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Testimony Before the House of Representatives Committee on Financial Services, Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises
May 11, 2010--Good afternoon Chairman Kanjorski, Ranking Member Garrett and members of the Subcommittee. I thank you for inviting me to today’s hearing on the unusual volatility in the capital markets last week. I also am pleased to testify alongside Securities and Exchange Commission Chairman Mary Schapiro. Staff of the Commodity Futures Trading Commission (CFTC) and SEC have been in constant communication since Thursday afternoon. We will continue to work closely together to review the events of last week and make joint recommendations to protect the integrity of our markets and the American public. This afternoon, I will focus my testimony primarily on issues related to the futures marketplace and allow Chairman Schapiro to address the securities markets.
The Equity Index Futures Markets
Before I turn to the events of last Thursday, I will discuss the makeup of the stock index futures markets. I will also address the market protection mechanisms in place for orders entered into the electronic trading systems of the two U.S. futures exchanges where the highest-volume equity futures trade.
Stock index futures are derivatives contracts that trade on central exchanges. Much like a crude oil futures contract is based upon the price of crude oil, a stock index futures contract is based on the level of a broad based stock index. The stock index futures marketplace consists almost entirely of futures contracts based on four principal stock indices. Futures on many U.S. stock indices, including the S&P 500, the Nasdaq 100 and the Dow Jones Industrial Average, trade on the Chicago Mercantile Exchange (CME). Futures on other U.S. stock indices, including the Russell 2000 Index, trade on the IntercontinentalExchange, Inc. (ICE). The total outstanding notional value of the futures contracts on these indices is approximately $360 billion. This compares to a total U.S. equity market value of approximately $13 trillion.
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Source: CFTC.gov
Standard & Poor's Announces Changes In The S&P/TSX Venture Composite Index
May 11, 2010--Standard & Poor's will make the following changes in the S&P/TSX Venture Composite Index after the close of trading on Tuesday, May 11, 2010:
* MTY Food Group Inc. (TSXVN:MTY) will be removed from the index.
* The company will graduate to TSX where it will trade under the same ticker symbol.
Company additions to and deletions from an S&P equity index do not in any way reflect an opinion on the investment merits of the company.
Source: Standard & Poors
Statement of Commissioner Michael V. Dunn on Meeting to Discuss Significant Price Discovery Contracts
May 11, 2010--When the initial legislation creating Significant Price Discovery Contracts (SPDC) was enacted, I was under the impression that there might be a half-dozen contracts that would fall into this category. The 90 plus ECM contracts initially identified as potential SPDCs and the subsequent in-depth analysis and Federal Register (FR) release of 41 of these contracts, frankly took me by surprise.
I commend the staff on their diligence in carrying out the provisions of the SPDC legislation and thank the public for their comments on the FR releases. During my briefing on the SPDC proposals we are considering today, I was struck by the time and effort expended by the CFTC staff to get us to this point.
ECMs were created by the CFMA of 2000, and SPDC determinations were mandated by the CFTC Reauthorization Act of 2008. If a local trader at an exchange had fallen asleep in 2000 and awoke today, that person would be hard pressed to recognize the futures industry. The trader would probably find himself in an abandoned trading pit. The contract he traded would likely have migrated to an electronic platform - globally accessed by multibillion dollar hedge funds through co-located, algorithm driven, high frequency trading strategies. The exchange itself, in all likelihood, would be a publicly traded company closely tied to a clearing house whose membership is made up of closely entwined global financial institutions.
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Source: CFTC.gov
Statement of Commissioner Bart Chilton Regarding the Market Events of May 6th
May 11, 2010--I commend CFTC Chairman Gensler, SEC Chairman Shapiro and Secretary Geithner for their tireless efforts (and those of their staffs) related to the serious and significant market events of May 6th. As we go forward, I am hopeful that we look at four areas of critical importance.
