No.
11 World Sugar Futures Contract - must be made in foreign countries of
origin. Moreover, we have direct foreign market competition in all of our
major markets. Therefore, we are particularly vulnerable to actions taken
by foreign governments that could affect our products.
Because of our unique circumstances, we have a different view of Section
4 of the Bill than the other U.S. exchanges. Basically, the approach of
Section 4 is to require the CFTC to consult with foreign governmental agencies
in an endeavor to secure adequate assurances that the presence of delivery
points in the United States will not create the potential for manipulation
or any other disruption in trading of U.S. futures contracts and commodities.
However, the Consolidated Testimony of U.S. Futures Exchanges states that
Section 4 of the Bill does not go far enough, and does not empower the
CFTC to do anything. We urge that the CFTC not be directed or encouraged
to do anything that may invite retaliatory action by the governments of
foreign markets. For example, it could present serious problems for us
if, for the first time, the CFTC were to be authorized to prohibit or restrict
futures trading on foreign exchanges simply because they have delivery
facilities in the United States.
While we endorse the basic concept of Section 4 of the Bill, we must point
out that there is one provision in Section 4 which is not workable. Specifically,
the proposed new Section 4(b)(2)(C), which would be added to the Commodity
Exchange Act by Section 4 of S. 257, would require a U.S. warehouse acting
as a delivery facility for a foreign exchange to keep records and file
reports regarding all transactions and positions in futures contracts on
that foreign exchange. No warehouse is in a position to obtain that type
of information, whether on behalf of a foreign exchange or a U.S. exchange.
The Summary and Discussion accompanying the Bill explains that the information
collected under this provision "would be similar to that which the
CFTC may already require of persons making trades on overseas markets".
However, it is a far different matter to ask persons for information on
their trades than to ask a warehouse to collect and to report information
on trading conducted on a futures market. We do not require U.S. warehouses
licensed as delivery points for U.S. futures contracts to perform such
a function. We should not require this of a U.S. warehouse that is a delivery
point for a foreign market.
In lieu of that proposed requirement, we believe it would be appropriate
to authorize the CFTC to adopt rules and regulations imposing the same
reporting and recordkeeping requirements on U.S. warehouses used as delivery
facilities under foreign futures contracts as are currently applicable
to U.S. warehouses used as delivery facilities under U.S. futures contracts.
A copy of language modifying S. 257 to accomplish this goal is attached.
Attachment
ATTACHMENT TO WRITTEN TESTIMONY OF COFFEE, SUGAR & COCOA EXCHANGE
Porposed Amendments to S.257
In Section 4, delete Subparagraph (C) on page 6 (lines 19 through 22) and
page 7 (lines 1 through 12). Insert a new section reading as follows:
SEC. . REGULATION OF WAREHOUSES
Section 8a of the Commodity Exchange
Act (7 U.S.C. 12a) is amended by adding at the end the following:
"(12) to make and promulgate such
rules and regulations as, in the judgment of the Commission, are necessary
or appropriate to require the operators of warehouses in which or out of
which any commodity is deliverable on any contract for future delivery
made on or subject to the rules of any contract market or any foreign board
of trade, exchange, or market, to make such reports, to keep such records
and to permit such visitation as the Commission may prescribe. Such books,
records, and warehouses shall be open at all times to inspection by any
representative of the Commission or the United States Department of Justice."