[Senate Report 104-7]
[From the U.S. Government Publishing Office]



                                                        Calendar No. 20
104th Congress                                                   Report
                                 SENATE

 1st Session                                                      104-7
_______________________________________________________________________


 
                    CFTC REAUTHORIZATION ACT OF 1995

                                _______


 February 3 (legislative day, January 30), 1995.--Ordered to be printed

_______________________________________________________________________


Mr. Lugar, from the Committee on Agriculture, Nutrition, and Forestry, 
                        submitted the following

                              R E P O R T

                         [To accompany S. 178]

    The Committee on Agriculture, Nutrition, and Forestry, to 
which was referred to bill S. 178, having considered the same, 
reports favorably thereon without amendment and recommends that 
the bill do pass.

                                CONTENTS

                                                                   Page
Purpose of the legislation.......................................     1
Background and need..............................................     1
Summary of provisions............................................     6
Committee consideration..........................................     6
Section-by-section analysis......................................    14
CBO cost estimate................................................    14
Regulatory impact evaluation.....................................    15
Changes in existing law..........................................    15

                       Purpose of the Legislation

    The purpose of S. 178 is to extend the authorization of 
appropriations for the Commodity Futures Trading Commission 
(``CFTC'' or ``Commission'') through fiscal year 2000. Existing 
section 12(d) of the Commodity Exchange Act (7 U.S.C. 1 et. 
seq.) (the ``Act'' or ``CEA'') authorizes appropriations for 
fiscal years 1993 and 1994.

                          Background and Need

    Futures trading in the United States evolved out of forward 
contracting in the grain markets to organized futures exchanges 
prior to the Civil War. Widespread dissatisfaction among 
agricultural producers, frequent price manipulations, and 
fraudulent ``bucket shops'' led to the beginning of federal 
regulation of futures trading in 1921. The 1929 stock market 
crash and fraudulent options trading ultimately resulted in the 
1936 adoption of the CEA. In the CEA Congress stated that the 
commodity futures and options markets are important to the 
national interest. Their importance derives from their hedging 
and pricing functions which are usually cited as economic 
justifications for these markets. Accordingly, the ``necessity 
for regulation'' of futures markets is based on the vital role 
futures markets play in meeting the hedging and pricing needs 
of interstate commerce.
    Until 1974 futures regulation covered only agricultural 
commodities and was carried out by the Commodity Exchange 
Authority of the United States Department of Agriculture 
(``USDA''). In the early 1970s fraud in gold and silver 
options, then unregulated commodities, led to concerns about 
the scope of federal regulation. Controversial trading by 
international grain firms during the great Soviet grain deal of 
1972, which had been negotiated by USDA, led to concerns about 
the role of USDA in futures regulation.
    In response to these concerns, Congress amended the CEA to 
create the CFTC in 1974 as the independent federal regulatory 
agency exclusively responsible for all commodity futures and 
commodity options regulation. In a form resembling other such 
commissions, the CFTC was established with five members 
nominated by the President and confirmed by the Senate for 
staggered five year terms. Additionally, no more than three 
members may be of the President's party. Finally, one of the 
five commissioners is nominated by the President and confirmed 
by the Senate as Chairman.
    The CFTC seeks to prevent manipulation, prohibit fraud, and 
maintain financial integrity in the futures markets. In recent 
years the agency also has focused attention on the 
encouragement of innovation in the nation's futures markets and 
the internationalization of the futures markets. In 
accomplishing these goals the CFTC's regulatory scheme relies 
on federal oversight of self-regulatory efforts supplemented 
with direct Commission action.
    In establishing this regulatory scheme to protect the 
futures markets, their participants, and their hedging and 
pricing functions, the CEA generally provides that all 
contracts for future delivery, or futures, transactions occur 
on exchanges that are ``designated contract markets'' by the 
CFTC. In return for a designation, a commodity exchange 
undertakes to regulate itself and its members to prevent 
manipulation, prohibit fraud and assure financial integrity of 
transactions. The CFTC, in turn, oversees these self regulatory 
organizations (SROs).
    To receive CFTC designation for the futures contracts they 
wish to list for trading, the futures exchanges must submit 
contract terms for CFTC approval and show that the contracts 
are not easily subject to manipulation and can be used for 
hedging or pricing purposes. In addition, trading rules must be 
submitted for approval and must be enforced by the exchanges.
    While in general all futures must be traded on designated 
exchanges, a number of exceptions have been made to this 
provision of the CEA. For instance, forward contracts have been 
excluded from this requirement since its inception in 1921. 
Additionally, as a part of the law that established the CFTC in 
1974, certain itemized financial transactions by banks and 
others were exempted by the ``Treasury Amendment'' from CFTC 
jurisdiction unless these transactions occurred on futures 
exchanges. Finally other financial instruments, such as swaps, 
hybrids, and certain other financial instruments, such as 
swaps, hybrids, and certain energy contracts have been exempted 
from the exchange trading requirement and most other CFTC 
regulations in the past two years.
    In addition to the requirement that trading occur on 
designated contract markets, all commodity businesses and 
commodity professionals must be licensed or ``registered'' by 
the CFTC. Registrants include: futures commission merchants 
(``FCMs''), introducing brokers (``IBs''), commodity pool 
operators (``CPOs''), commodity trading advisors (``CTAs''), 
floor brokers (``FBs''), floor traders (``FTs''), and 
associated persons (``APs''). As applicable, registration may 
require background checks, proficiency testing and ethics 
training. The registration process itself has been largely 
delegated to the National Futures Association (``NFA''), an SRO 
initially created to regulate registrants that were not 
exchange members due to Congressional, CFTC, and industry 
concerns about non-member retail practices.
    Today, futures trading provides a diverse array of products 
including contracts based on agricultural products, financial 
instruments, metals, and energy products. The volume of 
commodity futures and options contracts traded on the nation's 
commodity exchanges exceeded half a billion transactions in 
1994. The liquidity of these markets with their relatively low 
commissions provide efficient opportunities for hedgers and 
other market users. Commodity futures and options transactions 
directly or indirectly affect the financial well being of 
family farms, corporations, financial institutions, traders, 
and millions of individuals through pooled investments. All of 
this trading is carried out within a self-regulatory framework 
overseen and supplemented by the CFTC, an agency of fewer than 
600 employees.
    While the markets overseen by the CFTC have grown immensely 
in volume, variety of products, and diversity of users, the 
importance of futures trading to agriculture cannot be 
overstated. The development of futures trading allowed farmers 
to mitigate the boom and bust cycle of prices for their crops 
through intelligent marketing. Today, futures trading is an 
integral part of pricing and risk management for U.S. 
agriculture. Even farmers who do not use futures directly often 
employ options, forward contracts, basis contracts and other 
marketing tools which exist only because there is a viable, 
liquid futures market.
    The volume of exchange-traded futures and commodity options 
contracts for agricultural commodities on U.S. exchanges 
totalled over 58 million transactions in 1994. This trading 
affected not only the market participants, but ultimately all 
producers, processors, merchandisers and consumers of 
agricultural products with prices affected by exchange trading. 
As the Congress reviews the current federal commodity programs 
through hearings, and debates on the 1995 farm bill, the 
pricing and risk shifting functions of the futures markets may 
take on even more importance as Congress reconsiders the role 
of the federal government in stabilizing prices and assuming 
price risks in agriculture. Hence it is vital that the futures 
markets are operated appropriately and are properly overseen.

