Federal Register / Vol. 62, No. 179 / Tuesday, September 16, 1997 / Notices 48613

Dear Commissioner: This directive

amends, but does not cancel, the directive

issued to you on December 20, 1996, by the

Chairman, Committee for the Implementation

of Textile Agreements. That directive

concerns imports of certain cotton, wool and

man-made fiber textile products, produced or

manufactured in Egypt and exported during

the twelve-month period which began on

January 1, 1997 and extends through

December 31, 1997.

Effective on September 17, 1997, you are

directed to adjust the limits for the following

categories, as provided for under the Uruguay

Round Agreements Act and the Uruguay

Round Agreement on Textiles and Clothing:

Category Adjusted twelve-month

level 1

Fabric Group

218–220, 224–227,

313–317 and 326,

as a group.

97,305,756 square

meters.

Sublevel within Fabric Group

227 ........................... 22,175,665 square

meters.

Level not in a group

338/339 .................... 3,052,092 dozen.

1The limits have not been adjusted to account for any imports exported after December

31, 1996.

The Committee for the Implementation of

Textile Agreements has determined that

these actions fall within the foreign affairs

exception to the rulemaking provisions of 5

U.S.C. 553(a)(1).

Sincerely,

Troy H. Cribb,

Chairman, Committee for the Implementation

of Textile Agreements.

[FR Doc. 97–24527 Filed 9–15–97; 8:45 am]

BILLING CODE 3510–DR–F

COMMODITY FUTURES TRADING

COMMISSION

Strategic Plan

AGENCY: Commodity Futures Trading

Commission.

ACTION: Request for comments.

SUMMARY: The Commodity Futures

Trading Commission, in accordance

with the requirements of the

Government Performance and Results

Act, has developed a draft Strategic Plan

which was submitted to the Office of

Management and Budget on August 15,

1997. The Commission is now soliciting

comments on the draft plan.

DATES: Comments must be received on

or before October 16, 1997.

ADDRESS: Comments on the strategic

plan may be sent to Jean A. Webb,

Secretary, Commodity Futures Trading

Commission, Three Lafayette Centre,

1155 21st Street, NW, Washington, DC

20581. Comments may be sent by

facsimile transmission to (202) 518–

5528 or by electronic mail to

secretary@cftc.gov. Reference should be

made to ‘‘Strategic Plan.’’

FOR FURTHER INFORMATION CONTACT:

Madge A. Bolinger, Office of Financial

Management, Commodity Futures

Trading Commission, Three Lafayette

Centre, 1155 21st Street, NW,

Washington, DC 20581 (202) 418–5180.

SUPPLEMENTARY INFORMATION: The

Government Performance and Results

Act, 5 U.S.C. 306 (‘‘GPRA’’), requires all

agencies to develop and submit strategic

plans to the Congress and the Office of

Management and Budget no later than

September 30, 1997. The Commission

has developed its plan, ‘‘Vision and

Strategies for the Future: Facing the

Challenges of 1997 through 2002,’’

which establishes the goals, outcome

objectives and strategies for the next five

years. Public comment is now being

sought on the strategic plan.

The Commission’s draft Strategic Plan

is set forth below.

Issued in Washington, DC, on September 8,

1997, by the Commission.

Jean A. Webb,

Secretary to the Commission.

Vision and Strategies for the Future:

Facing the Challenges of 1997 Through

2002

Commodity Futures Trading

Commission Strategic Plan 1997–2002

August 1997

Draft

Table of Contents

Vision Statement

Mission Statement

Economic Benefits of Futures Trading

Profile of Market Users

Current Perspective on the Industry

U.S. Commodity Exchanges

Map of CFTC-Regulated Commodity

Exchanges

Number of Registered Commodities

Professionals

Number of Contract Markets

Volume of Trading

Managed Funds

Strategic Goals & Objectives

Goal One—The Marketplace

Goal Two—The Market Users

Goal Three—The Environment

Summaries of Outcome Objectives &

Activities

Achieving the Goals: Strategies to Mission

Performance—1997–2002

The Environment

The Strategies

Achieving the Goals: External Challenges—

1997–2002.

The Challenges

The Strategies

Achieving the Goals: Internal Challenges—

1997–2002.

The Challenges

The Strategies

Achieving and Measuring Performance

Achieving Performance

Measuring Performance: The Annual

Performance Plan

Relating General Goals and Objectives to

Performance Goals and Program

Evaluation.

Appendix

Understanding the Fundamental of

Commodity Futures and Options

Addresses of the Commodity Exchanges &

Designated Self-Regulatory

Organizations

CFTC Offices.

CFTC Team

Commission Concurrence

Publications and Information

Vision Statement

For the years 1997 through 2002, the

Commodity Futures Trading

Commission will:

Preserve and promote the vital role

America’s commodity markets play in

establishing fair prices for goods and

services and managing the risks of their

production, marketing, and distribution

in the world economy.

Mission Statement

The mission of the Commodity

Futures Trading Commission (CFTC) is

to protect market users and the public

from fraud, manipulation, and abusive

practices related to the sale of

commodity futures and options, and to

foster open, competitive, and financially

sound commodity futures and option

markets.

Background

The Commodity Futures Trading

Commission was created by Congress in

1974 as an independent agency with the

mandate to regulate commodity futures

and option markets in the United States.

The agency’s mandate was renewed and

expanded in 1978, 1982, 1986, 1992,

and 1995.

Today, the CFTC is responsible for

ensuring the economic utility of futures

markets by encouraging their

competitiveness and efficiency,

ensuring their integrity, and protecting

market participants against

manipulation, abusive trade practices,

and fraud. Through effective oversight

regulation, the CFTC enables the

commodity futures markets better to

serve their important function in the

nation’s economy of providing a

mechanism for price discovery and a

means of offsetting price risk.

Futures contracts for agricultural

commodities have been traded in the

U.S. for 150 years and have been under

federal regulation since the 1920s. In

recent years, futures trading has

expanded rapidly into many new

markets, beyond the domain of
48614 Federal Register / Vol. 62, No. 179 / Tuesday, September 16, 1997 / Notices

traditional physical and agricultural

commodities. Futures and option

contracts are now offered in a vast array

of financial instruments, including

foreign currencies, U.S. and foreign

government securities, and U.S. and

foreign stock indices.

Economic Benefits of Futures Trading

Why Were Futures Markets Created?

The frantic shouting and signaling of

bids and offers on the trading floor of a

futures exchange undeniably convey an

impression of chaos. The reality,

however, is that chaos is what futures

markets replaced. Prior to the

establishment of central grain markets

in the mid-nineteenth century, the

nation’s farmers carted their newly

harvested crops over plank roads to

major population and transportation

centers each fall in search of buyers.

The seasonal glut drove prices to giveaway levels and, indeed, to throw-away

levels as grain often rotted in the streets

or was dumped in rivers and lakes for

lack of storage. Come spring, shortages

frequently developed and foods made

from corn and wheat became barely

affordable luxuries. Through the year, it

was each buyer and seller for him- or

herself, with neither a place nor a

mechanism for organized, competitive

bidding. The first central markets were

formed to meet that need. Eventually,

contracts were entered into for forward

as well as for spot (immediate) delivery.

So-called forwards were the forerunners

of present day futures contracts.

Spurred by the need to manage price

and interest rate risks that exist in

virtually every type of modern business,

today’s futures markets have also

become major financial markets.

Participants include mortgage bankers

as well as farmers, bond dealers as well

as grain merchants, and multinational

corporations as well as food processors,

lending institutions, and individual

speculators.

