August 5, 2009 -- The Futures Industry Association testified before the Commodity Futures Trading Commission on the third day of hearings regarding speculation in the energy markets and urged the agency to consider the risk of “market migration” if it applies restrictive position limits in the futures markets. “Repeatedly we are told by our members, in the most emphatic terms, that futures markets and their inherent price discovery function are moveable,” said Mark Young, a partner in the Washington office of Kirkland and Ellis who testified on behalf of the FIA. The FIA also reiterated its view that the CFTC should preserve the position limit exemptions for swap dealers that use futures to hedge risks in their OTC swap positions.

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             “The FIA strongly supports each of the reforms that the CFTC has adopted in its acceptable practices for the governance of self-regulatory organizations,” said FIA President John Damgard. “These reforms are an essential response to the industry’s transformation over the last decade and should enhance the reputation of self-regulation throughout the futures industry.”

             “I want to thank the CFTC commissioners—both past and current—and the CFTC’s staff for their perseverance in pursuing these reforms. I also want to thank the board of the FIA and in particular our public directors for their good counsel, and all the exchanges and other parties who participated in the consultation process and dedicated their time towards the ultimate goal of making self-regulation work better.”

             “Our work is not done, however. All of us must work with the CFTC to ensure that self-regulation fosters public confidence in our industry’s fairness and impartiality.”

             The CFTC’s guidelines establish that the boards of directors of futures exchanges should have at least 35% public directors. These directors cannot have any material relationship with the exchanges or their member firms. Exchanges also should establish “regulatory oversight committees” composed entirely of public directors to oversee their self-regulatory functions, and exchange disciplinary panels should have at least one public member. Exchanges are not required to comply with the guidelines, but if they do not they must demonstrate to the CFTC how their alternative arrangements comply with requirement to minimize conflicts of interest.

             The CFTC’s review of exchange governance began in 2004, when the agency began considering how structural changes in the industry were affecting the self-regulatory system. Those changes included the shift in exchange ownership from members to investors, their transformation into profit-seeking enterprises, and the increased competition among exchanges. The FIA filed numerous comment letters over the years in support of the CFTC’s review and offering specific suggestions for reform. The FIA also published a white paper in June 2004 explaining why the industry’s self-regulatory system needed to be updated in light of the many changes taking place within the industry and across derivatives markets in general, and participated in a public hearing held by the CFTC in February 2006 to discuss issues related to self-regulation.