                            reauthorization

    Since the establishment of the CFTC in 1974, Congress has 
periodically reauthorized the CFTC. In 1978, issues included 
fraud in ``London Options,'' the legality of retail off-
exchange transactions known as leverage transactions, and the 
authorization of NFA. In 1982 reauthorization included the 
codification of the Johnson-Shad Accord which facilitated the 
development of stock index futures, the authorization of 
agricultural options, a provision for private rights of action, 
a clarification of the jurisdiction of the states, and numerous 
other provisions. In 1986 reauthorization was less extensive, 
but some international enforcement issues were addressed.
    In October 1987 and October 1989 the stock market dropped 
sharply and attention was focused on the relationship between 
stock index futures and the stock market. During the 1980s the 
development of new instruments such as swaps and hybrids 
focused attention on the prohibition of off-exchange futures. A 
federal district court decision involving an OTC oil market and 
a British court decision involving a municipality's purchase of 
swaps contracts led to legal uncertainty in the large and 
rapidly expanding derivative market. U.S. commodity exchanges 
began losing market share to foreign competitors. In 1989 the 
FBI announced that it had conducted an undercover investigation 
on the floors of the Chicago Board of Trade (``CBT'') and the 
Chicago Mercantile Exchange (``CME'') resulting in indictments 
of 48 individuals. In addition, a controversial emergency 
action by the CBT to avert a possible corner of its soybean 
market precipitated a sharp price drop. These events influenced 
and complicated the reauthorization of the CFTC which was not 
completed until the enactment of the Futures Trading Practices 
Act of 1992 (``FTPA'' or ``the '92 Act''). That law amended the 
CEA to:

        * * * improve the regulation of futures and options 
        traded under rules and regulations of the Commodity 
        Futures Trading Commission; to establish registration 
        standards for all exchange floor traders; to restrict 
        practices that may lead to the abuse of outside 
        customers of the marketplace; to reinforce development 
        of exchange audit trails to better enable the detection 
        and prevention of such practices; to establish higher 
        standards for service on governing boards and 
        disciplinary committees of self-regulatory 
        organizations; to enhance the international regulation 
        of futures trading; to regularize the process of 
        authorizing appropriations for the Commodity Futures 
        Trading Commission; and for other purposes. * * *

