Testimony of George E. Crapple

Chairman

Managed Funds Association

Before the Subcommittee on Research, Nutrition and General Legislation of the Senate Committee on Agriculture, Nutrition, and Forestry

March 20, 2000

Thank you for the opportunity to testify here today. I appear here as the Chairman of the Managed Funds Association ("MFA"), a national trade association representing more than 700 participants in the hedge fund and managed funds industry. I am also the Co-Chairman and Co-Chief Executive Officer of Millburn Ridgefield Corporation, which has managed money in the currency and futures markets since 1971 and also sponsors funds of funds and equity hedge funds.

MFA appreciates the opportunity to testify before this Subcommittee concerning the Commodity Futures Trading Commission's recently published staff task force report, "A New Regulatory Framework" (the "Report") and issues relating to the reauthorization of the CFTC. MFA commends the CFTC for its evident commitment to reinventing its regulatory program in fundamental ways - an approach designed to address seemingly intractable regulatory issues that have been with us for many years as well as issues that may be critical in permitting our markets to remain global leaders in the twenty-first century. Members of MFA in the aggregate manage the vast majority of the over $40 billion invested in managed futures and a significant portion of the nearly $400 billion invested in hedge funds. Our members are active participants in all derivatives markets, both on and off exchanges, foreign and domestic. Accordingly, a regulatory environment that promotes competition and innovation which results in liquid, efficient markets is of enormous significance to us.

MFA believes that the CFTC's Report and the previously issued President's Working Group Report on Over-the-Counter Derivatives identify a number of important issues deserving priority attention. I will review these issues in greater detail in the balance of my remarks. We believe in general that the CFTC's overall purpose and its suggested approach are highly constructive. The Report significantly advances the debate over the optimal regulatory structure for the U.S. futures markets, and MFA applauds this development.

Redesigning Regulation of U.S. Futures Exchanges

The highly competitive markets in which MFA's members and other market participants operate require prompt and creative responses to new market conditions, new technologies, new products, and new trading and clearing mechanisms. The CFTC is to be commended for developing an approach to exchange regulation that is designed to expand the ability of U.S. futures exchanges to meet these challenges - through a regulatory framework that affords the market maximum latitude, subject only to constraints reasonably designed to assure basic customer and market protections. As we understand it, the Report contemplates a regulatory approach under which futures exchanges and over-the-counter derivatives trading facilities would operate on an even playing field, one which in appropriate circumstances would be subject to minimal regulatory burdens.

MFA supports this concept of a new, highly flexible, largely unregulated marketplace. Commodity pool operators and commodity trading advisors qualified, registered professionals acting for pools, hedge funds and individual accounts should be able to access all future markets, just as today they have access to swaps, over-the-counter derivatives and foreign futures and options (markets not subject to the highest level of regulation). For CTAs, CPOs and their clients, special conditions or risks in these newly developed markets should be addressed as they are generally today in the case of foreign futures markets by the use of a standardized risk disclosure statement. As is the case with foreign futures, this risk disclosure statement would be simple and succinct, clearly highlighting the special risks associated with the particular kind of market thereby permitting the customer to make an informed choice whether to assume these risks. This approach would facilitate the broadest access for CTA-advised futures customers and commodity funds to the greatest possible array of innovative U.S. derivatives markets, resulting in the deepest, most liquid, hence, efficient, derivatives markets. A goal that all of us share. This approach is far superior to limiting eligibility to access a particular market to a defined group of customers, such as limiting access to only the institutional clients of a CTA. This creates significant problems. As the CFTC knows from its recent efforts, the use of this approach to implement a post-trade order allocation procedure rendered the rule unworkable. A reporting and record-keeping nightmare is created. For example, if a CTA had 50 clients in one program and only 30 of them "qualified" for access to the larger, more efficient market. The CTA would be forced to trade for the 30 accounts in one market and for the 20 accounts in another. As a result, most importantly, the CTA's performance results for the 30 accounts could differ substantially from those for the 20 accounts. Most likely, better results would be gotten for the 30 (large) customers. The fragmentation of liquidity would also adversely impact the efficiency of both markets.

Regulatory Relief for Commodity Pool Operators and Commodity Trading Advisors

The CFTC Report does not specifically address regulatory issues relating to CPOs and CTAs. However, MFA understands that the CFTC will be reviewing its regulatory framework for CPOs and CTAs with the same objectives of enhancing efficiency and competitiveness which have guided its review of exchange regulation. We are aware that CFTC staff, in cooperation with the National Futures Association, is developing draft "core principles" for CPOs and CTAs designed to supplement the Report's recommendations concerning other aspects of CFTC regulation. MFA strongly supports this effort and stands ready to assist the CFTC and NFA in any way they consider appropriate.

Legal Certainty for OTC Derivatives

The CFTC Report is not principally designed to address the issue of legal certainty for OTC derivatives. However, the Report builds upon and is consistent with the President's Working Group's recommendations for enhanced legal certainty for OTC derivatives, in particular by reinforcing and augmenting the existing Part 35 swaps exemption and by providing new exemptions for innovative trading and clearing structures for OTC derivatives. MFA strongly supports the objective of enhancing legal certainty for OTC derivatives, including the President's Working Group's recommendations for legislation to exclude OTC financial derivatives from the Commodity Exchange Act, as well as the Report's recommendations for actions by the CFTC to enhance legal certainty. MFA believes that in defining a statutory exclusion for OTC derivatives and any other measures to enhance the legal status of swaps, the existing criteria defining eligible swaps participants should not be further restricted. In fact, they should be expanded to include all clients of CTAs and all commodity pools. The President's Working Group's suggestion that consideration be given to increasing the financial threshold for natural persons engaging in swaps to $25 million in discretionary investments is not, in our view, warranted by experience or public policy. MFA opposes the creation of additional restrictions upon access to swaps or other derivative transactions.

Conclusion

I appreciate the opportunity to submit MFA's views to this Subcommittee. MFA fully supports the efforts of this Subcommittee and of the CFTC under Chairman Rainer to make U.S. futures regulation as vigorous and innovative as the industry it oversees. We look forward to providing our full assistance and cooperation in this endeavor. Once again, thank you for the opportunity to present MFA's views on this important topic. I would be pleased to answer any questions you may have.