The Global Competitiveness of 

U.S. Futures Markets Revisited 

 

 

 

Division of Economic Analysis

Commodity Futures Trading Commission

November 1999

The Global Competitiveness of U.S. Futures Markets Revisited 

Executive Summary 

This report updates a 1994 study of the competitiveness of organized U.S. futures exchanges relative to 

their counterparts abroad. In particular, the Commodity Futures Trading Commission (CFTC or 

Commission) staff assessed the competitiveness of U.S. futures and option markets by analyzing recent 

domestic and foreign trading volume data and other economic factors. It also compared aspects of U.S. 

and non-U.S. regulatory systems. 

The review of foreign and domestic futures and option trading activity over the period since the 1994 

study revealed five salient conclusions: 

z Both total U.S. and total foreign futures and option trading volume have increased significantly 

over the period 1994-1998; 

z the U.S. share of total worldwide futures and option trading activity appears to be stabilizing as the 

larger foreign markets have matured; 

z as in 1994, the most actively traded foreign products tend to fill local or regional risk management 

needs and few products offered by foreign exchanges directly duplicate products offered by U.S. 

markets; 

z the increased competition among mature segments of the global futures industry, particularly in 

Europe, may reflect industry restructuring and the introduction of new technologies, particularly 

electronic trading; and 

z to date, the distinctions in regulatory regimes between various countries do not appear to have been 

a significant factor in the competitive position of the world's leading exchanges. 

In sum, neither trends in the locus of trading activity nor regulatory developments over the last five years 

suggest an erosion of U.S. futures markets' global competitive position. However, the continued 

application of new technologies and the trend toward exchange consolidation are likely to change 

significantly the competitive structure of global futures markets in the coming years. The Commission is 

committed to continued regulatory flexibility to meet these challenges. Nevertheless, it is likely that the 

potential operational cost savings generated by the adoption of new technology and industry restructuring 

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and the ability of exchanges to provide liquid markets, more than the differences among the regulatory 

systems of various nations, will be the most important factors in shaping the futures industry's structure in 

the twenty-first century. 

THE GLOBAL COMPETITIVENESS 

OF U.S. FUTURES MARKETS REVISITED 

 

I. INTRODUCTION 

The Futures Trading Practices Act of 1992 (FTPA) required the CFTC to study the 

competitiveness of boards of trade over which it has jurisdiction compared with the boards of trade over 

which "foreign futures authorities"[1] have jurisdiction. The Commission submitted its report on this 

issue, "A Study of the Global Competitiveness of U. S. Futures Markets" (1994 Study), to the Senate and 

House agriculture committees in April 1994. 

 Since the completion of the 1994 Study, domestic futures exchanges have continued to claim that 

they face a competitive disadvantage vis a vis foreign exchanges due, in part, to a costly U.S. regulatory 

system. In view of this continued concern and the Commission's commitment to not impede domestic 

futures markets from being competitive internationally, Commission staff has updated the 1994 Study to 

incorporate data for the period 1994 through 1998 and to review its analysis and conclusions in the 

context of market developments and innovations that have occurred over this period.[2] 

The central findings of the 1994 report were as follows. First, the decrease in the U.S. exchanges' 

share of the continually increasing world futures trading volume had been accompanied by steady and 

vigorous growth in U.S. trading activity and in the number and diversity of instruments traded 

domestically. Furthermore, the cause of this decline in U.S. "market share" was not direct competition 

from foreign markets. Rather, it was an inevitable development for the more mature U.S. markets in 

relation to the emergence of new markets in foreign jurisdictions that successfully satisfied local risk 

management needs. 

 The Commission found that over the period of study, foreign regulatory oversight of non-U.S. 

futures and option markets had been strengthened relative to oversight of U.S. markets. It appeared that 

many foreign regulatory systems, whether recently strengthened or newly created, have tended to be 

patterned after the U.S. system, and that further harmonization of regulatory systems would continue. 

 The report concluded that U.S. markets had not been competitively disadvantaged in any 

significant way as the result of differential regulation. Nonetheless, the Commission reiterated its 

commitment to keeping its regulatory program under continuous review to assure that, consistent with its 

responsibilities for market integrity and customer protection, it: 

 A. kept pace with changes in the marketplace, and 

 B. did not unnecessarily impede domestic exchanges from evolving to remain competitive, 

especially with regard to the cost of compliance relative to non-U.S. exchanges. 

In order to determine whether new trends would call into question or support the continued 

validity of the 1994 Study, this report focuses, as did the earlier study, on the competitiveness of 

organized U.S. exchanges with their counterparts abroad, examining both floor-based (pit) and electronic 

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trading systems. In particular, it examines the nature and evolution of competing markets and the 

specific regulatory environments in which they operate. Those competing markets include organized, 

nondomestic exchanges that are subject to regulation and incorporate substantially equivalent central 

facilities for the multilateral execution of futures and option transactions and are supported by clearing 

arrangements.[3] The exchanges discussed in this report, and their acronyms, are listed in the appendix. 

 CFTC staff assessed the competitiveness of U.S. futures and option markets by analyzing domestic and 

foreign trading volume data and other economic factors that would bear on the relative success of U.S. 

and foreign markets.[4] It also examined the salient aspects of non-U.S. regulatory systems and compared 

these to the U.S. 