    Title I of FTPA established limitations on dual trading and 
trading between members of broker associations. Dual trading 
was prohibited in all contract markets except those with low 
trading volumes or those exempted from the prohibition by the 
CFTC due to the performance of the exchange's trade monitoring 
system.
    Title II of FTPA contained numerous provisions relating to 
the enhancement of regulatory and enforcement activities. 
Perhaps the provision of greatest consequence was the 
requirement that each exchange have a trade monitoring system 
to detect and deter trading abuses on the exchange floor. The 
trade monitoring system was required to include an audit trail 
capable of timing trades to the nearest minute and sequencing 
trades. The '92 Act required enhanced audit trails to be in 
place in October 1995 and to be independent, unalterable, and 
sequenced to the extent practicable. At the time this provision 
was adopted, it was widely discussed and anticipated that these 
requirements would be met through the use of electronic hand-
held devices which had not yet been developed. Despite the 
expenditure of substantial time and funds by the exchanges, 
these devices are not yet operational.
    FTPA also addressed exchange governance procedures 
requiring that governing boards represent the diversity of 
constituent groups. Additionally, 20 percent of the Board 
members were required to be non-members. Further, exchange 
disciplinary committees were required to have sufficient 
diversity of membership to insure fairness and prevent special 
treatment for persons subject to disciplinary action.
    FTPA contained a wide variety of additional provisions 
directed at anti-fraud enhancements, including requirements for 
the registration of floor traders, ethics training for 
registrants, the suspension of registrants charged with 
felonies, contemporaneous written records for oral orders, and 
the submission of NFA rules directed at telemarketing fraud. 
CFTC enforcement efforts were strengthened by provisions 
authorizing the CFTC to continue to request and cooperate with 
undercover operations by other federal law enforcement 
agencies, authorizing increased penalties, establishing new 
violations, authorizing the imposition of monetary penalties in 
conjunction with CFTC injunctive actions, and authorizing the 
CFTC to order restitution in administrative actions.
    FTPA required new regulations governing exchange emergency 
actions and new exchange rules providing for the avoidance of 
conflicts of interest. Also, insider trading by certain SRO 
staff and members based on non-public material information 
obtained in the performance of their regulatory duties was 
prohibited. Finally, the CFTC was authorized to adopt rules 
dealing with the financial risks to registered firms in the 
futures industry posed by the activities of their affiliates.
    Title III authorized the CFTC to assist foreign regulatory 
authorities in investigations and directed the CFTC to study 
the competitiveness of U.S. markets in comparison with foreign 
exchanges. Title IV provided certain technical amendments.
    Title V dealt with difficult issues involving intermarket 
coordination. In response to concerns that had been expressed 
since the introduction of stock index futures more than ten 
years before, the Board of governors of the Federal Reserve 
Board was given authority to review and adjust exchange margin 
requirements on stock index futures and options. In response to 
difficult jurisdictional and regulatory issues that arose with 
the advent of non-traditional off-exchange instruments such as 
swaps, hybrids, certain forwards, and others, the Congress 
directed and authorized the Commission to exempt transactions 
in these instruments from the exchange trading requirement of 
the CEA and most other provisions.
    For many of the rulemakings required by the '92 Act, 
explicit statutory deadlines for CFTC final rules were 
contained in FTPA. Similarly, studies required by FTPA were to 
be completed by dates set out in the '92 Act. As of this date, 
the CFTC has completed all of these FTPA requirements on a 
timely basis. However, experience with implementation of FTPA 
has been limited by the relatively short amount of time since 
the adoption of FTPA and by the large variety of rules adopted 
by the Commission.
    FTPA authorized appropriations for the CFTC for only two 
years. The 103rd Congress adjourned without passage of an 
extension of the FTPA authorization of appropriations.
    Given the history of exhaustive consideration prior to the 
adoption of the '92 Act and the extensive provisions contained 
in FTPA, the CFTC requested a reauthorization through fiscal 
year 2000 without any other changes to current law. In response 
to that request, Chairman Lugar, joined by Senator Leahy, 
introduced S. 178, the ``CFTC Reauthorization Act of 1995'', on 
January 9, 1995. As stated by Senator Lugar upon introduction 
of S. 178, this legislation is needed because it ``provides 
assurance to the national and international financial markets 
of the continuing authority of the CFTC, continues the CFTC's 
responsibilities under existing law, gives adequate time to 
complete implementation of the extensive amendments included in 
* * * FTPA * * * and allows time for review of the effects of 
that implementation.''
    Reviewing the implementation of FTPA is important because 
the futures industry is a regulated industry and the exchanges 
and their members, and the approximately 4,000 registered firms 
including FCMs, IBs, CPOs, CTAs, and their approximately 55,000 
registered employees are affected by the provisions of the CEA 
and by CFTC regulations. Congress has historically viewed the 
purpose of regulation to be, in important part, the maintenance 
of public confidence in futures trading, which in turn has been 
necessary to the long-term and sustained profitability of the 
futures industry so vital to the national economy.

                         Summary of Provisions

    There is only one provision of S. 178. It authorizes the 
appropriation of such sums as necessary to carry out the CEA 
for each of the fiscal years through 2000.

