Commodity Futures Trading Commission 

Office of External Affairs 

 Three Lafayette Centre 

 1155 21st Street, NW 

 Washington, DC 20581 

 202.418.5080 

Keynote Address 

Keynote Address of Acting Chairman Walter L. Lukken 

Before FIA Futures and Options Expo, Chicago, Illinois 

(As Prepared For Delivery) 

November 11th, 2008 

I appreciate the Futures Industry Association for inviting me here to speak today as we 

celebrate and honor our country’s military veterans—those brave individuals who have 

valiantly served this nation in time of war and peace. We give thanks for their service 

and for the life and liberty that they preserve for all Americans. 

Last week, voters in record numbers participated in an historic election in which this 

state’s celebrated son, Barack Obama, was elected to the nation’s highest office. As 

President, he will have a shorter honeymoon period than most, given the situation 

currently facing this country and its economy. But I am optimistic that President-elect 

Obama will work together with both parties to find sensible solutions to our nation’s 

problems and economic ills. All Americans should wish him the greatest success in 

uniting this country in pursuit of common goals and ideals. 

Every four years, an amazing occurrence happens in our nation’s capital as citizens and 

politicians gather and put aside their differences to celebrate the peaceful transition of 

power from one administration to the next. The Presidential Inauguration is a 

bipartisan-planned event that occurs without party distinctions or biases. Like rival 

siblings, during this period, we lay aside our disagreements and celebrate as one 

American family. As inaugurations have become routine, we often take this transition 

for granted. But it’s this routine nature that makes it awe-inspiring as the outgoing 

President hands over the leadership of the most powerful and wealthy nation on earth in 

celebrated pride for the rule of law. Respect for the democratic process makes the 

United States the envy of other nations around the world who do not have the luxury of 

a free and representative government where political differences can be aired and 

debated without fear of retribution. It is this liberty and freedom and these democratic 

ideals we celebrate as a nation every four years. 
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The CFTC will also face a transition with the coming Administration. As Acting 

Chairman of the CFTC, I serve under the nomination of the current President and do not 

intend to stay in the role of Acting Chairman past the inauguration. I also intend to 

leave the Commission shortly after stepping aside as Acting Chairman to provide others 

with an opportunity to serve the public. I am looking forward to helping the new 

Administration with this transition over the coming months. 

The Commission has accomplished a great deal over the last year during these trying 

economic times and what a year it was. The agency held eight public hearings, 

including an agricultural roundtable that drew 2,800 website viewers from 38 states and 

43 countries. And as commodity prices soared, I testified 14 times to various House 

and Senate Committees on speculation and other related topics. After years of effort, 

the CFTC was finally reauthorized in May, thus closing the “Enron Loophole” and 

bringing more oversight to the energy swaps markets. And as spring turned to summer, 

the Commission took action to increase transparency and controls on foreign boards of 

trade that list products linked to U.S. markets. Summer included the formation of an 

interagency working group with other federal regulators to study the commodity markets 

and the role of speculators. And fall began with the Commission publishing its Swap 

Dealer Report, providing unprecedented transparency on the size of off-exchange 

commodity index trading. On top of all of this, our Division of Enforcement pursued its 

national crude oil, cotton and silver investigations—along with dozens of others—and 

filed 40 new actions, resulting in over half a billion dollars in penalties. Needless to say, 

it has been busy, and the hard-working staff of the Commission should be proud of their 

efforts. 

But there remains much work to be done by the current and subsequent CFTC 

Commissions. Today I would like to discuss with you the challenges facing the financial 

services industry—and the futures industry in particular—and to outline what steps 

should be considered to restore the confidence of the investing public in our markets 

and the economy. 

“Breathtaking” is the word that best describes the current financial crisis being felt 

around the world. The Dow Jones Industrial Average has declined 40 percent from its 

recent highs, now hovering around 9000—a mark it first crossed in 1997. In other 

words, investors have given back a decade of gains in just the last several months. 

Should stock and home prices remain at current levels, Americans will witness 

approximately a 14 percent drop in household wealth this quarter, the largest on record. 

