I would like to welcome today's witnesses as the Subcommittee begins the first of three hearings to review H.R. 467 and issues related to reform of the Commodity Exchange Act.

There exists a rich history of federal regulation governing futures markets in the United States. The Commodity Exchange Act has been the primary statute governing futures markets since 1936. However, the Commodity Futures Trading Commission as we know it today was only established in 1974.

No longer a division of the Department of Agriculture, this independent regulatory agency was granted exclusive jurisdiction over futures trading in the United States and was formed based on the model of the Securities and Exchange Commission.

In large part, this separation reflected a realization that futures trading had expanded beyond the scope of agricultural markets to the global financial system.

Like the SEC, this new Commission was granted enforcement authority with broad power to take necessary actions against fraud, manipulation and excessive speculation in the markets.

Both models of the SEC and CFTC are premised and designed on the concept of self-regulation. Congress' intent was to assure a strong regulator whose role was to oversee the markets rather than to impact the market. To that end, the CEA established designated Self-Regulatory Organizations overseen by the CFTC. These SRO's -- the exchanges and the National Futures Association --- were charged with enforcing fair trading practices, and financial and reporting requirements of their membership.

The 1974 legislation also adopted the Treasury Amendment, an issue central to our debate today.

As the CFTC was being formed and charged with the exclusive responsibility of overseeing the futures markets….. jurisdictional concern was expressed by the Treasury Department who has the responsibility to regulate foreign currency and government security products.

The Treasury Department offered an amendment --- which was ultimately adopted --- that states that foreign currency and government security product transactions do not fall under the CFTC's jurisdiction unless it is a futures or option contract traded on an exchange. However, a number of court cases including the Supreme Court decision in Dunn have illustrated the need to clarify the scope of jurisdiction between Treasury and the CFTC.

In the Futures Trading Act of 1982, another jurisdictional dispute was resolved -- this time between the CFTC and the SEC on the issue of futures contracts involving securities --- specifically, single stocks and stock indices traded on securities exchanges. An agreement was reached between the CFTC and the SEC known as the Shad/Johnson accord.

This accord granted CFTC jurisdiction over futures contracts and options on futures contracts of broad-based on stock indexes … and … foreign currency products not traded on a securities exchange. The SEC retained jurisdiction over options on stock indexes, single stocks and foreign currencies traded on a securities exchange. More importantly, Shad-Johnson paved the way for innovative new futures products such as the S&P 500 futures.

The most recent debate of the futures issues was reflected in the Futures Trading Practices Act of 1992, which incorporated enhanced standards for audit trail requirements and permitted lesser regulated "professionals only" futures trading in the United States.

In 1993, the CFTC voted and approved to exempt certain swap agreements and hybrid instruments as well as certain energy forwards from the Commodity Exchange Act and from all CFTC regulations except that anti-fraud and anti-manipulation provisions would still apply.

The Commission found that limiting trading in the OTC market to professionals and institutions addressed concerns regarding financial integrity and consumer protection consistent with the public interest.

This Subcommittee passed the most recent legislation amending the Commodity Exchange Act with the passage of the Commodity Futures Trading Commission Reauthorization in 1995 --- the CFTC's fifth and probably most expedited reauthorization in the Commission's history.

The Subcommittee reported a clean reauthorization without amendment in order to provide the Commission a necessary base of support for operation.

It is important to note that the 1995 hearings included discussion of many of the issues at the heart of the 1997 debate.

Uncertainty of Treasury amendment jurisdiction, the authority for CFTC to exempt products that might otherwise be subject to regulation, approval of new contracts and rules, audit trail requirements, the need for cost benefit analysis, the potential to delegate additional responsibility to the industry's self-regulatory bodies, and the need to do business in a manner that retains the futures industry's competitiveness --- were all discussed during the 1995 hearing.

However, debate of these issues was put aside to avoid a protracted Congressional debate with one very important understanding.

That understanding was that the Subcommittee would retain the right to review and debate these issues in the future.

The legislation I introduced at the end of the 104^th Congress and reintroduced in the 105^th Congress incorporated many of the issues not considered at that time and is the second part of the 1995 deal.

Both of the bills I introduced, H.R. 4276 and H.R. 467, were introduced as discussion documents in an attempt to further the dialogue about important and controversial issues the Committee is preparing to debate this week.

The scope of the Commodity Exchange Act is enormous. The Subcommittee does not take its policy responsibility lightly. We will be thoughtful in our approach and thorough in our discussion of the issues as we move forward with this top legislative priority this year.

As policy makers, Congress has a responsibility to step back and see if we are doing the job properly? Can we be more efficient? Are we utilizing scarce resources in the best way possible?

