There was a robust discussion of a number of matters facing the agencies. Congress mandated that the agencies work together on several issues when it passed the Farm Bill last year. Specifically, the Farm Bill requires the agencies to take action under existing agency authorities by June 30, 2009 to permit the trading of futures on certain security indexes by resolving issues related to foreign security indexes and by September 30, 2009 to permit risk-based portfolio margining for security options and security futures products. These have been ongoing issues for our agencies, and I encourage any of you with an interest in the outcome of either of them to contact staff at the SEC and the CFTC and share your views.

I know that some have pushed for a merger of financial agencies. However, merger, in and of itself is not a solution, it’s just an activity. The real solution is harmonizing financial regulatory approaches. Whether we merge the agencies or develop new cooperative regulatory models, the bottom line is that we need to figure out how to mesh regulatory approaches. Merger may be one avenue for accomplishing that, but it may not be the most effective or efficient.

As we discussed in Wednesday’s international regulators meeting, not only must we coordinate within the U.S., we must also work to improve collaboration with international regulators. What happens in the U.S. affects markets and market participants around the world. Derivatives markets clearly cut across both domestic agency jurisdictions and international lines. The CFTC finds that during this time of global financial crisis, there has never been a greater need to coordinate with our international regulatory counterparts. All countries are confronting a need to rethink regulation and the investing world is expecting a united regulatory front. The great relationships that the CFTC has built over time are evidenced by the many international regulators present during our international regulators meeting on Wednesday.

As you know, there has been global concern about the volatility in commodity market prices. Therefore I was pleased when the International Organization of Securities Commissions (IOSCO) formed a Task Force co-chaired by the CFTC and UK Financial Services Authority to consider whether supervisory approaches are keeping pace with developments in the market and whether regulators are cooperating sufficiently to deal with the increasing globalization of the markets.

The Task Force’s report was just published last week. I was gratified that among the Task Force’s practical recommendations were steps to improve the quality of data on commodity markets – OTC and cash – as a means to facilitate our understanding of price formation in the futures markets. Additionally, the Task Force recommended that futures regulators meet regularly to share surveillance and enforcement trends and techniques.

This audience is also well aware of the number of hybrid products such as securities futures, exchange traded funds, or swap contracts that involve the jurisdiction of several domestic agencies. Resolving jurisdictional boundaries has bedeviled the derivatives industry for decades.

I expect that many of these issues will ultimately be considered by the President’s Working Group of which the CFTC Chair is a member. We have had one meeting of the principals of the PWG and several meetings of staff to begin discussions on the financial issues facing our markets, and we look forward to further work with our PWG colleagues.

Review of hedge exemption policies and increasing market transparency
Increasing market transparency is critical given that the past year has seen record price swings in commodities coinciding with a huge influx of money from new classes of investors such as index funds. Justifiably these events have inspired questions and significant concern from the public and Congress.

In the coming weeks, the Commission will be issuing a concept release seeking public comments on how the Commission should consider revising the way it classifies commercial and speculative traders and how it issues exemptions to speculative position limits for hedgers. The CFTC’s September 2008 staff report on Index Traders and Swap Dealers made recommendations, including that the agency review the bona fide hedge exemptions for swap dealers. The report’s recommendations included considering a limited risk management exemption for swap dealers with reporting requirements and position limits.

Also, in an effort to increase market transparency, the CFTC announced last month that it had launched, on a six-month trial basis, a new monthly report called “This Month in Futures Markets.” The report, produced by the Commission’s Office of the Chief Economist, adds transparency to the information the Commission provides the public concerning regulated futures markets by providing graphical and tabular displays on the Commission’s website.
The report draws from the Commission’s Commitment of Traders data and displays various market statistics for 22 actively-traded commodity markets including, in the energy markets, natural gas, crude oil, heating oil, and RBOB gasoline.

Even looking at the historical data contained in these new reports, it is clear there is no easy answer that explains the wild price swings experienced in many commodities over the last year. No easy answer exists to explain how the price of oil can fall from $147 a barrel to the low $40’s in just months.