Futures prices arrived at through

competitive bidding are immediately

and continuously relayed around the

world by wire and satellite. A farmer in

Nebraska, a merchant in Amsterdam, an

importer in Tokyo, and a speculator in

Ohio have simultaneous access to the

latest market-derived price quotations.

And, should they choose, they can

establish a price level for future

delivery—or for speculative purposes—

simply by having their broker buy or

sell the appropriate contracts. Images

created by the fast-paced activity of the

trading floor notwithstanding, regulated

futures markets are a keystone of one of

the world’s most orderly, envied, and

intensely competitive marketing

systems.

Indeed, it is an example of a classical

free market with many buyers and

sellers, no one of whom has dominant

market power, achieving an equilibrium

price level through open exchange of

supply and demand information.

Economic Benefits

In a competitive market economy,

there is general agreement among

economists that a market for a product

would be perfectly competitive if:

• many buyers and sellers met

openly, and no one individually

controlled the market;

• the commodity was standardized so

all knew the grade and quality of the

product being traded; and

• buyers and sellers could enter the

market freely, and participants had full

knowledge of available supply and

demand for their product.

While no market meets that ideal,

futures markets come closer to it than

most others and yield significant

economic benefits:

• Price Discovery. With many

potential buyers and sellers competing

freely, futures trading is a very efficient

means of determining the price level for

a commodity. This is commonly

referred to as price discovery.

• Hedging Risk. Futures markets give

producers, processors, and users of

commodities and financial instruments

a means of passing the price risks

inherent in their businesses to traders

who are willing to assume those risks.

In other words, commercial users of the

markets can hedge—enter into an equal

and opposite transaction to their cash

market position in order to reduce the

risk of financial loss due to a change in

price—and, through hedging, lower

their costs of doing business. This

results in a more efficient marketing

system and, ultimately, lower costs for

consumers.

• Market Information. Since futures

markets are national and worldwide in

scope, they act as a focal point for the

collection and dissemination of

statistics and vital market information.

Profile of Market Users

Hedgers

The details of hedging can be

somewhat complex, but the principle is

simple. Hedgers are individuals and

firms which make purchases and sales

in the futures market solely for the

purpose of establishing a known price

level for something they later intend to

buy or sell in the cash market (such as

at a grain elevator or in the bond

market). In this way, they attempt to

protect themselves against the risk of an

unfavorable price change in the interim.

Or hedgers may use futures to lock in

an acceptable differential between their

purchase cost and their selling price.

The number and variety of hedging

possibilities are extensive. A cattle

feeder can hedge against a decline in

livestock prices, and a meat packer or

supermarket chain can hedge against an

increase in livestock prices. Borrowers

can hedge against higher interest rates,

and lenders against lower interest rates.

Investors can hedge against an overall

decline in stock prices, and those who

anticipate having money to invest can

hedge against an increase in the overall

level of stock prices.

Whatever their hedging strategy, a

common denominator is that hedgers

willingly give up the opportunity to

benefit from favorable price changes in

order to achieve protection against

unfavorable price changes. In essence,

they acquire a form of price insurance.

Speculators

If you were to speculate in futures

contracts, the person taking the opposite

side of your trade on any given occasion

could be a hedger or another speculatorsomeone whose opinion about the

probable direction of prices differs from

your own.

Speculators are individuals or firms

who seek to profit from anticipated

increases or decreases in futures prices.

In so doing, they help provide the risk

capital needed to facilitate hedging.

Someone who expects a futures price

to increase would purchase futures

contracts in the hope of later being able

to sell them at a higher price. This is

known as ‘‘going long.’’ Conversely,

someone who expects a futures price to

decline would sell futures contracts in

the hope of later being able to buy back

identical and offsetting contracts at a

lower price. The practice of selling

futures contracts in anticipation of

lower prices is known as ‘‘going short.’’

One of the attractive features of

futures trading is that it is equally easy

to profit from declining prices (by

selling) as it is to profit from rising

prices (by buying).

Floor Traders

Floor traders, or locals, who buy and

sell for their own accounts on the

trading floors of the exchanges, play an

important role as futures market

participants. Like specialists and market

makers at securities exchanges, they

help to provide market liquidity. If there

is not a hedger or speculator who is

immediately willing to take the other

side of an order at or near the going

price, there may be a floor trader who
Federal Register / Vol. 62, No. 179 / Tuesday, September 16, 1997 / Notices 48615

will do so, in the hope of being able to

make an offsetting trade at a small profit

minutes or even seconds later. In the

grain markets, for example, there is

frequently only one-fourth of a cent per

bushel difference between the prices at

which a floor trader buys and sells.

Floor traders create more liquid and

competitive markets. However, it should

be noted that unlike market makers or

specialists, floor traders are not

obligated to maintain a liquid market or

to take the opposite side of customer

orders.

Current Perspective on the Industry

U.S. Commodity Exchanges

There are 11 commodity exchanges in

the United States, located in six cities.

These self-regulatory organizations are

responsible, subject to CFTC oversight,

for the operation of the exchange and

the business conduct and financial

responsibility of their member firms.

History

As the economy of the United States

expanded during the early part of the

nineteenth century, the commodity

exchanges evolved from unorganized

club-like associations into formalized

exchanges. In 1848, the first formal

exchange, the Chicago Board of Trade,

was established with 82 members. And

on March 13, 1851, the first contract

was traded on this exchange,

encouraged by the trading standards,

inspections system, and weighing

system prescribed by the board

members.

Trading on the Chicago Board of

Trade was considerable, and by 1870

futures trading also began on the New

York Produce Exchange and the New

York Cotton Exchange. By 1885, the

New York Coffee Exchange was actively

trading futures contracts. Since the

second half of the nineteenth century,

the growth of these exchange

institutions has been steady and

continuous-evolving into the 11 U.S.

commodity exchanges, designated as

contract markets by the CFTC, that are

used today.

The total volume of futures contract

and option trading on all exchanges in

the United States now has a notional

value of billions of dollars per day. The

commodity exchanges have become an

indispensable financial tool for the

world’s markets.

BILLING CODE 6351–01–P
48616 Federal Register / Vol. 62, No. 179 / Tuesday, September 16, 1997 / Notices

BILLING CODE 6351–01–C
Federal Register / Vol. 62, No. 179 / Tuesday, September 16, 1997 / Notices 48617

Number of Registered Commodities

Professionals

Companies and individuals who

handle customer funds or give trading

advice must apply for registration

through the National Futures

Association (NFA), a Congressionally

authorized self-regulatory organization

subject to CFTC oversight.

The Commission regulates the

activities of over 62,000 registrants:

Type of registered professional Number

in 1997

Associated Persons (Sales People) 45,850

Commodity Pool Operators (CPOs) 1,351

Commodity Trading Advisors

(CTAs) ......................................... 2,606

Floor Brokers (FBs) ........................ 9,299

Floor Traders (FTs) ........................ 1,331

Futures Commission Merchants

(FCMs) ........................................ 233

Introducing Brokers (IBs) ................ 1,538

Type of registered professional Number

in 1997

Total ..................................... 62,208

Number of Contract Markets

Before an exchange may offer a

contract for trading, the Commission

must review the terms and conditions of

the proposed contract, as well as

subsequent rule amendments to the

terms and conditions of the contract, to

ensure its economic viability.

Improperly designed contracts can

increase the chance of cash, futures, or

option market disruptions and

undermine the usefulness and efficiency

of a market.

During fiscal 1996, the Commission

designated 92 new futures and option

contracts, the highest number of new

contracts in any single fiscal year.

The Commission has seen the

introduction of new and novel trading

instruments to handle a variety of

financial risks, such as currencies,

inflation-indexed debt instruments,

contracts based on various domestic and

foreign stock indices, as well as the risks

inherent in the agricultural sector of the

economy. It is expected that this

innovation will continue as firms,

companies, producers, processors, and

others turn to the commodity futures

markets for hedge protection against

financial risk.