The “shock and awe” of the financial crisis has been equally matched by the 

government’s response. Like the Powell Doctrine on military engagement, global 

governments have responded with “overwhelming force” to shore up the current 

banking systems. Along with the Federal Reserve’s expansion of liquidity facilities and 

guarantees, the U.S. Congress has authorized $700 billion for Treasury to re-capitalize 

the banking system. Other countries around the world have followed suit with Germany 

having pledged 500 billion Euros, France 300 billion Euros, and the Netherlands with 

200 billion Euros, just to name a few. As Federal Reserve Chairman Bernanke has 

testified, such an “overwhelming” response by government is needed to unthaw the 

credit markets and help minimize the length of the pending recession that now looks 

inevitable. 
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This type of financial panic and government response prompted the Washington Post a 

few weeks back to ask in its lead editorial, “Is Capitalism Dead?” As the markets 

reeled, the very foundation of our republic’s economic system was being questioned. 

As the taxpayer bill increases from this crisis, one has to question whether the free hand 

of Adam Smith’s teachings was really free at all. 

I think this audience will agree with me that capitalism is not dead. The capitalist 

system has generated enormous amounts of global wealth and prosperity and 

increased the living standards of millions of impoverished citizens. And the futures 

markets have been a key driver in this prosperity. Over the last decade, we have seen 

exponential growth in our markets as trading has improved the ability of companies to 

manage risk, invest and allocate capital and create jobs. And throughout this crisis, the 

futures markets have continued to operate without major disruption. There have been 

no failed exchanges or clearinghouses, and customer funds have remained protected. 

With its principles-based regulatory structure, the core mission of the CFTC remains 

intact: protecting market users from abuse and overseeing the price discovery function 

of the regulated markets. 

But in recent months we have also witnessed the distortions and dire consequences 

that can arise within the capitalist system when it is left with inadequate checks. From 

the lax lending standards in the housing sector to the unregulated over-the-counter 

derivatives that helped to fuel the credit binge, the current crisis has uncovered the 

substantive need for reform and created the political will to get it done. We must take 

the necessary steps to repair the financial system and regain America’s trust and 

confidence in our markets. It is precisely at this moment when courageous regulatory 

reform is most needed. 

It is in this spirit that today I advocate a bold, new direction for our regulatory system. I 

believe the United States should scrap the current outdated regulatory framework in 

favor of an objectives-based regulatory system consisting of three primary authorities: a 

new Systemic Risk Regulator, a new Market Integrity Regulator and a new Investor 

Protection Regulator. This objectives–based framework is similar in concept to the 

reforms advanced by Treasury Secretary Paulson’s Blueprint and Paul Volcker’s Group 

of Thirty Report. 

A new Systemic Risk Regulator would have the responsibility of policing the entirety of 

the financial system for “black swan” risks that could cause a contagion event and 

taking preventative action against such occurrences. Such a regulator does not exist in 

the current framework but is absolutely necessary given the witnessed interconnections 

of our financial markets and the speed of the current global crisis. A new Market 

Integrity Regulator would oversee the safety and soundness of key financial institutions, 

including exchanges, investment firms and commercial banks whose failure may 

jeopardize the integrity of the markets. A new Investor Protection Regulator would 

broadly oversee investor protection and business conduct across all firms in the 

marketplace. This objectives-based framework focuses on risks from the macro to 

micro levels and would be a radical departure from the current structure. The different 

functions of the CFTC, as well as the SEC and the various banking regulators, would be 

dispersed among these three regulatory authorities. 
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This objectives approach would significantly improve financial market transparency 

across-the-board, but most importantly in the current unregulated over-the-counter 

(OTC) markets. Regulation by objective rather than function will ensure that all 

products and institutions are properly overseen based on identified public risks rather 

than futile and difficult determinations of whether an instrument is a security, a future, or 

a swap contract. Under this approach, the Systemic Risk Regulator would have broad 

access to information from the entire marketplace to monitor concentrations of risk while 

the Market Integrity and Investor Protection Regulators focus more specifically on their 

respective missions. 