                        Committee Consideration

    Following the introduction of the CFTC Reauthorization Act 
of 1995 on January 9, 1995, Chairman Lugar announced a hearing 
to be held on January 26, 1995 to consider S. 178 and to review 
the CFTC's progress in implementing the requirements of the `92 
Act, as well as assess its operations generally The CFTC was 
invited to testify and the four largest U.S. futures exchanges, 
two futures industry trade groups, and the NFA requested to 
give oral and written testimony to the Committee. One 
additional exchange, two agricultural groups, and one 
respondent in a CFTC enforcement action submitted written 
testimony.

                                hearing

    At the hearing on January 26, Chairman Lugar in his opening 
statement addressed the development of the futures industry and 
remarked that the industry may face new challenges providing 
risk management to agriculture, an area where government 
programs now absorb much of the risk of volatile prices. The 
Chairman noted the importance of public confidence in the 
markets and the performance of the regulators in establishing 
that confidence. He further reviewed past events and the 
legislative history of the `92 Act. The Chairman concluded that 
if the Committee determined that the CFTC merits 
reauthorization, he hoped that the Committee would pass a bill 
extending the Commission's existence unencumbered by other 
legislation. If futures-related issues appropriate for 
Committee consideration arose during the next few years he said 
the he expected the Committee would deal promptly with such 
issues.
    The Ranking Democratic Member, Senator Leahy, stated that 
the passage of FTPA was one of the outstanding achievements of 
the Committee in recent years. He noted that he and Senator 
Lugar worked closely on that legislation while he was Chairman 
and Senator Lugar was Ranking Minority Member. Senator Leahy 
called FTPA landmark legislation and the toughest pro-consumer 
futures reform package in a generation. Finally, Senator Leahy 
noted the importance of a strong audit trail as well as 
oversight of the derivatives market.
    Ms. Mary Schapiro, Chairman of the CFTC, testified orally 
before the Committee on behalf of the Commission and submitted 
written testimony for the record in support of prompt action on 
S. 178 in its present form. After commenting on recent 
developments in the futures industry, here and abroad, and on 
the lack of corresponding growth in CFTC staffing, she reported 
on the performance of the CFTC in implementing FTPA.
    Chairman Schapiro began by reporting on the Commission's 
current rulemaking in process in response to CBT, CME and later 
New York Mercantile Exchange petitions for exemptive relief for 
markets limited to appropriate persons. In a pilot program, the 
CFTC proposal would offer some flexibility to exchanges in 
offering and trading products. And, unlike over-the-counter 
(``OTC'') products, transactions in the pilot program will be 
cleared by exchange clearing houses and their pricing will be 
far more transparent than OTC transactions. As a part of the 
Commission's proposal, the CFTC requested comment on 
modifications to its existing exemptions for swaps as to 
whether there should be any limitations on the participation of 
municipalities and pension funds in that market.
    Chairman Schapiro reported on three of the major studies 
mandated by FTPA and completed by the CFTC on derivatives, 
global competitiveness and audit trail. Further, she reported 
on the CFTC's recent risk assessment rules, the performance of 
the Commission in approving new contracts, the CTC's 
surveillance efforts and the agency's enforcement program. 
Specifically, Ms. Schapiro reported on the performance of 
exchange audit trails to date. Chairman Schapiro stated that 
the Commission will press the exchanges to continue their 
ongoing efforts to develop improvements, electronic and non-
electronic, to meet the `95 requirements. She stated that the 
exchanges can make significant improvements to their current 
systems through non-electronic enhancements, and that such 
improvements can show that they are acting in good faith to 
meet the October `95 standards of independence, unalterability, 
and sequencing. On an enforcement matter, Chairman Schapiro 
reported on the joint action by the CFTC and the Securities and 
Exchange Commission against Bankers Trust Securities alleging 
fraud in the sale of OTC derivatives. That case resulted in a 
settlement in which Bankers Trust agreed to pay a civil 
monetary penalty of $10 million and to take actions to review 
and modify its derivatives marketing.
    Following Ms. Schapiro's testimony, Chairman Lugar asked 
whether she believed that the current audit trail systems could 
be improved to meet the enhanced audit trail requirements of 
FTPA or whether an electronic trading card is absolutely 
necessary. Chairman Schapiro responded that the CFTC had not 
taken the position that an electronic trading card is necessary 
to meet the `95 standards. Following that response, Chairman 
Lugar asked whether, after the exchanges have attained a level 
of accuracy that is extremely high, but still less than 100%, 
there is merit to the view that the CFTC should weigh both 
costs and benefits in determining the practicability of 
additional incremental enhancements. Chairman Schapiro 
responded that she thought the statute offers flexibility in 
the provision that improvements need to be made to the extent 
practicable, and that her view is that cost is certainly an 
issue in determining practicability. In a third question 
related to audit trail, Chairman Lugar asked Ms. Schapiro 
whether the CFTC was committed to giving the exchanges guidance 
as to what they need to do to show good faith in meeting the 
October `95 audit trail requirements. Chairman Schapiro replied 
that the CFTC was committed to working with the exchanges and 
that she believed that non-electronic enhancements will show 
good faith toward meeting the enhanced requirements.
    Focusing on another area, Chairman Lugar noted that the 
CFTC exemptions should have resolved most of the jurisdictional 
concerns about swaps, hybrids, and forwards. He asked whether, 
given the exemption from oversight and regulation, the 
Commission's residual anti-fraud authority has been sufficient 
to allow action where absolutely necessary. Chairman Schapiro 
prefaced her response by noting that most of the derivatives 
problems that received public attention in the last year, such 
as Orange County, were not problems involving futures-like 
derivatives but were rather problems that involve investment 
strategies utilizing over-leveraging in government securities. 
Nevertheless, she believes that the Commission's decision to 
retain anti-fraud authority in the swaps exemption was a wise 
one.
    Ms. Schapiro responded to a question by Chairman Lugar by 
stating that the exchanges had implemented rules requiring 
public governors and diversity on exchange boards. Chairman 
Schapiro stated that the CFTC would be doing a review of the 
effectiveness of the exchange governance provisions of FTPA and 
promised when it was completed to provide that review to the 
Chairman.
    In response to further questions from Chairman Lugar, Ms. 
Schapiro stated that the Commission's enforcement program had 
become more effective and that it was using virtually every 
tool available to it. Finally, Chairman Schapiro stated that 