There are currently over 230 separate

actively traded contracts on the United

States exchanges. This number has

grown by 105% over the number of

contracts traded just a decade ago and

is expected to reach nearly 280 contracts

by the year 1999.

BILLING CODE 6351–01–P

BILLING CODE 6351–01–C Volume of Trading

Volume of trading is measured in

number of contracts traded. The volume

of trading on the U.S. exchanges has

risen nearly 130% in the decade since

1986.

During FY 1996, there were

494,502,868 futures and option

contracts traded. Volume is expected to

rise to over 579 million contracts in FY

1999.
48618 Federal Register / Vol. 62, No. 179 / Tuesday, September 16, 1997 / Notices

BILLING CODE 6351–01–C

Managed Funds

Investment management professionals

have been using managed futures for

more than 20 years. Recently, there has

been a surge in pooled and managed

money and an increasingly large

segment of the population has money

invested in the futures markets, either

directly or indirectly, through pension

funds or ownership of shares in publicly

held companies that participate in the

markets. Institutional investors such as

corporate and public pension funds,

insurance companies, and banks are

increasingly using managed futures to

diversify their portfolios.

Over the last decade, from 1986

through 1996, the amounts of money

under management has grown

exponentially from less than $2 billion

to nearly $26 billion.
Federal Register / Vol. 62, No. 179 / Tuesday, September 16, 1997 / Notices 48619

BILLING CODE 6351–01–C

Over the past 15 years, the profile of

the typical commodity pool has changed

significantly. Fifteen years ago,

commodity pools were offered with the

expectation that maximum

contributions would be $1 million. Most

pools were single-advisor pools, with

the CPO acting as CTA for the pool.

Pools were designed for speculative

trading, and there were no ‘‘principalprotected’’ pools, tiered pools, or

dynamically managed pools.

Today, the pool universe is comprised

of:

• Single and multiple advisor pools;

• Multi-media pools-that is, pools

that invest in securities and futures as

well as other investments, including

‘‘hot issues’’ of U.S. securities, offexchange instruments, and international

markets;

• Pools which use leverage and

isolate particular forms of return, such

as the mortgage pre-payment option;

• Principal-protected pools; and

• Pools which invest in other pools.

Strategic Goals and Objectives

The mission of the Commodity

Futures Trading Commission is

accomplished through three strategic

goals, each focusing on a vital area of

regulatory responsibility. The goals are

highlighted here, and defined in terms

of outcome objectives and related

activities on the charts which follow.

Goal One—The Marketplace

Protect the economic functions of the

commodity futures and option markets.

The focus of this goal is the

marketplace. If the United States

commodity futures markets are

protected from and free of abusive

practices and influences, they will

better operate to fulfill their vital role in

our market economy and the global

economy-accurately reflecting the forces

of supply and demand and serving

market users by fulfilling an economic

need.

Goal Two—The Market Users

Protect market users and the public.

The focus of the second goal is

protection of the firms and

individuals—market users—who come

to the marketplace to fulfill their

business and trading needs. Market

users must be protected from possible

wrongdoing on the part of the firms and

commodity professionals with whom

they deal to access the marketplace, and

they must be assured that the

marketplace is free of fraud,

manipulation, and abusive trading

practices.

Goal Three—The Environment

Foster open, competitive, and

financially sound markets.

The third goal focuses on several

important outcomes—effective industry

self-regulation, firms and financial

intermediaries with sound business,

financial, and sales practices, and

responsive and flexible regulatory

oversight.

SUMMARIES OF OUTCOME OBJECTIVES AND ACTIVITIES—GOAL #1

Goal #1: Protect the economic junctions of the commodity futures and option markets.]

Outcome objective Activity

Foster futures and option markets that accurately reflect the

forces of supply and demand for the underlying commodity

and are free of disruptive activity.

1. Collect and analyze daily U.S. futures and options data for all actively trading

contracts to detect congestion and/or price distortion and respond quickly to

potentially disruptive situations.
48620 Federal Register / Vol. 62, No. 179 / Tuesday, September 16, 1997 / Notices

SUMMARIES OF OUTCOME OBJECTIVES AND ACTIVITIES—GOAL #1—Continued

Goal #1: Protect the economic junctions of the commodity futures and option markets.]

Outcome objective Activity

2. Monitor the markets to determine how conditions and factors observed may

impact individual registrants or the markets in general (e.g., price volatility,

supply conditions, activities of affiliated companies of registrants, over-thecounter derivatives trading, manipulative or fraudulent practices, etc.), to deter

potentially negative situations and to take appropriate action.

3. Conduct timely review of contract market designation applications and

changes to applications to determine if they are economically viable and do

not pose a likelihood of disruption in the cash, futures, and option markets.

4. Conduct weekly market surveillance meetings of the Commission to analyze

market information, to discuss potentially disruptive situations and conditions,

and to respond quickly to market crises.

5. Respond to market emergencies and disruptive activities swiftly and effectively.

6. Maintain a current understanding of market functions and developments

through research.

7. Identify possible manipulation and other abusive trading practices for investigation and possible enforcement or criminal action.

8. Investigate possible manipulation and other abusive trading practices.

9. Institute enforcement cases concerning manipulation and other abusive trading

practices.

10. Sanction violators.

2. Oversee markets which can be used effectively by producers, processors, financial institutions, and other firms for

the purposes of price discovery and risk shifting.

1. Conduct timely review of contract market designation applications, and

changes to applications, to determine if they are economically viable and do

not increase the likelihood of disruption in the cash, futures, and option markets.

2. Participate in the President’s Working Group on Financial Markets to ensure

coordination of information and efforts among U.S. financial regulators.

3. Maintain a current understanding of market functions and developments

through research.

4. Provide materials and information on the functions and utility of the markets to

the public through public Commission meetings, through public roundtables,

advisory committee meetings, symposia, U.S. Department of Agriculture publications, press releases, advisories, etc.

SUMMARIES OF OUTCOME OBJECTIVES AND ACTIVITIES—GOAL #2

[Goal #2: Protect market users and the public.]

Outcome objective Activity

Promote compliance with and deter violations of federal commodities laws.1. Identify and investigate possible fraudulent and other illegal activities relating

to the commodity futures and option markets and their registrants.

2. Bring injunctive actions, including using ‘‘quick-strike’’ efforts to protect assets

and to stop egregious conduct.

3. Bring administrative cases involving manipulation, fraud, and other violations.

4. Hear administrative cases.

5. Sanction violators.

6. Inform the public and the industry concerning allegations of wrongdoing and

associated legal actions, including through publications and through Commission orders and reports describing the alleged violations and the Commission’s

legal and policy analysis.

7. Collect sanctions and civil monetary penalties against violators.

8. Cooperate with the exchanges, the National Futures Association, other federal

agencies, state governments and law enforcement entities, and foreign authorities to gain information for law enforcement purposes and to provide enforcement assistance as necessary and appropriate.

9. Monitor the Internet and other communication media for fraudulent √ √

√activities and other possible violations of the Act.

10. Resolve appeals in administrative enforcement matters and self-regulatory

organization adjudicatory actions.

2. Require commodities professionals to meet high standards.1. Oversee the National Futures Association registration program.

2. Require testing, licensing, and ethics training for commodities professionals.

3. Maintain regulations and oversight to ensure the effective use of disclosure

documents by commodities professionals.

