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