July 12, 2000

Mr. Chairman, thank you for recognizing me. I commend you for holding this important hearing and I warmly welcome our distinguished witnesses.

My colleagues, forgive me for being blunt, but this bill is a real turkey and most of you know what I do to turkeys. If the bill’s many defects are not fixed in this Committee, I will do everything within my power to put this legislation out of its misery at the earliest opportunity.

First, I support the effort to provide legal certainty for OTC derivatives. The Commerce Committee played an instrumental role in crafting and passing the swaps exemption in the 1992 Futures Trading Practices Act. I would like to be in a position to enthusiastically support the legal certainty provisions in H.R. 4541. However, the bill before us contains defective provisions on the regulation of clearinghouses that must be fixed to assure appropriate regulation of the risks that may be concentrated there. I also am concerned that the bill’s definition of "eligible contract participants" includes retail investors who have no business in these unregulated institutional markets. I have other questions and concerns about this part of the bill but these are the principal ones.

Second, my general disdain for the quality of futures regulation in this country has not improved after reading this bill. As I understand it, H.R. 4541 transforms the CFTC from a "front line regulatory agency" into an "oversight regulator" of what the bill calls "acceptable business practices under core principles" that will be applicable to registered futures markets. If the CFTC believes that a registered entity is violating these yet-to-be-determined core principles, it must first notify the entity in writing, then recommend an appropriate remedial action to remove the deficiency, but only after first conducting a cost -benefit analysis of the remedial action, and finally the burden of proof is shifted to the CFTC which must demonstrate the violation by a preponderance of the evidence. Every crook and swindler in the country is hoping that these outrageous provisions stay in the bill. I support reasonable regulatory relief for the futures exchanges, but H.R. 4541 is clearly contrary to the public interest.

Third -- and I saved the best for last -- I see absolutely no redeeming value whatsoever in the provisions of this bill that lift the ban against single-stock futures and create a defective regulatory structure for these retail products under the Commodity Exchange Act and the CFTC -- the same CFTC that this bill reduces to a defanged oversight regulator of core principles. This part of the bill -- Section 8, Futures on Securities -- poses a serious threat to the integrity of this country’s capital markets, undercuts over six decades of unparalleled investor protection and investor confidence, and makes a joke of fair competition between markets. These provisions are opposed by the Securities and Exchange Commission, the American Stock Exchange, the Boston Stock Exchange, the Chicago Board Options Exchange, the Chicago Stock Exchange, the Cincinnati Stock Exchange, the Nasdaq Stock Market, the New York Stock Exchange, the Pacific Stock Exchange, the Philadelphia Stock Exchange, the Depository Trust & Clearing Corporation, and the Options Clearing Corporation, among others. Mr. Chairman, I ask unanimous consent to include in the record a May 22, 2000 Business Week article entitled "The Case Against Single-Stock Futures" as well as copies of the June 27, 2000 letter of the NYSE and the July 11, 2000 memorandum of the U.S. Securities Markets Coalition, setting forth these entities’ detailed concerns with this bill. I agree with many of their comments. I also ask to include in the record a copy of the February 9, 2000 letter that Mr. Towns, Mr. Markey and I sent to the SEC setting forth the questions that we believed had to be satisfactorily addressed on this matter. I would observe that the bill before us does not meet any of the tests that we set for a good bill.

Mr. Chairman, I am highly skeptical about the wisdom of authorizing single-stock futures or futures on narrow stock indices or narrow groups of stocks. As the GAO warned in its April report, "even a small price movement in the underlying stock could encourage attempts to manipulate stock prices." Futures are a highly-leveraged zero-sum game. A lot of people will get burned. The stock markets that have been the envy of the world will be reduced to a commodity with the futures markets becoming the price discovery point. This concerns me greatly. Nonetheless, if it is the judgment of my colleagues that we should authorize these ill-advised instruments, it is absolutely imperative that the integrity of our nation’s securities markets and the protections afforded investors not be undermined in any way. At a minimum, we need to provide protections substantially similar to those that we have applied with respect to options on stocks and narrow indices.