4. Investigate and bring administrative registration cases arising out of alleged

statutory disqualification and obtain suspensions, revocations, conditions, or

restrictions of registration.
Federal Register / Vol. 62, No. 179 / Tuesday, September 16, 1997 / Notices 48621

SUMMARIES OF OUTCOME OBJECTIVES AND ACTIVITIES—GOAL #2—Continued

[Goal #2: Protect market users and the public.]

Outcome objective Activity

3. Provide a forum for effectively and expeditiously handling

customer complaints against persons or firms registered

under the Act.

1. Provide a reparations program for commodities market users to make claims

relating to violations of the Act.

SUMMARIES OF OUTCOME OBJECTIVES & ACTIVITIES—GOAL #3

[Goal #3: Foster open, competitive, and financially sound markets.]

Outcome objective Activity

1. Ensure sound financial practices of clearing organizations

and firms holding customer funds.

1. Promulgate regulations to ensure sound business, financial, and sales practices in firms participating in the commodities industry.

2. Review and oversee self-regulatory organization audit and financial practices.

3. Identify possible financial, capitalization, segregation, and supervision violations for investigation and possible prosecution.

4. Investigate possible financial, capitalization, segregation, and supervision violations.

5. Bring cases concerning financial, capitalization, segregation, and supervision

violations.

6. Sanction violators.

2. Promote and enhance effective self-regulation of the commodity futures and option markets.1. Ensure effective self-regulatory organization enforcement programs.

2. Review and approve self-regulatory organization rules and rule amendments.

3. Conduct rule enforcement reviews of self-regulatory organizations (financial

practices, sales practices, trade practices, and audit trail).

4. Review and oversee self-regulatory organization audit and financial practices.

5. Review adequacy of self-regulatory organization disciplinary actions.

6. Conduct direct audits of clearing organizations and firms handling customer

money to ensure compliance with capitalization and segregation rules.

7. Promulgate regulations to ensure effective self-regulation by exchanges, clearing organizations, and registered futures associations.

3. Facilitate the continued development of an effective, flexible regulatory environment responsive to evolving market

conditions.

1. Coordinate and cooperate with global financial services regulators to share

vital information and develop appropriate global standards in the commodities

industry as markets emerge and evolve.

2. Participate in the International Organization of Securities Commissions and

represent the Commission at international meetingsconcerning commodity regulation.

3. Participate in the President’s Working Group on Financial Markets to ensure

coordination of information and efforts among U.S. financial regulators.

4.Provide exemptive, interpretive, or other relief as appropriate to foster the development of innovative transactions, trading systems, and similar arrangements.

4. Promote markets free of trade practice abuses .................. 1. Identify possible trade practice violations for investigation and possible enforcement proceedings.

2. Investigate possible trade practice violations.

3. Bring cases concerning trade practice violations.

4. Bring enforcement proceedings against violators.

Achieving The Goals: Strategies to

Mission Performance—1997–2002

The Environment

The environment in which the

Commodity Futures Trading

Commission operates and works is

dynamic. Futures and option markets

are fluid. New products, as well as

changes in terms and conditions of

existing contracts, are common.

Increasing globalization of the financial

markets also presents challenges and

opportunities to the agency’s mission

performance.

Accomplishing our mission will

require a commitment continually to

assess the external and internal issues

and trends that may affect our mission

and the way in which we must respond

to meet it successfully. Evaluating and

adjusting our plan will ensure that

potential problems or weaknesses are

managed before they develop into

crises.

The Strategies

To fulfill our commitment, we must

develop and employ various strategies

which focus on achieving results. These

strategies will define the basis for

developing policies, making decisions,

taking actions, allocating resources and

defining program direction. They will

clarify why the organization exists, what

it does, and why it does it—providing

a bridge to understanding how we

connect to our environment.

Achieving The Goals: External

Challenges—1997–2002

The Challenges

The Commodity Futures Trading

Commission faces challenges external to

the organization which may

significantly alter its ability to meet its

goals, its outcome objectives, and even

its mission, depending on the weight of

their influence and the timing of their

occurrence.

We have identified ten such factors

that may impact strategic planning at

the CFTC.

The volume of trading in futures and

commodity options—which is

influenced, in turn, by external

economic factors such as interest rate
48622 Federal Register / Vol. 62, No. 179 / Tuesday, September 16, 1997 / Notices

volatility, commodity price volatility in

general, and events and conditions

specific to individual commodity

markets.

The number and sophistication of

market users—including the increasing

number of institutional users trading as

fiduciaries.

The variety of markets traded—in

recent years, the CFTC has designated

futures and option markets on a wide

range of commodities, instruments, and

indices. These have included: dairy

products, such as milk and cheese;

various energy products including:

electricity; various currency and crosscurrencies; inflation-indexed U.S.

Treasury bonds; foreign interest rates;

boneless beef; pollution rights; crop

yields; and a wide range of foreign and

domestic stock indices.

The growing use of over-the-counter

(OTC) derivatives—such use may

increase exchange trading volume as

dealers in such OTC instruments

attempt to hedge their resulting risk

exposures. Often it also requires

analysis of such OTC instruments for

purposes of determining the appropriate

regulatory framework.

Structural changes in the financial

services industry—such as the

diversification into overseas markets,

and the convergence of the securities,

commodities, insurance, and banking

industries.

Events that destabilize the commodity

markets—such as the 1987 stock market

break, the 1995 collapse of Barings

Bank, and the copper market events

precipitated by the Sumitomo

Corporation in 1996.

The globalization of financial

markets—broadening the needs for

market surveillance, analysis of

intermarket relationships, cross-border

enforcement efforts, and cooperation

and information sharing with foreign

authorities.

The effect of federal laws and

policies—on the U.S. economy, such as

the deregulation of the energy industry

and changes in farm subsidy policies,

spawning change and innovation such

as new types of crop insurance.

The advancement in technology—

which continues to introduce challenges

in many areas-alternatives to the ‘‘openoutcry’’ method of trading commodity

futures on the exchange floor, enhanced

methods for timing and tracking trading

transactions, on-line filing of financial

information by market users, electronic

marketing and trading of financial and

risk-hedging products, and trading

commodity futures and options on a

global, 24-hour real-time basis.

The standards, resources, and

priorities of other organizations and

jurisdictions—such as self-regulatory

organizations, other federal and state

law enforcement agencies, and foreign

authorities.

The Strategies

Develop a Responsive and Flexible

Regulatory Posture—It is not possible to

predict which external influences

ultimately will affect the commodity

futures and option industry over the

next five years. However, certain trends

observed in the past few years are likely

to continue. In order to fulfill its goal of

being a flexible and responsive

regulatory body, the Commission must

develop strategies to ensure that the

appropriate reactions and responses to

these trends are developed.

Innovation

• Respond to innovation through the

timely review of new and novel trading

instruments.

• Develop a capability of

understanding the underlying economic

effects and benefits of new product

development, new markets, and new

complex trading mechanisms.

Globalization

• Maintain watchful surveillance

activities to monitor systemic risk of

expanding markets, intermarket

linkages, and cross-border trading

systems.

• Foster and sustain strong

relationships with foreign authorities to

ensure rapid communication and

responsive actions in the event of global

financial uncertainty.

• Participate in international efforts

to standardize world-wide market

surveillance and information sharing

practices.

Competitiveness

• Consider refinements to the

regulatory framework to take into

account the growing use of over-thecounter derivatives.

• Respond to structural changes in

the financial services industry to ensure

a level playing field as the commodities,

securities, and banking industries

become more integrated.

Dynamic Economic Forces

• Monitor general economic events

and trends in order to understand

dynamics affecting commodity futures

and option trading.

• Respond to the changing needs of

the U.S. agricultural community

resulting from the passage of the Federal

Agricultural Improvement Reform

(FAIR) Act of 1996 and the changes it

will spawn in this sector of the U.S.

economy.