the CFTC is as talented, as hard working and as expert as the 
staff of any financial regulator.
    Senator Leahy, the Ranking Democratic Member, took over the 
questioning and returned to the audit trail issue. After 
expressing his pleasure that the CFTC is committed to a strong 
audit trail, Senator Leahy asked whether Ms. Schapiro felt the 
good faith exception provided exchanges flexibility to design 
something that works for them. Chairman Schapiro stated that 
the law provides exactly the kind of flexibility that the 
agency and the exchanges need to make progress and to improve 
without being held to an impossibly high standard. Further, in 
response to the Ranking Democratic Member, Chairman Schapiro 
stated that she believed all of the exchanges could ultimately 
meet the enhanced audit trail standards. Also in regard to 
audit trail issues, Senator Leahy asked whether improvements to 
the hand-held devices being developed by the exchanges include 
additions unnecessary to meet audit trail requirements. A brief 
discussion followed about the business benefits that might 
accrue through the implementation of electronic devices beyond 
the regulatory benefits. In response to further questions from 
Senator Leahy, Chairman Schapiro stated the standards in the 
'92 Act are good standards and should not be diminished. 
Further, she stated that the law provides very significant 
flexibility to strive toward those standards, but not to hold 
anybody to a standard that is impracticable or impossible. 
Chairman Schapiro stated that costs and benefits and common 
sense are all part of making the determination of what is 
practicable. In response to Senator Leahy, Ms. Schapiro stated 
that she believed that ultimately all of the exchanges can meet 
the 1995 standards of independent, automatic, continuous, 
precise, and unalterable with significant enhancements to 
existing systems. Finally, Chairman Schapiro stated that it 
would be a mistake to diminish the standards and that we should 
be aiming for the best possible audit trail consistent with 
practicability.
    Senator Cochran then took over the questioning and asked 
whether, in light of the changing emphasis of this new 
Congress, Chairman Schapiro intended to undertake a review of 
regulations that have been issued by the CFTC under FTPA to see 
whether some should be modified, rescinded or rewritten. Ms. 
Schapiro responded that the agency would undertake such a 
review, that she had already written a number of major industry 
participants requesting their views, and further that the 
agency was planning a series of public roundtable discussions 
over the next two years to discuss particular regulations. In 
response to a question from Senator Cochran as to whether she 
would recommend any changes in the law to support this 
regulatory review, Chairman Schapiro stated that the Commission 
is completely supportive of S. 178 as written, but that if the 
agency discovers legislative changes are necessary to address 
regulatory reforms that she would not hesitate to return to the 
Committee. Finally, in response to questions from Senator 
Cochran, Chairman Schapiro reported on the rapid response the 
agency is now making to contract market applications and that 
specifically the application by the CME to trade contracts 
based on the Mexican peso was filed only three weeks ago, has 
already been published in the Federal Register, and has been 
shared with other regulators.
    Senator Heflin raised the issue of a tax on futures 
transactions. Chairman Schapiro stated that the Commission has 
not taken a position on a transaction tax. However, she stated 
her own personal concern about funding the CFTC at an adequate 
level to carry out its responsibilities. She recognized the 
problems that may arise from the imposition of a transaction 
tax including global competition. Following that issue, Senator 
Heflin asked whether there were any developments toward the 
establishment of minimum standards for foreign markets. 
Chairman Schapiro discussed the CFTC's participation in the 
International Organization of Securities Commissions and stated 
that the CFTC regulatory program is the model for both emerging 
and developed markets. Finally, Senator Heflin addressed the 
swaps market and after some discussion asked whether from a 
historical viewpoint the swaps market resembles the futures 
market prior to regulation.
    The Committee next heard testimony from a panel consisting 
of John F. Sandner, Chairman, CME; accompanied by William 
Brodsky, President, CME; Patrick Arbor, Chairman, CBT; 
accompanied by Thomas Donovan, President, CBT; Daniel 
Rappaport, Chairman, NYMEX; Patrick Thompson, President, NYMEX; 
and Bennett J. Corn, President, Coffee, Sugar & Cocoa Exchange, 
Inc.
    As he began his testimony Mr. Sandner stated that he had to 
change his remarks after hearing the testimony of the CFTC 
Chairman and her responses to questions. He praised the 
``mindset'' brought out by the questions and answers.
    Mr. Sandner discussed the growth of the CME and the role 
that it has taken to set compliance and surveillance standards. 
He noted the international character of his exchange, the 
growth of foreign markets, and the potential movement of U.S. 
business overseas to countries without regulators and with 
legislators with the ``mindset'' of encouraging economic 
growth. He addressed the last reauthorization of the CFTC and 
the relationship between the agency and the industry. He 
concluded his oral remarks by stating that, in view of the 
remarks by CFTC Chairman Schapiro, that the CME was totally in 
support of a simple, one-line reauthorization.
    In his written testimony Mr. Sandner also was supportive of 
S. 178, but expressed concerns about a number of issues 
including audit trail, the CME's petition for exemptive relief, 
transaction taxes, and a potential merger of the CFTC and the 
SEC. Mr. Sandner reiterated his support for a broader 
reorganization of the structure of U.S. financial regulation 
and supplied the Committee with copies of an exchange proposal 
that was widely discussed during the last Congress.
    Mr. Arbor testified that the CBT unequivocally supports a 
very speedy reauthorization of the CFTC. Mr. Arbor discussed 
the CBT's concern about audit trail requirements and described 
the operation and capability of the existing CBT audit trail 
system. He then summarized the exchange views on the FTPA 
requirements that go into effect in October of this year. In 
discussing this issue, Mr. Arbor noted that the October 1995 
requirements have been a source of some confusion and concern; 
that exchanges have spent more than $15 million to try to 
develop new technology to meet those requirements, including 
the electronic hand-held trading card called AUDIT; that no one 
knows whether those technological efforts will successfully 
meet the October 1995 requirements; and that all exchanges 
testifying agree that AUDIT, which is scheduled to be tested on 
certain exchanges this year, will not be ready to be deployed 
in the near future and certainly will not be ready to be 
deployed in time to meet the October 1995 requirements. Mr. 
Arbor stated that the CBT wants to proceed with AUDIT under a 
sensible, rational, business strategy.
    Subsequently, Mr. Arbor urged the Committee to do a 
complete review of the regulatory structure of the futures 
markets in view of the changing nature of the markets and 
foreign competition. He also noted the advantages of 
transparency and exchange clearing over the OTC market, but 