1 – What Happened? We need to figure out—immediately—specifically what happened. Regulators need to use every existing tool at their disposal, and get the answers. "We don't know," or "we aren't sure," is simply not acceptable. The CFTC and the SEC need to focus on this matter, with additional outside experts if need be, in a time-sensitive fashion. In that vein, I’m extremely pleased that we’ve set up a joint SEC/CFTC advisory committee to address issues such as this. Standard operating procedures should not apply. Indeed, the fact that we still do not have an answer to the question of “What happened?” highlights that we need to do more and have better oversight and enforcement tools. The regulatory reform bill making its way through Congress is critical in this regard.
2 – Circuit Breakers. Clearly, the fail-safe measures that were put in place were not safe—and failed. Circuit breakers—that is, systems that trigger a trading halt when certain market-related events occur—need to become mandatory and approved by regulators as appropriate for all markets and all contracts. These circuit breakers are currently voluntarily put in place by exchanges. Not only are such circuit breakers needed, they need to have ensured consistency and be set at appropriate levels, before serious and significant market anomalies take place. The fact that the circuit breakers were not triggered and that trades on some equity exchanges were busted, indicates a clear flaw in the current circuit breaker system. 3 – OTC Authority. Finding out what happened is, in part, made more difficult because oversight agencies don’t have all the regulatory tools that we need to make swift, accurate, and thoughtful determinations about these markets. The over-the-counter (OTC) market is estimated to account for more than $600 trillion in annual trading. By comparison, the regulated U.S. futures exchanges amount to less than $5 trillion.
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Source: CFTC.gov
CFTC and SEC Announce Creation of Joint CFTC-SEC Advisory Committee on Emerging Regulatory Issues
May 11, 2010--Commodity Futures Trading Commission Chairman Gary Gensler and Securities and Exchange Commission Chairman Mary Schapiro today announced the formation of a joint committee that will address emerging regulatory issues. The establishment of the Joint CFTC-SEC Advisory Committee on Emerging Regulatory Issues was one of the 20 recommendations included in the agencies’ harmonization report issued last year.
The joint committee will develop recommendations on emerging and ongoing issues relating to both agencies. The first item on the committee’s agenda is conducting a review of last Thursday’s market events and making recommendations related to market structure issues that may have contributed to the volatility, as well as disparate trading conventions and rules across various markets.
To orient the Committee’s work, the staff of the CFTC and SEC will provide to the Committee on Monday their joint preliminary findings regarding last Thursday’s market events.
“It is important that we hear from this prominent panel of market practitioners, academics and former regulators about emerging risks in our markets,” Chairman Gensler said. “It is critical that the CFTC and SEC hear from the panel together because our markets are so intertwined. I am particularly interested in the Committee’s first focus: advising on courses of action in response to the lessons learned from the market events of May 6.”
“As last week’s events remind us, our markets are increasingly interrelated and interdependent so we need to appreciate how events in one arena can potentially impact investors and markets elsewhere,” said Chairman Schapiro. “The Joint Committee will serve an essential role in addressing that challenge.”
The Committee’s charter provides for a broad scope of interest, including:
1. Identifying of emerging regulatory risks;
2. Assessing and quantifying of the impact of such risks and their implications for investors and market participants; and
3. Furthering the CFTC’s and SEC’s efforts on regulatory harmonization.
Chairman Gensler and Chairman Schapiro will serve as co-chairs of the Joint Committee.