• Develop an automated market

surveillance system capable of

collecting and assimilating data from

option trading, as well as commodity

futures trading.

• Respond rapidly and effectively to

destabilizing events, either in the

United States markets or in the global

marketplace, to ensure the protection of

U.S. interests and customers.

• Monitor the increasing volume of

the public’s funds invested either

directly or indirectly through

commodity pools.

Advancing Technology

• Develop capability of overseeing

rapidly evolving technological changes

and innovations influencing the

markets—electronic trading

mechanisms, increasingly linked trading

relationships, real-time trading,

electronic commerce, expansion of the

Internet and other advancements.

• Ensure that the Commission has

state-of-the art computing power to

collect and analyze the increasing

volume of data generated by the

commodity futures and option markets.

Develop and Sustain Vital

Partnerships—Strong working

relationships with other organizations

and jurisdictions involved not only in

commodity futures and option trading,

but domestic and international finance

and law enforcement, increase the

Commission’s ability to build

knowledge and insight, share

information, and participate in

developing standard practices and

policies.

Federal and State

• A key relationship that ensures

regulatory consistency across the federal

government is the Commission’s

participation in the President’s Working

Group on Financial Markets. This

critical forum for coordination of

regulation across financial markets

brings together the leaders of the federal

financial regulatory agencies to consider

issues concerning risk assessment,

capital requirements, internal controls,

disclosure, accounting, market practices

relating to trading in derivative

instruments, bankruptcy law revisions,

and contingency planning for market

emergencies.

• Another key federal liaison is with

the U.S. Department of Agriculture.

Consistent with the mandate of the Act,

the FAIR, CFTC will work with USDA

staff in a risk management education

effort to reach agricultural producers

seeking risk management services or

advice to deal with the changes

resulting from its passage.
Federal Register / Vol. 62, No. 179 / Tuesday, September 16, 1997 / Notices 48623

• Commission staff works through

various established intergovernmental

partnerships to share information and to

consult on issues of importance both to

the Commission and to other financial

regulators. Some meetings are recurring,

such as biweekly conference calls and

quarterly meetings held among the

CFTC, the Securities and Exchange

Commission, the Department of the

Treasury, the Board of Governors of the

Federal Reserve System, the New York

Federal Reserve Bank and the Federal

Deposit Insurance Corporation. Others

are occasional as needed, but

nonetheless valuable, such as those with

the Department of Energy, the

Department of Agriculture, and the

Department of Labor’s Bureau of Labor

Statistics on other matters.

• The working relationships with

other federal law enforcement entities

are also fundamental to an effective law

enforcement effort. The Commission

coordinates its enforcement efforts with

agencies such as the Department of

Justice, the Federal Bureau of

Investigation, the Federal Trade

Commission, the Securities and

Exchange Commission and the U.S.

Postal Inspection Service.

The CFTC is also represented on

several interagency task forces designed

to keep participants abreast of new

developments in financial crimes and to

coordinate the government’s response.

• Enforcement efforts are coordinated

with state authorities as well, including

state commissions responsible for the

regulation of corporations, securities,

insurance, and banking.

Self-Regulatory

The National Futures Association

(NFA) has been granted registration by

the Commission as a futures association

with specific self-regulatory

responsibilities under the Commodity

Exchange Act. The NFA has existed

since 1982 and works in partnership

with the Commission to assure high

standards for industry professionals.

The Commission works closely with the

NFA in a variety of areas to augment

scarce government resources—

registration, ethics training for industry

professionals, the review of disclosure

documents, and issues concerning

statutory disqualification of registrants.

International

• In the past several years, the

Commission has cooperated with a large

number of foreign regulatory authorities

through formal memoranda of

understanding (MOUs) and other

arrangements to combat cross-border

fraudulent and other prohibited

practices that could harm customers or

threaten market integrity. Cross-border

information sharing among market

regulators forms the linchpin of

effective surveillance of global markets

linked by products, participants, and

information technology. The

Commission currently has 18 formal

arrangements for the sharing of

information on enforcement matters,

three arrangements related to financial

information sharing, and nine

cooperative arrangements for the

sharing of information on matters

related to foreign firms and exemptions

from certain CFTC rules and one letter

relating to the use of foreign settlement

banks.

• A key partnership in our efforts to

remain abreast of global financial issues

is our membership in the International

Organisation of Securities Commissions

(IOSCO), an organization of more than

120 members from over 75 countries.

IOSCO’s main purposes are to provide

machinery for exchanging information

and expertise between regulatory

authorities for the supervision of world

securities and derivatives markets, to

establish standards of best practice, to

ensure market integrity, and to promote

effective supervision and enforcement.

IOSCO deals with issues affecting both

developed and emerging markets.

Advisory

The Commission sponsors three

advisory committees that facilitate a

dialogue between the CFTC and three

key groups of interested persons—the

American agricultural community, the

financial community, and the states.

• The Agricultural Advisory

Committee (AAC) represents a vital link

between the Commission, which

regulates agricultural futures and option

markets, and the agricultural

community, which depends on those

markets for hedging and price

discovery. The AAC’s 25 member

organizations represent a major portion

of the American agricultural

community. For the last 14 years, the

AAC’s twice yearly meetings have

fostered an ongoing dialogue between

that community and the Commission.

• The Financial Products Advisory

Committee provides a means of

receiving invaluable information and

obtaining advice and recommendations

on issues related to financial markets. In

this regard, the Committee has served as

a channel for communicating to the

Commission diverse viewpoints within

the financial community, including the

views of broker-dealers, pension fund

sponsors, investment companies,

futures commission merchants,

commodity pool operators, and

commodity trading advisors. The

Committee has also served a conduit for

the views of federal financial market

oversight agencies, futures exchanges,

and accounting firms.

• The CFTC-State Cooperation

Advisory Committee (CSCAC) continues

to play a highly productive role in

facilitating the cooperation between

federal and state regulatory authorities.

In the context of diverse state laws and

enforcement authorities, it provides a

forum for the Commission to solicit the

advice and recommendations of

knowledgeable state officials in efforts

to protect investors from fraud and

secure the integrity of futures markets.

Similarly, it helps the various state

regulators learn about changes to federal

laws and regulations as well as federal

enforcement activities. This facilitates

the exchange of information and the

coordination of policies and

enforcement efforts among the CFTC,

the SEC, and the Department of Justice.

Some of the issues addressed in recent

years include:

—misleading advertising in the

broadcast media;

—bank-financed precious metal

investing;

—commodity pool operations; and,

—public availability of disciplinary

actions in the futures industry.

CSCAC’s membership includes

representatives of federal and state law

enforcement agencies, futures industry

associations, and private futures

brokerage firms.

Achieving the Goals: Internal

Challenges—1997–2002

The Challenges

Many of the internal challenges

identified may not be unique to the

CFTC, but nonetheless are possible

barriers to success which must be

analyzed and met in order to succeed in

its mission.

Diminishing Resources—with a

declining pool of budgetary resources

slated for domestic discretionary

programs, every federal entity faces the

same task of streamlining the way it

operates. The Commission will continue

to review its requirements and program

initiatives to ensure that its fiscal

perspective is sound. It must also

continue to seek ways of improving

performance, delegating responsibilities,

and becoming more efficient.

Recruitment and Retention of

Qualified Professionals—nearly 80% of

the staff of the CFTC falls into four

categories of professional employment:

law, economics, financial audit, and

futures trading. The complexity of the

work at the Commission demands

highly skilled workers, many with
48624 Federal Register / Vol. 62, No. 179 / Tuesday, September 16, 1997 / Notices

advanced educational degrees.

Competition for these individuals has

always been keen, and there is no

indication that this challenge will abate.