expressed concern that a transaction tax would disadvantage 
exchange trading. In his written statement, Mr. Arbor listed a 
number of outstanding issues and potential concerns including 
regulations of dual trading, the process for approval of new 
contracts and rules, the existing ban on single stock futures, 
litigation with respect to the ``Treasury Amendment'', and the 
exemptive authority granted to the CFTC.
    Mr. Rappaport testified as to the role NYMEX plays as the 
world's largest energy exchange and the world's largest 
precious metals exchange. He urged the Congress to insist on 
rigorous cost-benefit analyses of regulation and to be 
sensitive to the global competitive pressures faced by the 
domestic futures industry.
    Mr. Rappaport supported the one-line reauthorization. He 
then discussed how each exchange has its own audit trail system 
and described the NYMEX system. He expressed approval of the 
CFTC's approach to this issue.
    Mr. Rappaport concluded with a statement of his concerns 
about foreign competition when the London Metals Exchange, a 
market with no price transparency, no audit trail, and a margin 
system based solely on credit, decided to open warehouses for 
delivery on their contract at five locations in the United 
States.
    Mr. Corn testified that his exchange firmly supported the 
proposed reauthorization of the CFTC. He also discussed his 
exchange's experience with its efforts to meet the enhanced 
audit trail standards and its own unique approach to devising a 
better audit trail. Finally, he discussed some innovative 
approaches his exchange has taken recently following the delays 
occurring in the development of electronic hand-held devices.
    Chairman Lugar asked Mr. Sandner to describe his exchange's 
experience in limiting dual trading on its own initiative.
    Mr. Leahy asked Mr. Arbor about the development of AUDIT 
and whether one of the reasons that it was not fully ready was 
that the exchange had added some other functions to the system 
that were unrelated to audit trail requirements. Mr. Arbor 
discussed the current system and AUDIT. He stated that the 
exchange has always tried to work on AUDIT as a business tool 
as well as an audit system.
    In response to a question from Senator Leahy, Mr. Rappaport 
pledged to work with the CFTC to come into compliance with the 
October 1995 audit trail requirements.
    Senator Warner asked the panel of witnesses how they would 
look up a simply amendment to the effect that, as a part of 
this reauthorization, the Commission would go back and review 
its rules within a stipulated time period and give the private 
sector an opportunity to comment. Mr. Sandner responded that 
the futures markets and their participants have changed greatly 
since the current regulatory structure and regulations were 
adopted and that industry believes the structure should be 
revisited. Nevertheless, he stated that he was comfortable with 
the new CFTC Chairman and that he was confident that she would 
be going back and looking at the regulations. Mr. Arbor added 
that his exchange shared the philosophy that existing 
regulations should be reviewed, however, they did not wish to 
impair the speedy reauthorization of the agency in any way.
    Mr. Brodsky then addressed the Committee remarking on his 
career in the securities industry before joining the futures 
industry. He noted that in the securities industry the 
existence of the SEC is a foregone conclusion and that the 
issue was really a financial appropriations issue. The 
committees of jurisdiction would carry out periodic oversight 
hearings, or where needed, consider particular legislation. He 
felt that was a better process and that futures legislation 
should be handled the same way.page II deg.
    Chairman Lugar then commented on the difficult process that 
reauthorization can be when it involves protracted 
philosophical discussions to try to restructure the entire 
industry and the Commission. However, the Chairman stated that 
the Committee needs to conduct oversight and stated that it was 
his intent as Chairman to conduct oversight and to keep in 
contact with all interested parties.
    The next panel to testify included Mr. Robert Wilmouth, 
President, NFA; Mr. Peter Karpen, Chairman, Futures Industry 
Association; accompanied by John Damgard, President, FIA; Mr. 
John R. Frawley, Jr., Chairman, Managed Futures Association; 
accompanied by John Gaine, General Counsel, MFA.
    Mr. Wilmouth first testified in support of the CFTC 
reauthorization. Then he discussed the nature of NFA, its 
members, their employees, and noted that NFA is entirely paid 
for by the futures industry. Mr. Wilmouth stated that NFA has 
four basic responsibilities: NFA develops and enforces customer 
protection rules to ensure that its members are observing the 
highest possible ethical standards; NFA prevents unethical 
firms and individuals from entering the futures industry by 
performing the registration function on behalf of the CFTC; NFA 
protects customers by educating them about the futures markets 
and the risks involved in that market so that the customers can 
make informed investment decisions; and NFA provides customers 
with an arbitration forum to resolve disputes. Mr. Wilmouth 
said that there is one thing that sets NFA apart from the other 
witnesses before the Committee today and apart from the self-
regulatory body in the securities industry: regulation is not 
part of what NFA does, it is all that it does. Mr. Wilmouth 
commented favorably on several provisions of the 1992 Act which 
specifically involved NFA including telemarketing rules, public 
directors, and the registration of floor traders. The Chairman 
noted that the Ranking Democratic Member and he have been 
meeting with Mr. Wilmouth on futures issues for nearly two 
decades and that he appreciates Mr. Wilmouth's experience and 
wisdom.
    Mr. Karpen testified in support of the CFTC reauthorization 
and stated that the FIA continues to support the provisions of 
the 1992 Act. He discussed several issues including the CFTC 
exemptive authority, risk assessment, audit trail, dual trading 
and exchange governance. He was particularly supportive of the 
need for accurate audit trails and expressed concern about the 
extent to which diversity had been achieved on exchange boards.
    Mr. Frawley also testified in support of the 
reauthorization of the CFTC. Mr. Frawley represents substantial 
users of the futures markets as managers of funds for both 
private and institutional investors. Managed futures has been a 
large and growing segment of the futures industry for several 
years. He noted the value of NFA at a time when resources were 
scarce for the CFTC. He commended both the NFA and the CFTC for 
the jobs they were doing and noted that the CFTC considered 
both the needs of protecting U.S. customers and the need for 
international competitiveness.
    The Kansas City Board of Trade, The American Cotton 
Shippers Association, The National Grain and Feed Association, 
and The National Grain Trade Council submitted statements in 
support of the reauthorization of the CFTC. One respondent in 
an injunctive action filed by the CFTC in U.S. District Court 
submitted a statement alleging excessive and improper 
activities by CFTC staff in the course of the investigation and 
litigation against his firm.
    Chairman Lugar announced the scheduling of the Markup for 
S. 178 for February 1, 1995, and adjourned the hearing.

