Good morning, Mr. Chairman and Members of the Subcommittee. My name is Peter Lee and I am responsible for all North American operations for Merrill Lynch Futures, Inc. On behalf of Merrill Lynch, I want to thank you for the opportunity to appear before you today to present our views on the Report of the CFTC Staff Task Force entitled "A New Regulatory Framework".

Overwhelmingly, the message that I would like to communicate to you today is that the CFTC staff, under the leadership of Chairman Rainer, has done an outstanding job of setting forth a viable proposed framework for regulatory reform. The CFTC staff has worked within a somewhat outdated statute to identify important reforms capable of being administratively enacted. We eagerly await the opportunity to work with the Commission and others in the industry to fashion rules that can implement these important initiatives. At the same time, we will continue to work for legislation that will address the issues that, as the CFTC staff acknowledges, cannot be resolved administratively. We will also continue to offer recommendations for additional administrative relief necessary, in our view, to complete the package of reform.

Merrill Lynch is a user of the derivatives markets - listed and OTC - for its own benefit and on behalf of its clients. There are several important challenges the firm faces in these markets, some competitive and some regulatory, but virtually all driven by technology. Improved communications and electronic processing have fostered global access and reduced barriers to entry, all of which have increased competition and improved market efficiency. However, in many important respects, because U.S. law in this area has been too inflexible to accommodate the markets' evolution, it has created artificial competitive boundaries and legal distinctions that have impeded the growth of both the listed futures and the OTC derivatives markets.

The most important issue to Merrill Lynch relating to these markets is legal certainty. The firm and its customers must be confident that they understand the requirements applied to the transactions they enter into, the systems they use, and the counterparties with which they deal. Those requirements must be clear and not subject to change based upon philosophical changes at the regulator. And most importantly, a failure to adhere to a specific regulatory requirement should not, except in extraordinary circumstances, result in the "death penalty" - allowing a counterparty on the losing side of a transaction to walk away from its obligations under the guise of an illegality defense.

The second most important issue to Merrill Lynch in this debate is regulatory flexibility. Technological change, particularly in communications, makes it impossible to have any confidence that the associations we now know will be the associations of the future. We need a structure that allows participants in the OTC and exchange-traded derivatives markets to communicate broadly, across borders and across markets, without the current consequences of being deemed a "board of trade". Similarly, we need a change in regulatory focus - from detailed, specific regulations to flexible oversight. We need the ability to try new concepts and regulate only the issues that arise in the real world, not inhibit the implementation of new ideas by the imposition of a bevy of requirements to prevent theoretical problems.

Overall, Merrill Lynch believes that the Report positively reflects the goals of legal certainty and regulatory flexibility within the framework of the Commodity Exchange Act, although this is clearly an area that will require legislative and further administrative action to fully achieve our objectives. That said, specifically providing that clearing of bilaterally negotiated swap transactions would not transform an otherwise exempt instrument into a futures contract required to be traded on a designated contract market is a significant step forward. In the same vein, the replacement of many prescriptive regulations with core principles, if coupled with the proper oversight approach in practice, should significantly improve our ability to innovate and test new trading products and practices in the marketplace.

As always, "the devil is in the details" and we look forward to working with the Commission and its staff to implement the reforms represented by the Report. We would like to note several important issues that should be addressed in that process.

In the competitive marketplace, the use of our capital and the customer's use of its capital are paramount. They are drivers of where and how the business gets done. We believe that the Commission needs to focus very carefully on these issues in fashioning proposed rules. Specifically, the Commission needs to find alternatives to the current restrictions on investment of segregated funds, customers' inability to opt-out of segregation requirements, and the calculation of amounts necessary to secure foreign futures and options obligations that result, in certain cases, in an inefficient use of capital. The Commission should also give thorough consideration to the use of risk-based capital requirements for intermediaries. Finally, whatever market structure options are ultimately available, an intermediary must be free, at its election (and subject to the specific requirements of each marketplace), to conduct all of its business within a single legal entity in order to capture the benefits of reduced capital requirements, reduced risk, and netting of exposures.

In closing, I would again like to commend the Commission for its leadership and its vision in pushing forward with regulatory reform, and to thank Subcommittee Members for their interest in these issues. The firm pledges its support in working through the issues directly, and through its participation in the FIA, the ad hoc coalition of investment banks, and the other trade associations of which it is a member. I thank you for your time and attention and would be happy to answer any questions you may have.