This new structure would require certain reporting of exchange and over-the-counter 

market data to regulators, particularly when such products begin playing a public pricing 

role or when their size creates the risk of a systemic event. Clearly today’s credit 

default swaps market, which has garnered so much attention lately, would meet this 

threshold. The resulting enhanced transparency would enable the Market Integrity and 

Systemic Risk Regulators to police the markets for misconduct and concentration of 

risk. In building such a framework, Congress might look to the model adopted in the 

Farm Bill for the OTC energy swaps market, which triggers additional oversight and 

transparency when a product begins to serve a significant price discovery function. 

Such an approach enjoys the advantage of allowing the over-the-counter market to 

continue to serve as an incubator model for product innovation and tailored risk 

management but would trigger additional oversight when certain public risks arise. 

This broad restructuring must be preceded or accompanied by a complete rewrite and 

modernization of the laws and regulations governing the financial markets, including the 

securities and futures laws, to adopt a more consistent principles-based regulatory 

approach. One of the lessons from this crisis is that the current rules-based regulatory 

approach was not able to keep up with the speed and innovation of the financial 

markets. A principles-based structure complements tailored rules by adding needed 

guidance and flexibility to desired policy objectives. This helps prevent institutions from 

making end runs around static rules when such actions violate a broader public policy. 

The CFTC currently utilizes such an approach, coupled with strong enforcement, which 

has enabled the agency to keep pace with fast moving global markets. 

The flexibility of a principles system also would help to manage the important but 

different missions of our current financial market regulators for futures, securities, and 

banking. For example, the CFTC is charged with promoting price discovery and risk 

management in our markets while the SEC upholds the important mission of investor 

protection and the banking regulators focus on the safety and soundness of depository 

institutions. As products converge, these differing missions can conflict and agencies 

are left attempting to balance the competing public interests. Simply placing these 

missions under one roof does not resolve the conflicts. A new objectives-based 

regulatory system, using a flexible principles approach, would provide new regulatory 

authorities with the tools and the structure to better coordinate and manage the critical 

but sometimes competing public missions that federal regulators must pursue to 

oversee broad financial markets, while avoiding the rules-based tripwires that bog down 

the current system. 

One idea that has been put forth as both a permanent and interim reform step is a 

simple merger of the CFTC and the SEC. In Washington, this is code for the larger 
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SEC—along with its rules-based model and culture—taking over the principles-based 

CFTC. In my view, this would be ineffective and would only reinforce our outdated 

regulatory structure. Even if proposed as an interim step, the difficulty of a merger—

both politically and substantively—would likely transform a provisional action into a final 

one. This would be a crucial lost opportunity because merger alone does not address 

the current problems that plague our economy or the shortcomings in our regulatory 

system. A merger would not have improved the lending standards for mortgages nor 

would it have addressed any of the problems in our housing markets, which are at the 

core of the current credit crisis. A merger would not have solved the debate over the 

impact of mark-to-market accounting. A merger would not have addressed the credit 

rating agencies nor changed the effectiveness of the consolidated supervised entity 

program. A merger would not have affected the lack of regulation for credit default 

swaps as both the SEC and CFTC are explicitly excluded from regulating these 

instruments by statute. To say that a merger would have prevented our current financial 

crisis is not accurate. Simple merger is a recycled idea when bold solutions are 

needed. If change is in the air, we should start from scratch with a new regulatory 

vision and not get caught up in the entrenched interests of the past. 

The regulatory framework I have outlined today will take significant time to debate and 

implement—months maybe years. A thoughtful discourse is needed to work through 

the many complex details and to avoid unintended consequences in the markets and 

economy. Unfortunately, time is at a premium given the state of the volatile markets 

and some immediate steps are required. 

To quicken the process of reform, I support the creation of a bipartisan select 

Congressional committee to study the way forward on financial reform. The formation 

of such a committee seems almost a necessity, given the multiple committees of 

jurisdiction on this topic. I fully support the idea, provided that the current committees of 

jurisdiction over the CFTC, the Agriculture Committees, are adequately represented. 