                                 markup

    On February 1, 1995, the Committee held a business meeting 
to consider S. 178. Chairman Lugar opened the meeting with a 
statement reiterating his support for the reauthorization 
contained in S. 178. He addressed the concerns that had been 
raised by some exchanges about the implementation of the 
enhanced audit trail requirements in FTPA scheduled to go into 
effect in October of this year. However, Chairman Lugar noted 
that in the testimony of the CFTC Chairman, and in her 
responses to questions, it was made clear that the CFTC has not 
held that an electronic hand-held device is necessary to meet 
the enhanced requirements. Further, he noted that the CFTC 
Chairman had assured the Committee that, after the exchanges 
met a minimum acceptable level of compliance, further 
incremental improvements would only be required as practicable 
and that the cost of the improvements would certainly be an 
issue in determining what is practicable. He reported that by 
the end of the hearing all witnesses present supported the 
reauthorization without amendments.
    Chairman Lugar stated his expectation that the Committee 
would want to conduct vigorous oversight and consider futures 
legislation as needed. But he urged that if the Committee 
concluded that the CFTC merits reauthorization, S. 178 be 
reported out, unencumbered by amendments.
    No amendments were offered. Senator Cochran made a motion 
to favorably report the bill. By voice vote, S. 178 was ordered 
reported favorably by the Committee.