Members of the Joint Committee include (additional members will join in the coming days):
• Maureen O’Hara, Professor of Management, Professor of Finance, Cornell University
• Brooksley Born, Former Chair of the CFTC
• David Ruder, Former Chair of the SEC
• Jack Brennan, Former Chief Executive Officer and Chairman, Vanguard
• Robert F. Engle, Michael Armellino Professor of Finance at the NYU Stern School of Business
• Richard Ketchum, Chairman and Chief Executive Officer, FINRA
• Susan Phillips, Dean and Professor of Finance, The George Washington University School of Business
Source: CFTC.gov
Emerging Markets Week in Review-5/3/2010 - 5/7/2010
May 10, 2010--The Dow Jones Emerging Markets Composite Index fell 8.91% last week as riots in Greece sparked fears of contagion in Europe and other developed markets. Health Care and Technology declined the least, down 7.81% and 7.03% respectively, and remain the only two positive sectors for the year. Materials and Energy led the decline, down 12.90% and 9.45% respectively. Emerging Markets look to bounce back strong this week as the US Federal Reserve agreed over the weekend to join the European Union in a nearly $1 trillion rescue plan in an attempt to avoid a sovereign debt crisis in Western Europe.
This morning at 11:15am, Richard Kang, CIO and Director of Research at Emerging Global Advisors LLC, will appear on FOX Business News to share his perspective on the fiscal problems in Greece and fear of European contagion.
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Source: Emerging Global Advisors
CBOE Futures Exchange Experiences Busiest Week In Its History - Single-Day Volume Reaches Consecutive Highs On Thursday And Friday, VIX Futures Sets Back-To-Back Daily Trading Records
May 10, 2010--The CBOE Futures Exchange, LLC (CFE) today announced that the Exchange set several new trading records during the week ended Friday, May 7, 2010.
From May 3 through May 7, CFE experienced the most active trading week in its history as a total of 155,672 contracts changed hands. This was the second consecutive weekly volume record at CFE, surpassing the week of April 26 through 30 when 80,503 contracts traded.
CFE also set new all-time highs for single-day trading volume last week -- first on Thursday, May 6, as 45,305 contracts traded and then on Friday, May 7, as 46,046 contracts changed hands. Prior to this week, the previous single-day high had been 27,907 contracts traded on August 1, 2007.
"The global expansion of ETFs requires broader knowledge about the nuances of different country markets and their regulatory rules," said Alan Greene, executive vice president of State Street's US global services business. "A number of servicing challenges come with diversification into fixed income and actively managed products from a base of passively managed domestic equity ETFs."
The Vision report goes on to cite such best practices as Web-based service platforms, flexibility and highly customized client service provided by staff who share their expertise in numerous areas of fund administration, including legal, tax and treasury services. State Street has utilized its leading-edge technology, consultative client approach and flexible servicing model to service ETFs since their inception in 1993.
State Street's Vision Series addresses topics that affect the financial services industry today and tomorrow. Previous reports have focused on pensions, UCITS IV and sovereign wealth funds. view the ETF Servicing: Moving Forward in a Market in Motion paper Standard & Poor's Announces Changes in the S&P/TSX Canadian Indices Company additions to and deletions from an S&P equity index do not in any way reflect an opinion on the investment merits of the company.
ETFs currently account for more than $1 trillion in global assets under management and remain an efficient, low-cost, transparent and tax-friendly investment tool. However, ETF sponsors are facing new challenges as the funds continue to grow rapidly in both size and type.
Source: State Street
May 10, 2010------Standard & Poor's Canadian Index Operations announces the following index changes:
The unitholders of Daylight Resources Trust (TSX:DAY.UN) have approved the conversion of the company to a corporate structure through a Plan of Arrangement. The units will be exchanged on a 1-for-1 basis for Daylight Energy Ltd. (TSX:DAY).
As a result of the
conversion, Daylight Resources Trust will be removed from the S&P/TSX
Income Trust and Capped Energy Trust Indices. Daylight Energy Ltd.
will be added to the S&P/TSX Equity, Capped Equity, Equity Completion
and Equity SmallCap Indices. The conversion is effective after the
close of Tuesday, May 11, 2010. The name and ticker change, with no
change in capitalization, will be effective in the S&P/TSX Composite
and Capped Composite, the S&P/TSX Completion, the S&P/TSX SmallCap
and the S&P/TSX Capped Energy indices.
Source: Standard & Poors