Good morning Mr. Chairman and members of this distinguished Committee. I am Patrick Arbor, Chairman of the Chicago Board of Trade. With me is Thomas Donovan, our President and Chief Executive Officer. We are pleased to appear today in support of S. 257, a bill to modernize the Commodity Exchange Act and strengthen U.S. markets.

Mr. Chairman, in the last Congress you passed the Freedom to Farm legislation. What we are seeking today is Freedom to Compete legislation. U.S. exchanges now face competition from two sources -- over-the-counter derivatives and foreign futures exchanges. Both enjoy a tremendous, but unfair, edge over U.S. exchanges. They are not heavily-regulated. We are. Their regulatory cost advantage has been a boon for them. Our regulatory cost disadvantage has stunted our markets' growth and even caused some to shrink.

Consider these facts: In the past five years, the OTC swaps market's growth rate has been better than 500%. Our growth in our most popular contract, Treasury Bond futures, over the same period was 54%, almost a 10-1 ratio in favor of OTC products. As if that wasn't bad enough, in the last two years, our Treasury Bond trading volume has declined each year. International banking surveys also show that in terms of gross amounts outstanding, the OTC market is now about four times our size -- $63.7 billion to $16.3 billion.

The foreign futures exchange story is much the same. Ten years ago, no foreign futures exchange traded any of the top ten futures or options contracts. Now seven of the top ten contracts are foreign.

Those facts offer a chilling message to anyone running an exchange today -- regulatory arbitrage is driving our business away and if we can't provide a regulatory environment that fosters our ability to innovate, our markets will disappear. We have tried cutting exchange-imposed costs; the Board of Trade's costs are already the lowest in the world and our fees haven't been raised for 15 years. So that is not the answer.

What most professional market participants apparently want is regulatory freedom. They want to trade markets where they are not under the thumb of a government regulator who would require them to file regular and special reports, maintain specified books and records, meet position limits and fulfill ongoing government-imposed compliance and paperwork obligations.

To attract those customers, we need to change our current regulatory system. Mr. Chairman, last year we testified before this Committee that the existing regulatory system had a "choke hold" on U.S. markets. We used strong words because while we saw the existence of U.S. exchanges slipping away, we feared no one was listening.

Mr. Chairman, you, Senator Harkin and Senator Leahy as well as other members of this Committee were listening. You have begun to correct the unfair competitive imbalance U.S. exchanges face from foreign exchanges and over-the-counter dealer markets. We thank you for your leadership, foresight and hard work.

S. 257 is ground breaking legislation that would bring common sense and consistency to the regulation of modern U.S. markets. The Chicago Board of Trade is pleased to join all U.S. exchanges in supporting S. 257. Our joint written testimony details the exchanges strong support for many provisions of this bill, as well as areas where we believe improvements could be made.

Among the many improvements in our existing regulatory system, S. 257 includes important provisions on audit trail and cost-benefit analysis. The audit trail provision would underscore that the audit trail requirements enacted in 1992 constitute a performance standard that may be met in a variety of different ways by exchanges utilizing their existing systems, rather than new, untested and prohibitively expensive technologies. The bill also would take a historic step by requiring the Commission to assess in some formalized way the cost and benefits of the regulatory actions it considers. That should provide better regulation and stronger markets.

Mr. Chairman, the Chicago Board of Trade looks at S.257 through the prism of one simple principle -- "All professional markets should be treated alike." If "professionals only" OTC markets are exempt from regulation, then "professionals only" exchange markets should be exempt too.

Mr. Chairman, the Treasury Amendment and ProMarket provisions of S.257 come close to meeting that test. They would afford exchanges an opportunity to offer institutions and other professionals a new market choice under exemptive terms comparable to OTC dealers. All we have ever wanted is that Freedom to Compete.

We know you have heard from some who fear our new ProMarkets would be unregulated. Those claims are not true. Self-regulation does not mean no regulation. No one has more at stake in the integrity of our markets than we do.

For that reason, ProMarkets would offer market participants many well known exchange safeguards:

     open and competitive liquid trading;
      transparent pricing;
     no credit, margining of positions that are marked to market daily;
     time-tested self-policing systems; and
      unsurpassed financial integrity through clearing systems which eliminate counter-party risk.

Each of these safeguards was invented by exchanges, not the federal government, because it is good for our markets and our business. I want you to know Mr. Chairman that the Board of Trade would rigorously apply all of those safeguards in any professional market we operate.

If Exchanges with their proven record for operating safe markets are to have a continuing role in the international economy, they must be freed from the regulatory micro management they have come to endure. If institutions and professionals are to have the benefits of those proven business systems, futures markets must be freed to compete without crippling regulatory costs. Your bill implements those important principles .

Some have claimed that professional exchange markets need federal regulation while professional OTC markets do not. That form of discrimination against exchanges makes no sense. Exchange markets are safer due to their elimination of counter-party risk and other inherent protections. No one has explained why the safer market should have more federal regulation.

While S. 257 contemplates leveling the playing field, more work remains to be done. The bill would perpetuate the disparate regulatory treatment of exchanges in three areas.

First, Mr. Chairman, the Board of Trade has pledged to you that none of its existing agricultural commodity contracts would be traded on a ProMarket. But the bill goes further by banning ProMarket transactions for any new, innovative contracts involving agricultural commodities. In contrast, the bill's exemption for the OTC market is unlimited in the agricultural area and would permit even corn, soybean and wheat futures to be traded in exempt OTC markets. We doubt that this Committee would feel safe allowing that trading to occur. For new innovative agricultural instruments, the Committee may want to allow professional markets to develop. If so, all we ask for is Freedom to Compete.

In that connection, we know that you may be asked to lift the agricultural trade options ban now imposed by the CFTC. While we have some concerns about removing the ban, we have been persuaded that, so long as financial integrity is secured, trade options could provide producers with needed risk management flexibility. To that end, we recommend that any action to lift the trade options ban should be conditioned on requiring any party who sells such an option to hedge that OTC transaction on the exchange.

Second, the bill's otherwise even-handed Treasury Amendment reform allows certain OTC dealers to offer currency and government security futures to the retail public without the customer protections this Committee has historically required. The bill denies exchanges, with inherent self-regulatory protections, the same freedom. Why?

By leaving the term "general public" undefined for Treasury Amendment transactions, the bill also would allow the CFTC to undermine fair competition. That risk could be remedied by statutorily defining the term "general public" the same for both on-exchange and off-exchange transactions. The Committee should adopt such a definition.

Third, the bill allows equity products offered by OTC dealers to be exempt from the provisions of the Shad-Johnson Accord. The same equity products offered in ProMarkets are denied that exemption. No policy reason has been offered for releasing dealer markets in single stock futures from the current statutory ban, while the same instruments traded on U.S. exchanges remain banned. Ironically, foreign futures exchanges in Australia, Hong Kong and Brazil already trade single stock futures. We favor lifting the ban for all equity products traded among professionals whether on- or off-exchange. Again, all we want is Freedom to Compete.

Mr. Chairman, these are constructive suggestions. The Chicago Board of Trade applauds the exceptional work you and your excellent staff have done in setting out a framework that will strengthen our ability to compete well into the next century.

We have asked for Freedom to Compete with the OTC dealers on a fair playing field. We thank you for authoring legislation that would go a long way toward securing that right for U.S. exchanges. We look forward to working with you and this Committee to secure passage of S. 257.