The Subcommittee's goal will be to review the Commodity Exchange Act to see if we are doing the job properly. Let's step back and determine if we can do things in a better way? Can we … in fact …operate more efficiently, more effectively, or more competitively?

This pragmatic type of review is occurring everyday in government. In agriculture, we are taking this same approach toward our review of our agriculture research and crop insurance programs.

Congress has long recognized the goals of protecting the public interest, preserving the integrity of the markets, providing a forum for market participants to transfer risk, and the need to provide a mechanism for price discovery as it has considered treatment of the futures market and futures market regulation.

Much of our debate will be centered on a theme made famous in Jerry Maguire --- "Show me the money." The issues are transparency, full disclosure and reasonable accountability not lack of management controls or outright fraud --- activities which are generally unpreventable by regulators.

Concern has been expressed by CFTC about the promarket provisions of H.R. 467 leading to another Barings or a Sumitomo situation.

To that issue .. I say that the Baring's and Sumitomo management should have said "show me the money". On other derivatives agreements gone bad --- such as Gibson Greetings, Proctor & Gamble or Orange County --- a central request should have been made - "show me the money".

Many of the participants entered into these agreements understanding very little about these contracts. More importantly, they could not calculate or learn the value of their transactions one day to the next.

Hedge-to-arrive contracts are another example. These contracts were clearly under CFTC's jurisdiction. There was no prevention of these activities by the regulator. Instead, the result was CFTC attempting to clean-up after the fact and many millions of losses in farm country.

The exchange system exists to preserve market integrity. Among the primary requirements, each exchange is backed by a clearinghouse which is required to "show the money" by meeting certain financial standards and by establishing a margin system to cover losses on outstanding futures contracts --- all of which are imposed by the traders themselves not by government regulation.

If my colleagues will indulge me for a moment, I would like to briefly discuss the issue of public interest. I would like to share some observations made by the Congressional Research Service on this issue. The observation is that "the exchange system has developed out of the need for traders to protect themselves and the market from defaults brought about by quick and massive losses which are expected to occur from time to time given the risk inherent in the markets.

"When two exchange members trade with each other the role of government may be limited as orderly markets, free competition and a level playing field are in the interest of both. However, when outside customers are involved, self-interest is not there."

CRS correctly observes that Congress has responded to the issue of consumer protection by adoption of provisions to require registration requirements and implementation of audit trail rules.

Protecting the public interest is a cooperative effort between the government and the exchanges. Just as important is the CFTC's ability to exercise adequate enforcement authority.

Beyond consumer protection of customer interests, the public interest is also served through integrity of the markets and by assuring flexibility to allow innovation and development of products necessary to assure price discovery for our many agricultural commodities.

The U.S. futures markets provide the vital functions of price discovery and hedging capability, functions that are just as important on the farm as they are in the market place.

Each of these standards, themes and functions is based on the Self-Regulatory Organizations ability to compete in today's global market. A noncompetitive U.S. exchange structure will not be able to provide the most effective forum by which to discover prices, transfer risk.

Today's futures market is not the same market that existed in 1974.

One only need to look at the products delivered by the exchanges to understand that the agricultural commodity focus has expanded well into the financial markets. The composition of the markets and customers has changed dramatically and technological advances have created an instantaneous global market that trades 24 hours a day.

The markets --- whether agricultural or financial --- serve a single purpose -- the function of risk management.

1996 statistics reported by Futures Industry in February show that global futures volume was down less than 1%. Trading of financial instruments which account for 73% of total volume declined by 4%. Agriculturals, metals and energies fell by 9%.

Of most interest … is the fact that nine of the top ten contracts that saw the largest gains in 1996 DID NOT occur on our U.S. exchanges. With the exception of the CBOT's corn contract, all of these contracts were traded on a foreign exchange.

Each of us has a responsibility to review the many issues involved in reform of the CEA to seek balance --- the balance of allowing market innovation to develop and competition to proceed while maintaining adequate enforcement and surveillance of the markets and … most importantly … while protecting the public interest. I believe we can achieve this balance through very thoughtful, informed and rational debate and discussion.

H.R. 467 provides a framework for achieving this balance. Although the CFTC has expressed concern about provisions included in this framework, it nonetheless reflects a benchmark of standards shared by all --- standards of maintaining market integrity, protection of public interest, and preservation of price discovery and hedging mechanisms.

It is my hope that the Commission will rise to the challenge and work with us as we attempt to make the CEA more relevant to today's markets.

I look forward to working with the Administration, the industry and my colleagues as we move forward with this very important debate.