CBOE supports shift at SEC from rules-based approach

Below is testimony given by William Brodsky at the SEC-CFTC meeting on harmonization on Sept. 2.

I am William J. Brodsky, Chairman and Chief Executive Officer of the Chicago

Board Options Exchange, Inc. (CBOE). For the past 35 years, I have served in

leadership roles at major U.S. stock, futures and options exchanges, including 11

years as CEO of the Chicago Mercantile Exchange and the past 12 years in my

current role as CBOE Chairman and CEO.

Exchange-traded options have become a major component of the U.S. -- and the

world’s -- financial markets. In 2008, over 3.6 billion options contracts traded on

the seven U.S. options exchanges, an increase of 25% over 2007. This was the

fifth consecutive year that volume growth has exceeded 25%. The annual number

of contracts traded has tripled over that five-year period, outstripping the growth in

both stock and futures trading. This dramatic growth is a reflection of the

expanding use of options as a tool for managing the risk of owning stocks,

Exchange Traded Funds (ETFs) and mutual funds and also reflects the highly

competitive environment in which exchange-traded options are traded.

In addition to my role at CBOE, I am currently serving as chairman of the World

Federation of Exchanges (WFE), a 49-year old organization, which is based in

Paris and includes over 50 of the world’s major regulated stock, futures and

options exchanges. WFE promotes the highest standards of market integrity by

working on a global basis with policy makers, regulators and government

organizations for fair, transparent and efficient markets. The fact that the CEO of a

derivatives exchange has been elected Chairman of the WFE for the first time

illustrates the heightened role that exchange-traded derivatives now play in the

global financial system.

Throughout my career at exchanges, I have witnessed and participated in many meaningful improvements in the efficiency, functionality and value of our exchange markets. Following the 1987 stock market crash, U.S. exchanges made significant enhancements to market infrastructure and resiliency, but very little changed in the way of regulatory oversight despite the Brady Report, the seminal presidential study of the crash, which found that our regulatory system was already sorely outmoded when the markets fell precipitously in 1987.

The regulatory system deemed antiquated in 1987 remains in place today, but now labors under the weight of increasingly sophisticated technology and instruments that trade around the world in less than a blink of an eye. The ongoing failure to modernize our regulatory system has resulted in a disjointed, overlapping situation that causes bottlenecks in some markets, unregulated gaps in others, and lacks an overarching regulatory perspective.

While reasonable people may disagree on the best ways to create a 21st century system for market regulation, there is clearly a national consensus that retaining the

status quo is not an option. For that reason, we were gratified the Administration’s

proposal for financial regulatory reform (“Reform Proposal”) included the recommendation that the Commodity Futures Trading Commission (“CFTC”) and

the Securities and Exchange Commission (“SEC”) work towards harmonizing their

respective statutes and regulations. We strongly support the Administration’s

recommendation that the statutory and regulatory regimes for futures and securities

be harmonized to reduce the disparities between these two important agencies.

We commend the CFTC and SEC for acting promptly to initiate discussions on

regulatory harmonization, and I am honored to share CBOE’s perspective in my

testimony today.2 My testimony will focus primarily on the harm caused by split

jurisdiction between securities and equity-related futures in the U.S. and the means

by which harmonization can help address those problems. Since the enactment in

1974 of amendments to the Commodity Exchange Act (“CEA”), which gave the

CFTC jurisdiction over all futures, there have been conflicts between the CFTC

and the SEC as to their respective jurisdictions, particularly involving financial

instruments that have elements of both securities and “commodities.” This conflict

is a result of divided jurisdiction in which the SEC has oversight of “securities,”

including stocks, bonds, mutual funds and options on these instruments or an index

of such instruments, while the CFTC has jurisdiction over “commodities,” which is

very broadly defined and includes futures on securities indexes or government


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