Indeed, the Commission is the only

federal financial regulator which does

not have the authority to pay

professionals at premium pay levels.

In some instances, as with lawyers

and economists, the Commission has

experienced the effects of a ‘‘brain

drain,’’ when highly talented and

skilled employees are hired away from

the CFTC by other federal financial

regulators who can offer premiums.

Potential for Significant Numbers of

Retirements—the CFTC is in its 23rd

year of operation. Many of the

employees who started with the

Commission in its early days are

approaching retirement age. Over 12%

of CFTC’s on-board staff will become

eligible for retirement in the next five

years. This level of turnover will require

significant levels of recruitment and

training, particularly to fill behind the

loss of so much ‘‘institutional memory.’’

Another challenge associated with a

significant turnover in staff is the

question of reengineering. Allocation of

staff resources in the future needs to be

considered in light of changes in the

organization’s tasks and responsibilities.

Remaining Abreast of Current

Technology—perhaps more so than

many other federal agencies, the

Commission is dependent on a

significant level of advanced technology

to manage the volume and complexity

of financial information we collect and

analyze. Data are voluminous, require

timely handling, and must be

thoroughly analyzed for anomalies in

trading patterns, relationships, and

strategies.

Over the years, the Commission has

developed and maintained an

impressive technological infrastructure

and has employed automation when

feasible to enhance its work product and

to enhance productivity in light of a

static level of staffing.

The sophisticated market surveillance

and market analysis the Commission

performs are accomplished through the

use of databases and econometric

modeling. Fact patterns for enforcement

investigations are supported by

computer programs, and many other

responsibilities could not be

accomplished without the significant

level of information technology at the

CFTC. The need for this level of support

will increase over the coming five years

as technology continues to evolve and to

offer new capabilities.

Commission staff must be

knowledgeable as to current

technologies in order adequately to

perform oversight of the exchanges as

they increase their use of technology.

This technological trend has been

reflected in the increasing linkage of

global markets and the introduction of

overnight trading capabilities by major

U.S. exchanges linked to foreign

counterparts. Advances in technology

will improve the ability of the

exchanges to handle their work

electronically. The Commission must be

knowledgeable in these technologies to

fulfill its mission of fostering innovation

and a flexible and responsive regulatory

environment.

Remaining Educated and Informed as

Innovation Changes the Industry—it has

always been necessary for Commission

staff to continue to improve their

knowledge of developing economic

trends, new trading instruments, trading

strategies, and the interrelationship of

markets, domestically and

internationally. Without such continued

investment in skill and information

building, they may not be fully capable

of understanding the marketplace, the

economic influences on it, and its

changing needs and uses. This level of

skill and knowledge will need to

increase over the next five years as new

markets emerge around the world and

market users seek new hedging

strategies.

The Strategies

Strategies to Develop a Responsive

Commission Culture—At the center of

the Commission’s mission

accomplishment are the core business

processes and responsibilities. Meeting

these responsibilities and performing

them well provides an ongoing level of

regulatory presence and support to the

industry and its users. These core

business processes are many and

include: daily market surveillance, the

detection and prosecution of

wrongdoing, contract market

designation, rule review, market

research, and audits of industry firms.

To accomplish the day-to-day

activities associated with these

processes, the Commission must

maintain a positive culture within

which to work. Over the next five years,

the following strategies will guide us

and help us meet the internal challenges

we face.

Build a professional and highly

trained staff—

• Set standards for the recruitment of

qualified staff.

• Develop a recruitment and

promotion strategy to build a new

professional base for filling behind the

anticipated high level of retirements in

the next five years.

• Provide technical and advanced

training to ensure that CFTC staff skills

keep pace with advances in the

commodities industry and permit

promotion to higher levels of

responsibility.

Build a strong technological

infrastructure—

• Implement the Commission’s FiveYear Automated Data Processing (ADP)

Plan. The plan establishes: the

Commission’s systems development

priorities; agency standards for various

software applications; policies and

procedures related to support provided

by the Office of Information Resources

Management (OIRM); and priorities for

acquisition and utilization of external

databases and other electronic

information services.

• Sustain the Commission’s End-User

Advisory Group (EAG) to gain broad

input into planning and prioritizing

technological developments. The EAG

provides: assistance and guidance to

OIRM in the development of the FiveYear ADP Plan; annual review and

prioritization of OIRM’s systems

development workload; establishment

of Commission-wide standards for the

use of software applications and support

provided by OIRM; and priorities for

acquisition and utilization of databases

and information services.

• Implement and refine the CFTC’s

automated Market Surveillance System.

• Maintain and enhance expertise

capable of overseeing the technological

advancements in the domestic and

international markets.

• Review and replace hardware and

software with current technology to

support Commission goals.

Reengineer business processes to

streamline regulatory requirements and

to create internal efficiencies—

• Identify areas which may benefit

from reengineering, to create efficiencies

for the regulated industry or for the

CFTC’s internal processes.

Recent examples include: the

implementation of ‘‘fast-track’’

procedures for processing certain

contract designation applications and

rules-cutting in half the average period

such contracts and rules are pending

with the Commission; streamlining of

the risk disclosure process; and

streamlining the administrative

opinions process to reduce the backlog

of pending cases.

Restructure organizationally to

improve performance and respond to

changing mandates and trends—

• As warranted, reorganize the

internal structure of the Commission to

strengthen program initiatives.

Recent examples include: the

strengthening of the enforcement
Federal Register / Vol. 62, No. 179 / Tuesday, September 16, 1997 / Notices 48625

program through a reorgani-zation,

concentrated hiring and renewed

training efforts; and the establishment of

an Office of International Affairs to

enhance the Commission’s ability to

meet the increasing challenge of playing

an active role in international

initiatives.

Plan effectively to maximize the use

of scarce budgetary resources—

• Continually review resource

requirements for operations and

program initiatives to ensure sound

fiscal management and the optimal

allocation of resources to mission

requirements.

• Enhance the capability of the

financial management system to aid in

analyzing inputs and outputs in order to

improve the measurement of outcomes

at the Commission.

• Make increasing use of the data

flowing from our payroll/ personnel

system in order to determine how we

are using our most significant resourcestaff-years.

• Develop advanced planning skills

to assure an emphasis on resultsoriented management.

Communicate accountability to CFTC

managers and staff—

• Institute a new Performance

Management System to create a more

effective and responsive communication

tool for managers and staff.

• Employ the Annual Performance

Plan to improve the commu-nication of

specific goals and performance levels to

staff to improve performance.

• Provide training at all levels of the

Commission so that employees have the

skills and current information to enable

them to perform at a high level.

Achieving and Measuring Performance

Achieving Performance

The Commission may measure the

success of its performance through four

broad indicators:

• Markets free of disruption.

• Registered and fit market

professionals and financial

intermediaries.

• Self-regulatory organizations with

sound financial practices and effective

enforcement programs.

• Swift and aggressive investigation

and prosecution of wrongdoing, with

sanctions and fines levied for the

maximum remedial and deterrent effect.

Measuring Performance: The Annual

Performance Plan

On an annual basis, work of the

Commission is directed through the

Annual Performance Plan (APP). The

APP establishes a full set of

performance indicators and targets to

ensure that day-to-day activities are

appropriately defined and measured.

Activities are outlined by performance

indicators and performance targets for

five years, FY 1998 through FY 2002.

Relating General Goals and Objectives

to Performance Goals and Program

Evaluation

Program evaluation, or determining

how well the performance targets CFTC

has established are being achieved, is

necessary to measure the effectiveness

and efficiency of our work. Many

program priority and resource allocation

decisions hinge on the knowledge of

what is going well and what is not. For

the first three years of this plan, the

Commission will use methods and

processes already in place to evaluate

how we are progressing on the

implementation of the Strategic Plan

and the Annual Performance Plan.