                      Section-by-Section Analysis

                         section 1. short title

    Section 1 provides that this Act may be cited as the ``CFTC 
Reauthorization Act of 1995''.

               section 2. authorization of appropriations

    Section 2 amends section 12(d) of the Commodity Exchange 
Act to authorize appropriations such sums as are necessary to 
carry out its provisions for each of the fiscal years 1995 
through 2000.

                             Cost Estimate

    In accordance with paragraph 11(a) of rule XXVI of the 
Standing Rules of the Senate, the Committee has included the 
cost estimate provided by the Congressional Budget Office.

                                     U.S. Congress,
                               Congressional Budget Office,
                                  Washington, DC, February 1, 1995.
Hon. Richard G. Lugar,
Chairman, Committee on Agriculture, Nutrition, and Forestry,
U.S. Senate, Washington, DC.
    Dear Mr. Chairman: The Congressional Budget Office has 
prepared the enclosed cost estimate for S. 178, the CFTC 
Reauthorization Act of 1995.
    Enactment of S. 178 would not affect direct spending or 
receipts. Therefore, pay-as-you-go procedures would not apply 
to the bill.
    If you wish further details on this estimate, we will be 
pleased to provide them.
            Sincerely,
                                    Robert D. Reischauer, Director.
    Enclosure.

               CONGRESSIONAL BUDGET OFFICE COST ESTIMATE

    1. Bill number: S. 178.
    2. Bill title: CFTC Reauthorization Act of 1995.
    3. Bill status: As ordered reported by the Senate Committee 
on Agriculture, Nutrition, and Forestry on February 1, 1995.
    4. Bill purpose: S. 178 would authorize the appropriation 
of such sums as are necessary for the Commodities Futures 
Trading Commission (CFTC) for the fiscal years 1995-2000.
    5. Estimated cost to the Federal Government: Funds for CFTC 
have been appropriated for 1995, and the estimate assumes that 
no additional appropriation will be necessary for this fiscal 
year. Because the bill does not provide a specific 
authorization, the table shows two alternative authorization 
levels for fiscal years 1996-2000--the 1995 appropriation for 
CFTC without adjustment for anticipated inflation and the 1995 
appropriation with adjustment for inflation. Outlay estimates 
are based on historical spending rates for this program and 
assume that appropriations will be provided before the start of 
each fiscal year.

------------------------------------------------------------------------
                      1995     1996     1997     1998     1999     2000 
------------------------------------------------------------------------
Without adjustment                                                      
 for inflation:                                                         
  Estimated                                                             
   authorization                                                        
   level..........        0       49       49       49       49       49
  Estimated                                                             
   outlays........        0       42       49       49       49       49
With adjustment                                                         
 for inflation:                                                         
  Estimated                                                             
   authorization                                                        
   level..........        0       51       53       56       58       60
  Estimated                                                             
   outlays........        0       44       53       55       57       60
------------------------------------------------------------------------

    The costs of this bill fall within budget function 370.
    6. Comparison with spending under current law: The fiscal 
year 1995 appropriation for CFTC activities is $49 million. If 
appropriations were to remain at the 1995 level, projected 
spending would not exceed the amount under current law. If 
appropriations were to increase each year to reflect 
anticipated inflation, budget authority and outlays would 
exceed the levels under current law by amounts growing to $11 
million in 2000.
    7. Pay-as-you-go considerations: None.
    8. Estimated cost to State and local governments: None.
    9. Estimate comparison: None.
    10. Previous CBO Estimate: None.
    11. Estimate prepared by: John Webb.
    12. Estimate approved by: Paul N. Van de Water, Assistant 
Director for Budget Analysis.

                      Regulatory Impact Statement

    In compliance with paragraph 11(b) of rule XXVI of the 
Standing Rules of the Senate, the Committee made the following 
evaluation of the regulatory impact that would be incurred in 
carrying out S. 178.
    Because S. 178 merely authorizes appropriations and makes 
no substantive changes in the CEA, S. 178 does not have a 
regulatory impact.

                        Changes in Existing Law

    In compliance with paragraph 12 of rule XXVI of the 
Standing Rules of the Senate, changes in existing law made by 
the bill S. 178, as ordered to be reported, are shown as 
follows (existing law proposed to be omitted is enclosed in 
black brackets, new matter is printed in italic, existing law 
in which no change is proposed is shown in roman):

                         COMMODITY EXCHANGE ACT

    Sec. 12. [(d) There are authorized to be appropriated to 
carry out this Act--
          (1) $53,000,000 for fiscal year 1993; and
          (2) $60,000,000 for fiscal year 1994.]
    (d) There are authorized to be appropriated such sums as 
necessary to carry out this Act for each of the fiscal years 
1995 through 2000.