These committees have many years of experience with the risk management markets 

and the regulation of exchange-traded derivatives, and their input to the process is 

crucial. 

As long term reform takes shape, policymakers also should consider the interim step of 

creating a unified regulatory board—consisting of the heads of the Federal Reserve, the 

SEC and the CFTC—that would facilitate the sharing of market information and be 

armed with joint rulemaking and exemptive authority to eliminate regulatory gaps and 

duplications that currently exist in the system. While each agency remains 

independent, this unified regulatory board would have the benefit of preserving the 

expertise of each agency while formalizing the coordination that is needed to oversee 

the entirety of the marketplace, including over-the-counter products. Another benefit of 

this board would be to provide the Federal Reserve with access to securities and 

futures market data—along with the OTC data from banks—that would enable them to 

immediately begin serving in the role of systemic risk regulator as Congress works on 

long term reform. 

There are immediate steps that regulators should take to shore up the financial system 

and provide policymakers with some breathing room to thoughtfully consider reform 

ideas next year. 
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In the near term, regulators should continue to aggressively advance efforts by market 

participants to create a clearinghouse for credit default swaps. I am a strong proponent 

of these initiatives. Clearing brings enhanced transparency, standardization and risk 

management to these products at a time when it is most needed. As this audience 

knows, clearinghouses have been functioning for many years as a means for mitigating 

the risks associated with exchange-traded financial products. Whether for securities, 

options, or futures, centralized clearinghouses ensure that every buyer has a 

guaranteed seller and every seller has a guaranteed buyer, thus minimizing the risk that 

one counterparty’s default will cause a systemic ripple through the markets. For futures 

contracts, clearing has worked extraordinarily well in managing credit risk. Importantly, 

no U.S. futures clearinghouse has ever defaulted on its guarantee. With our experience 

in clearing OTC derivatives, the CFTC will work expeditiously with other federal 

regulators to conduct our due diligence and approve those CDS clearing facilities that 

have met our high regulatory standards, including international central counterparty 

standards developed by IOSCO. 

Immediate steps should be taken by global authorities as well. As this financial crisis 

has shown, the world financial system is highly intertwined, leaving no country’s banking 

system unscathed. This week global leaders will meet in Washington D.C. as part of 

the G20 to discuss broad principles on how to move forward as an international 

community to address this financial crisis. Progress on this front is imperative to ensure 

the steps taken by one nation to improve oversight are not exploited by participants in 

the global financial community. 

One global idea that should be seriously discussed is standardizing the sharing of 

international market data among regulators, which would allow authorities quicker 

access to market information from around the world in their policing of the financial 

system. Such a concept would be advanced by the agreement on a universal financial 

data format, such as the XML standard, and I strongly support this idea. Another global 

problem—witnessed firsthand by the futures industry in the crisis—is the difference in 

the bankruptcy treatment of customer assets around the world. In future cross-border 

discussions, regulators should also make it a priority to come up with common 

standards for this important customer protection issue. 

In closing, it is clear that regulatory change is imminent. This industry can and should 

play a vital role in the coming regulatory revolution and do its part to restore confidence 

in the system. I think it would be a monumental mistake for this industry to put up 

roadblocks to reform and not engage in a constructive dialogue. If the U.S. futures 

industry wants to continue to lead the world, we must be fully engaged as thought 

leaders and strong advocates for a sensible path forward. Please do not misunderstand 

me. There will be countless bad ideas out there that would only make matters worse, 

and we should strongly resist ill informed initiatives. But in resisting bad ideas, we 

should strive to inform the debate with good alternatives and give testament to the 

experience of the futures industry over the last decade, in which volumes have 

quintupled while safety and soundness has been preserved and upheld. The first 

speech I gave as a Commissioner six years ago was at an FIA event here in Chicago 

on the benefits of “smart” regulation. Today I again ask this industry—in one of my final 

addresses on this Commission—to help policymakers find a “smart” regulatory solution 

for the betterment of the markets and the American public as a whole. 
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Thank you for allowing me to speak here today.