Quarterly Objectives Review Process

The Quarterly Objectives reporting

process provides executive management

with a review of program

accomplishments for the fiscal quarter

just completed and program priorities

for the current fiscal quarter. Also

included is a summary of performance

statistics, a series of output measures

provided by program. This reporting

process will be evaluated to determine

how it may be used as the method for

reporting on program progress toward

meeting the goals, outcome objectives,

and activities in the Strategic Plan as

well as a method for setting overall

priorities and allocating resources

consistent with those priorities.

Management Accounting Structure

Code System

Information concerning the

distribution of labor at the Commission

is captured through the financial

reporting system called MASC—

Management Accounting Structure Code

System. This input data, provided by

every employee on a bi-weekly

schedule, reflects the hours they

dedicate to various Commission

activities and projects. The information

is intended for use by agency program

managers in their resource management

activities, as well as to provide a

database for documentation and support

of the CFTC fee structure for such feegenerating activities as the designation

of contract markets for trading on

exchanges and rule enforcement reviews

of the exchanges.

The MASC system will be reviewed

with the goal of reengineering the

present system to conform to the

activity structure defined by this

Strategic Plan. This evaluation will

assess the current system’s utility as the

primary method for capturing the

distribution of labor costs.

Status of Funds Reporting Process

The Status of Funds, a financial

management reporting process,

executed from the Commission’s

automated financial management

system and presented to executive

management, is the basis for periodic

reports of the agency’s financial

condition and usage of its chief

resource—staff-years. This process will

be evaluated to determine how it may

best facilitate the reporting of resource

usage under the new framework of the

Strategic Plan.

Stakeholders

The Commission’s stakeholders-the

public, the Congress, the

Administration, other federal

departments and agencies, market users,

registrants, the exchanges, the National

Futures Association, and foreign

authorities-are valuable resources which

must be tapped to provide critical

feedback on Commission goals and

priorities. Understanding their

perspectives will assist the Commission

in clarifying its mission and directing its

resources. We will evaluate how best to

use these partnerships effectively.

Leadership

The outcome envisioned by the

Government Performance and Results

Act is improved efficiency and

effectiveness of federal programs

through the establishment of a system to

set goals for program performance and

to measure the results.

As this planning and reporting

process evolves, the Commission will

evaluate how best to provide the

leadership and direction to integrate

program, cost, and budget information

into a reporting framework that allows

for fuller consideration of resource

allocations, operational costs, and

performance results.

Monitoring External and Internal

Factors

The Commission will evaluate the

most effective method to continually

review key factors, external and internal

to the agency, which may affect how it

achieves its mission. This evaluation

process will ensure that the Commission

anticipates future challenges and makes

adjustments to its goals, outcome

objectives, and activities before

potential issues and problems escalate.

As part of this evaluation the

Commission will continue its

refinement of vital systems such as the

Market Surveillance System which
48626 Federal Register / Vol. 62, No. 179 / Tuesday, September 16, 1997 / Notices

provides invaluable front-line

information on commodity futures and

option trading on a daily basis, and will

look to defining other systems that may

provide assistance in anticipating issues

and directing resources.

Appendix

Understanding the Fundamentals of

Commodity Futures and Options

What is a Futures Contract?

What is an Option Contract?

What is Price Discovery?

What is Daily Cash Settlement?

What is Leverage?

What is Margin?

Addresses of the Commodity Exchanges

Addresses of CFTC Offices

CFTC Team

Organizational Structure

Staffing

Occupations

Commission Concurrence

Publications and Information

Understanding the Fundamentals of

Commodity Futures and Options

What Is a Futures Contract?

A futures contract is an agreement

between two parties to buy and sell in

the future a specific quantify of a

commodity at a specific price. The

buyer and seller of a futures contract

agree now on a price for a product to be

delivered and/or paid for at a set time

in the future, know as the ‘‘settlement

date.’’ Although actual delivery of the

commodity can take place in fulfillment

of the contract, most futures contracts

are actually closed out or ‘‘offset’’ prior

to delivery.

What Is an Option Contract?

An option on a commodity futures

contract is an agreement between two

parties which gives the buyer, who pays

a market determined price known as a

‘‘premium,’’ the right (but not the

obligation), within a specific time

period, to exercise his option. Exercise

of the option will result in the person

being deemed to have entered into a

futures contract at a specified price

known as the ‘‘strike price.’’ In some

cases, an option may confer the right to

buy or sell the underlying asset directly,

and these options are known as options

on the physical asset.

What Is Delivery vs. Cash Settlement?

There are two types of futures

contracts, those that provide for

physical delivery of a commodity or

other item and those which call for cash

settlement. The month during which

delivery or settlement is to occur is

specified in the contract. Thus, a July

futures contract is one providing for

delivery or settlement in July.

It should be noted that even in the

case of deliverable futures contracts,

very few actually result in delivery. Not

many speculators have the desire to take

or make delivery of, for example, 5,000

bushels of wheat, or 112,000 pounds of

sugar, or even one million dollars worth

of U.S. Treasury bills. Rather, the vast

majority of speculators in futures

markets choose to realize their monetary

gains or losses by buying or selling

offsetting futures contracts prior to the

delivery date.

Selling a contract that was previously

purchased liquidates a futures position.

Similarly, a futures contract that was

initially sold can be liquidated by an

offsetting purchase. In either case, gain

or loss is the difference between the

buying price and the selling price.

Even hedgers generally do not make

or take delivery. Most find it more

convenient to liquidate their futures

positions and (if they realize a gain) use

the money to offset whatever adverse

price change has occurred in the cash

market.

What Is Price Discovery?

Futures prices increase and decrease

largely because of the myriad factors

that influence buyers’ and sellers’

judgments about what a particular

commodity will be worth at a given time

in the future (anywhere from less than

a month to more than two years).

As new supply and demand

developments occur, and as new and

more current information becomes

available, these judgments are

reassessed, and the price of a particular

futures contract may be bid upward or

downward. The process of

reassessment-price discovery-is

continuous.

Thus, in January, the price of a July

futures contract would reflect the

consensus of buyers and sellers at that

time as to what the value of a

commodity or item will be when the

contract expires in July. On any given

day, with the arrival of new or more

accurate information, the price of the

July futures contract might increase or

decrease in response to changing

conditions and expectations.

Competitive price discovery is a major

economic function and benefit of

futures trading. The trading floor of a

futures exchange is where available

information about the future value of a

commodity or item is translated into

price. In summary, futures prices are an

ever-changing barometer of supply and

demand and in a dynamic market, the

only certainty is that prices will change.

What Is Daily Cash Settlement?

Once a closing bell signals the end of

a day’s trading, the exchange’s clearing

organization matches each purchase

made that day with the corresponding

sale and tallies each member firm’s

gains or losses based on that day’s price

changes—a massive undertaking

considering that well over one million

futures contracts are bought and sold on

an average day. Each firm, in turn,

calculates the gains and losses for each

of its customers having futures

contracts.

Gains and losses on futures contracts

are not only calculated on a daily basis,

but they are also credited and debited

on a daily basis. This process is known

as a daily cash settlement and is an

important feature of futures trading. It is

also the reason a customer who incurs

a loss on a futures position may be

called to deposit additional funds into

his account—a margin call.

What Is Leverage?

To say that gains and losses in futures

trading are the result of price changes is

an accurate explanation, but by no

means a complete explanation. Perhaps

more so than in any other form of

speculation or investment, gains and

losses in futures trading are highly

leveraged. An understanding of leverage

is crucial to an understanding of futures

trading.

