Chairman Dick Lugar, U.S. Senator for Indiana

Opening Statement

Date: 6/21/00

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Ag/Banking Hearing on CEA

Today the Senate Agriculture and Banking Committees will hear testimony from members of the President's Working Group regarding S. 2697, legislation to provide legal certainty to the over-the-counter derivatives market and to reauthorize and reform the Commodity Exchange Act. The Commodity Exchange Act expires on September 30th of this year, and the Senate Agriculture Committee is charged with reauthorizing this statute. However, we cannot accomplish this endeavor without the assistance and cooperation of the members of the Senate Banking Committee. I am pleased to have the distinguished chairman of the Senate Banking Committee, Senator Gramm, joining me as a cosponsor of this important legislation, and we look forward to working with his Committee as this legislation proceeds.

This legislation has been several years in the making. The Senate Agriculture Committee held a two day roundtable of 19 industry experts in February of 1999 to discuss the policies surrounding CFTC reauthorization. Asked to prioritize the issues of importance, most panelists thought legal certainty to be the most pressing issue; others suggested repeal of the Shad-Johnson Accord, including Phil Johnson, former CFTC Chairman and one half of the Accord's namesake; and several mentioned regulatory relief for the futures exchanges. Today's hearing, representing our Committee's fifth public forum on CFTC reauthorization in the last 18 months, will hear testimony regarding how all of these issues are addressed in our legislation.

Signed into law in 1974, the modern Commodity Exchange Act requires that futures contracts be traded on a regulated exchange. As a result, a futures contract that is traded off an exchange is illegal and unenforceable in a court of law. When Congress enacted this Act, the meaning of the terms 'future' and 'exchange' were relatively apparent and the over-the-counter derivatives business was in its infancy. In the 26 years since the statute's creation, however, the definitions of a swap and a future began to blur.

In 1998, the CFTC released its concept release on over-the-counter derivatives, which was perceived by many as a precursor to regulating these instruments as futures. Just the possibility of reaching this conclusion threatened to move significant portions of the business overseas. This led the Treasury Department, the Federal Reserve, and the SEC to ask Congress to enact a moratorium on the CFTC's ability to regulate these instruments until after the President's Working Group (PWG) could complete a study on the issue. As a result, Congress passed a six-month moratorium and in November 1999, the President's Working Group completed its unanimous recommendations on derivatives and presented Congress with its findings.

This legislation adopts many of the unanimous recommendations of the Working Group's report, including an exclusion for over-the-counter derivatives transacted on an electronic exchange and a clarification of the 'Treasury Amendment'. Another important recommendation of the Working Group was to authorize futures clearing facilities to clear over-the-counter derivatives in an effort to lessen systemic risk. This bill incorporates this finding.

The second major section of this legislation addresses regulatory relief for the futures market. In February, the CFTC, under the leadership of Chairman Bill Rainer, issued a thoughtful proposal that would provide relief to futures exchanges and their customers. Instead of listing specific requirements for complying with the Act, the proposal would require exchanges to meet internationally agreed-upon core principals. The CFTC proposal tailors regulation for exchanges based on whether the underlying commodity can be manipulated or whether the users of the exchange are institutional. Our legislation incorporates this framework.

The bill's last major section addresses the Shad-Johnson jurisdictional accord, which banned single stock futures in 1982. The Working Group unanimously agreed that the Accord can be repealed if regulatory disparities are resolved between futures and securities. In December, Senator Gramm and I sent a letter requesting that the CFTC and the SEC make recommendations on reforming the Shad-Johnson Accord. The SEC and CFTC responded that, although progress had been made, the agencies could not resolve these issues before October. Disappointment with this answer led Senator Gramm and I to once again ask the agencies to attempt to resolve the problems surrounding lifting the ban. Unfortunately, an agreement within our legislative time-frame was not reached, and we have decided to move forward with our legislation.

This legislation would repeal the prohibition on single stock futures and allow these products to trade on either a CFTC-regulated futures exchange or an SEC-regulated securities exchange. Our bill also would provide for joint jurisdiction with each agency maintaining its core authorities over the trading of single stock futures. The legislation would further require that margin levels on these products be harmonized with the options market.

The goal of this legislation is to ensure that the United States remains a global leader in the derivatives marketplace. Already, the United States has lost its leadership role in the exchange-traded futures market to Europe, and the over-the-counter market may not be too far behind. Congress has an good opportunity to reverse this tide by enacting sound legislation this year. I am hopeful that our Committee can mark-up this legislation before the July 4th recess.

The importance of this legislation is reflected by the witnesses assembled before us today. Our first panel consists of the head of the President's Working Group, the Honorable Lawrence Summers, Secretary of the U.S. Department of the Treasury and the Honorable Alan Greenspan, Chairman of the Federal Reserve System. Our second panel consists of the Honorable Arthur Levitt, Chairman of the SEC and the Honorable Bill Rainer, Chairman of the CFTC. We look forward to their insights regarding their agencies' discussions on the Shad-Johnson Accord as well as other issues.

I now turn to my distinguished colleague, Senator Gramm, for his opening remarks.

Lugar's statement and testimony from the today's hearing will be posted to the Internet at www.senate.gov/~agriculture.

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