By Robert Hunter

William Rainer, nominated in June by President Clinton to replace Brooksley Born as chairperson of the Commodity Futures Trading Commission, may have waltzed through the first stages of his Senate confirmation hearings as expected, but a political tempest has quickly dampened his honeymoon.

The most bluster has come from the Chicago Board of Trade, Chicago Mercantile Exchange and New York Mercantile Exchange, which joined forces in July to launch a major lobbying effort in Washington against the CFTC’s decision to process applications from foreign boards of trade that wish to operate in the United States. On June 28, the three exchanges sent a joint petition to the CFTC detailing their displeasure with the CFTC’s decision to allow foreign exchanges to operate in the United States under much less stringent regulatory regimes, while the U.S. exchanges were offered no guarantee of reciprocity in trading abroad.

“Foreign exchanges will be able to pay for order flow, permit prearranged trades, facilitate block trades with delayed price reporting, dispense with strict audit trail rules, and allow large traders to escape reporting requirements,” the missive said. “To level the regulatory playing field, the U.S. exchanges’ petition seeks the right to obtain the same flexibility as their foreign counterparts.”

The exchanges’ lobbying efforts in Washington paid off. In mid-July, eight of the 32 members of the House Agriculture Committee’s Subcommittee on Risk Management, Research and Specialty Crops sent the CFTC a letter urging it to reconsider the anticompetitive implications of its decision. Among other things, the letter requested a visit with acting commissioner David Spears before any new applications are approved. All this political muscle-flexing had an effect at the CFTC, which launched on July 16 a two-year “pilot program” allowing U.S. exchanges to list futures and options before CFTC review and approval—one of the sweeping changes the CBOT and Merc proposed earlier this year.

If the CFTC acquiesces too quickly on the foreign terminals issue, however, it will face opposition from other camps. The nation’s futures commission merchants and brokers naturally favor a proliferation of foreign screens in the United States, which would allow them to offer customers bigger product menus and better prices. The groups have reportedly launched a lobbying blitz of their own, arguing that the U.S. futures establishment is trying to preserve a monopoly in the face of justified competition. Some have even quipped that the exchange’s political support is based more on past campaign contributions than on the validity of their argument.

And there’s yet another dimension to the foreign terminals debate: In June, the CFTC announced that Frankfurt-based Eurex, which was allowed to install terminals in the United States in 1996, will not be allowed to install any new terminals until Liffe gets its new electronic-trading system up and running, which may not happen before fall. Predictably, Eurex is furious, but it has decided against mounting a legal challenge to the ruling. “What can we do?” said a Eurex spokesman in June. “If we put this in the hands of lawyers, it will take months, if not years, to resolve.

Shake-up?

All this has provided more fuel for those eager to legislate the CFTC out of existence. Sen. Richard Lugar (R–Ind.) and Rep. Tom Ewing (R–Ill.) announced on July 1 plans to draft a legislative proposal for Commodity Exchange Act reauthorization during the August Congressional recess. The current CEA authorization ends September 30, 2000, so the new proposal will be afforded ample time for debate.

The Lugar–Ewing announcement didn’t spell out their intentions word for word, but it did outline certain “parameters” that will guide the reauthorization—many of which echo the CBOT–Merc’s aggressive proposal unveiled earlier. Among them:

• Legislation should revamp functions of the CFTC to transform it from a “front-line” regulator to an “oversight” agency, as long as such changes do not conflict with the public interest.
• Legislation should clarify and refocus the jurisdiction of the CFTC without significantly expanding its original grant of authority.
• Legislation should streamline and eliminate unnecessary regulations for the futures exchanges.
• Legislation should incorporate how the emergence of electronic trading may require a different level of and approach to regulation.
• Legislation should provide legal certainty for over-the-counter derivatives.

Rainer’s mission, should he choose to accept it: to preserve the regulatory integrity of the CFTC while simultaneously embracing many of the sweeping changes that have been proposed. A daunting task indeed.

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