The leverage of futures trading stems

from the fact that only a relatively small

amount of money (known as initial

margin) is required to buy or sell a

futures contract. On a particular day, a

margin deposit of only $1,000 might

enable you to buy or sell a futures

contract covering $25,000 worth of

soybeans. Or for $20,000 you might be

able to purchase a futures contract

covering an index of common stocks

valued at $200,000. The smaller the

margin in relation to the underlying

value of the futures contract, the greater

the leverage.

If you speculate in futures contracts

and the price moves in the direction you

anticipated, high leverage can produce

large profits in relation to your initial

margin. Conversely, if prices move in

the opposite direction, high leverage can

produce large losses in relation to your

initial margin.

What Is Margin?

The margin required to buy or sell a

futures contract is a deposit of good

faith money that can be drawn on by

your brokerage firm to cover losses that

you may incur in the course of futures

trading. It is similar to money held in an

escrow account.
Federal Register / Vol. 62, No. 179 / Tuesday, September 16, 1997 / Notices 48627

Minimum margin requirements for a

particular time are set by the exchange

on which the contract is traded. They

are typically about 5% of the current

value of the commodity or asset

underlying the futures contract.

Exchanges continuously monitor market

conditions and risks and, as necessary,

raise or reduce their margin

requirements. Individual brokerage

firms may require higher margin

amounts from customers than the

exchange-set minimums.

Addresses of the Commodity Exchanges

& Designated Self-Regulatory

Organizations

Chicago

Chicago Board of Trade, 141 West

Jackson Boulevard, Chicago, IL 60606

Chicago Mercantile Exchange, 30 South

Wacker Drive, Chicago, IL 60606

MidAmerica Commodity Exchange, 141

West Jackson Boulevard, Chicago, IL

60604

Kansas City

Kansas City Board of Trade, 4800 Main

Street, Kansas City, MO 64112

Minneapolis

Minneapolis Grain Exchange, 400 South

Fourth Street, Minneapolis, MN

55415

Philadelphia

Philadelphia Board of Trade, 1900

Market Street, Philadelphia, PA 19103

New York

AMEX Commodities Corporation, 86

Trinity Place, New York, NY 10006

Coffee, Sugar & Cocoa Exchange, Inc.,

Four World Trade Center, New York,

NY 10048

New York Cotton Exchange, Four World

Trade Center, New York, NY 10048

New York Futures Exchange, Four

World Trade Center, New York, NY

10048

New York Mercantile Exchange, One

Northend Avenue, World Financial

Center, New York, NY 10282

COMEX Division

NYMEX Division

Registered Futures Association

National Futures Association, 200 West

Madison Street, Suite 1600, Chicago,

IL 60606

CFTC Offices

Headquarters, Three Lafayette Centre,

1155 21st Street, N.W., Washington,

D.C. 20581, Telephone: 202–418–5000

Eastern Regional Office, One World

Trade Center, Suite 3747, New York,

NY 10048, Telephone: 212–466–2061

Central Regional Office, 300 South

Riverside Plaza, Suite 1600 North,

Chicago, IL 60606, Telephone: 312–

353–5990

Southwestern Regional Office, 4900

Main Street, Suite 721, Kansas City,

MO 64112, Telephone: 816–931–7600

Sub-Office, 510 Grain Exchange

Building, Minneapolis, MN 55415,

Telephone: 612–370–3255

Western Regional Office, Murdock

Plaza, 10900 Wilshire Boulevard,

Suite 400, Los Angeles, CA 90024,

Telephone: 310–235–6783

CFTC Team

Organizational Structure

Based in Washington, D.C. the

Commodity Futures Trading

Commission maintains regional offices

in Chicago and New York, and has

smaller offices in Kansas City, Los

Angeles, and Minneapolis. The CFTC

consists of five Commissioners,

appointed by the President to serve

staggered five-year terms. One of the

Commissioners is designated by the

President, with the consent of the

Senate, to serve as Chairperson. No

more than three Commissioners at any

one time may be from the same political

party.

The Chairperson oversees the

management of the agency and its five

major organizational units:

• Division of Economic Analysis

• Division of Enforcement

• Division of Trading and Markets

• Office of the General Counsel

• Office of the Executive Director

Staffing

The Commission is requesting 621

full-time equivalent staff-years, or FTEs,

in FY 1999. A regional staffing

distribution is shown below:

Washington, D.C. (DC) ........................ 370

Chicago, IL (CH) .................................. 131

New York, NY (NY) ............................. 90

Los Angeles, CA (LA) .......................... 21

Kansas City, MO (KC) .......................... 7

Minneapolis, MN (MN) ....................... 2

Total Staff Years ............................... 621

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BILLING CODE 6351–01–C
48628 Federal Register / Vol. 62, No. 179 / Tuesday, September 16, 1997 / Notices

1Executives include Chairperson, Commissioners, and managers in the Senior Executive Service. Other Professionals include computer analysts, budget

and finance professionals, human resource specialists, and contracting officials.

Occupations

The principal professional occupations at the Commission are attorney, economist, futures trading specialist and

investigator, auditor and computer specialist. These professionals are assisted in their work by a wide range of administrative and support personnel.1

Commission Concurrence

lllllllllllllllllllll

Brooksley Born, Chairperson

lllllllllllllllllllll

Joseph B. Dial, Commissioner

lllllllllllllllllllll

John E. Tull, Jr., Commissioner

lllllllllllllllllllll

Barbara Pedersen Holum, Commissioner

lllllllllllllllllllll

David D. Spears, Commissioner

Publications and Information

For a list of other CFTC publications

or for more information on the CFTC,

please visit the CFTC’s home page on

the World Wide Web. Our address is

http://www.cftc.gov.

Or contact the Office of Public Affairs,

Commodity Futures Trading

Commission at: Three Lafayette Centre,

1155 21st Street, N.W., Washington,

D.C. 20581, (202) 418–5080.

[FR Doc. 97–24388 Filed 9–15–97; 8:45 am]

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DEPARTMENT OF DEFENSE

Office of the Secretary

Meeting of the Task Force on Defense

Reform

AGENCY: Department of Defense, Task

Force on Defense Reform.

ACTION: Notice.

SUMMARY: Notice is hereby given of an

open meeting of the Task Force on

Defense Reform (the Task Force) on

October 21, 1997. One purpose of the

meeting is to meet with representatives

of the Federal unions and employee

associations representing federal

employees in the Department of Defense

(DoD). In addition, time will be set aside

for anyone wishing to address the Task

Force with ideas about streamlining,

restructuring, and reengineering of

various components or elements of the

Department. A second notice containing

meeting details about the open meeting

will be published in early October.

The Task Force was established to

make recommendations to the Secretary

of Defense and Deputy Secretary of

Defense on alternatives for

organizational reforms, reductions in

management overhead, and streamlined

business practices in DoD, with

emphasis on the Office of the Secretary

of Defense, the Defense Agencies, the

DoD field activities, and the Military

Departments.

Notice is also hereby given for closed

sessions of the Task Force on Defense

Reform on September 30, and October 2,

7, 9, 14, 16, 23, 28, and 30, 1997. In

accordance with Section 10(d) of the

Federal Advisory Committee Act, Public

Law 92–463, as amended, 5 U.S.C.,

Appendix II, it has been determined that

matters affecting national security, as

covered by 5 U.S.C. 552b(c)(1)(1988),

will be presented throughout the

meetings, and that, accordingly, these

meetings will be closed to the public.

Dated: September 11, 1997.

L.M. Bynum,

Alternate OSD Federal Register Liaison

Officer, Department of Defense.

[FR Doc. 97–24531 Filed 9–15–97; 8:45 am]

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