There are no generally accepted models that answer the question of whether speculative trading, easy credit, or “irrational exuberance” led to long term price distortions or a “bubble” last year. Unfortunately, it seems that bubbles are like recessions, you only firmly identify you are in one months after it has already begun. We still do not fully understand, even with all the data the CFTC has collected and analyzed, exactly how these factors worked together and how individual factors contributed to the overall problem.

We do know the data we collect and the studies we have done thus far have not conclusively shown that investment by speculative or index traders is directly driving prices. We look for those types of relationships on a daily basis—but we do it in a limited way. We look at whether current market conditions or market structures are leading to problems with price discovery or price distortions. Where we see problems, we intervene, working with the exchanges and traders to address those problems. Where we see fraud or manipulation, we bring enforcement cases.

As we continue to examine last year’s events, I believe that we can, and must, take pragmatic steps to address serious concerns. We must increase transparency in markets so both the CFTC and the public have a clear window into the potential factors driving price discovery. More transparency in supplies and storage and more transparency into market makeup will help market participants make better decisions.

Given the high percentage of open interest attributable to noncommercial positions speculative trading in some of our markets, I believe that a careful review speculative positions limits is required.

In some of our markets, particularly agricultural markets, we have noted potential structural problems. These problems, such as lack of convergence, weak basis, and high margin requirements jeopardize the futures markets’ effectiveness as a risk management tool for the agricultural sector.

Congress has been very active in this area—considering legislation that would impose speculative position limits for energy futures contracts, redefine allowable hedging activity, impose stiffer penalties for manipulation, just to name a few things.
Two bills, one by Senator Harkin and one by Representative Peterson, Chairmen of the Senate and House Agriculture Committees, respectively, would provide the CFTC additional oversight authority over OTC markets. Senator Harkin’s bill eliminates many of the exclusions and exemptions for OTC trading that were contained in the CFMA. His intent appears to be to require OTC transactions to be moved onto regulated futures exchanges.

Representative Peterson’s bill seeks, among other things, to mandate clearing of OTC transactions, require CFTC mandated position limits, establish conditions for granting hedge exemptions, require increased recordkeeping and reporting, and provide additional requirements on foreign boards of trade, index traders, and swap dealers.

Adequate CFTC funding
Finally, the CFTC continues to face significant resource challenges and without additional resources, the CFTC will be unable to fulfill its regulatory charge. Each day the CFTC oversees markets whose traded contracts have a notional value of $5 trillion. President Obama’s 2010 budget for the entire year is $3.5 trillion. Again, we oversee $5 trillion in notional value of trading each day. We also are working with fewer people at a time when the markets we regulate have grown exponentially. In 1992, the CFTC had 592 full-time employees, today we have 490 employees. Though technology has helped us become more efficient in the work we do, we can no longer sustain our current level of work without an infusion of human and fiscal capital. Fortunately, help may be on the way.

The omnibus appropriations bill signed into law yesterday by President Obama included a much needed boost—approximately 31%—in funding for the CFTC’s critical mission areas. President Obama’s 2010 budget calls for another 10% increase in the CFTC budget for a total increase of 41% over our present day operating budget. I am very thankful to the Appropriations Committees in both the House and Senate for recognizing this need, and in particular to Senator Durbin who continues to show his commitment to a successful and robust CFTC. I am hopeful that this increase in funds will enable the CFTC to fulfill its responsibilities without Congress resorting to new funding streams, such as user fees.

While we are pleased with the outcome of the appropriations process, more resources are needed as the financial crisis and desperate economic times continue to uncover fraudulent behavior throughout the markets. I will continue to call on Congress and the Office of Management and Budget at the White House to ensure we have enough resources and personnel to carry out the agency’s many essential mandates. There has never been a more important time in the CFTC’s history for thorough and unwavering oversight of the futures markets, and having the people and the technology to collect, analyze, oversee, and enforce the Commodity Exchange Act is the key to our success. (Mr Michael V Dunn is Acting Chairman, Commodity Futures Trading Commission, USA)