II. Developments in Worldwide Commodity Futures and Option 

Activity Since 1994

An examination of foreign and domestic futures and option trading activity over the period since the 1994 

Study reveals five points that appear relevant to an updated assessment of the competitiveness of U. S. 

markets:| 

z Both total U.S. and total foreign futures and option trading volume have increased significantly 

over the period 1994-1998; 

z the U.S. share of total worldwide futures and option trading activity appears to be stabilizing as the 

larger foreign markets have matured; 

z as in 1994, the most actively traded foreign products tend to fill local or regional risk management 

needs and few products offered by foreign exchanges directly duplicate products offered by U.S. 

markets; 

z the increased competition among mature segments of the global futures industry, particularly in 

Europe, may reflect industry restructuring such as mergers and alliances and the introduction of 

new technologies, particularly electronic trading; and 

z to date, the distinctions in regulatory regimes between various countries do not appear to have been 

a significant factor in the competitive position of the world's leading exchanges. 

Each of these points is discussed below. 

The Continued Growth of Worldwide Trading Volume 

The dramatic increase in worldwide exchange-traded futures and option activity that took place 

throughout the 1980s has continued in the 1990s (see chart A). Total worldwide trading volume for 

futures and options combined reached a record 1,482 million contracts in 1998 (see table I).[5] 

By way of comparison, in 1993, the last year covered in the 1994 Study, volume was 890 million 

contracts. These figures compare to worldwide volume of 272 million contracts in 1986, the first year 

covered by the 1994 Study. The absolute increase in volume over the last five years (1994-98) of 592 

million contracts is nearly equal to the increase experienced over the eight-year period (1986-1993) 

covered by the 1994 Study (618 million contracts). The significantly lower rate of growth over the latter 

period, 67 percent, compared to the former period, 227 percent, reflects the fact that the base volume of 

trading was much lower in 1986 (272 million contracts) than in 1994 (890 million contracts). For the 

same reason, the mean annual growth rate in worldwide futures and option trading volume over the 1994-

1998 period was 13 percent compared to 33 percent for the 1986-1993 period. 

Table II further illustrates this growth pattern for the worldwide futures industry and presents 

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trading volume data for the 10 leading countries in 1993 and in 1998. It is noted that the 

composition and rankings of this group remained unchanged from 1994 through 1998 (see also chart B). 

For the first seven months of 1999, however, Germany replaced the U.K. as the country 

CHART A

 

CHART B

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with the second highest level of trading volume (next to the U.S.) with the United Kingdom (U.K.) 

showing the third highest level. Table III depicts the top ten futures and option exchanges in the world 

during 1993 as compared to 1998.[6] 

 The growth of U.S. trading volume has followed a pattern similar to that of worldwide growth. 

Over the period 1994-1998, total U.S. futures and option trading volume increased by about 210 million 

contracts, representing an average annual growth rate of about 8.4 percent. This compares to an increase 

of 205 million contracts and an average annual growth rate of 14 percent over the period 1986-1993. 

 For both U.S. and foreign markets, the rate of growth of futures and option volume has slowed in 

the first seven months of 1999 compared to 1998. Total U.S. futures and option trading volume grew by 

about one percent and foreign trading volume was about even compared to the same period in 1998. 

The 1994 Study noted that innovative futures contracts on nontraditional commodities accounted 

for most of the volume growth prior to year-end 1993. This resulted in a shift in volume from contracts 

on agricultural commodities to financial commodities. As a result, in 1993 interest rate futures and option 

contracts accounted for 52 percent of total annual volume, currency products 10 percent, stock indexes 

four percent and agricultural contracts 16 percent.[7] 

 Two of these commodity categories, interest rates and stock indexes, have accounted for the 

majority of volume growth since 1993 and now account for nearly two-thirds of activity on U.S. 

exchanges (see chart C). For the period 1993 through 1998, 65 percent of the increase in total annual U.S. 

trading volume was in interest rate contracts and 15 percent was in stock index contracts. In 1998, the 

two most active contracts traded on U.S. exchanges were Chicago Board of Trade (CBT) U.S. Treasury 

bonds followed by Chicago Mercantile Exchange (CME) three-month Eurodollars, together representing 

about 47 percent of total volume. The next three leading contracts were CBT 10-year U.S. Treasury notes 

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followed by Crude Oil traded at New York Mercantile Exchange (NYMEX) and the Standard and 

Poor (S&P) 500 Index futures contract traded at the CME (see table IV). This ranking of the top five 

domestic contracts was unchanged on the basis of trading volume for the first seven months of 1999.[8] 

U.S. market innovations in other product areas have continued, with the Commission approving 

large numbers of new futures and option contracts during each of the last three years.[9] 

CHART C

 

Many of these new contracts involve new product areas. Among these new product areas are inflation 

indexed debt instruments, catastrophe insurance, electricity, dairy, coal, and indexes of degree days and 

bankruptcy. Others involve the refinement of contracts in existing product areas to serve better specific 

industry groups as market niches. Few of these new contracts face direct product line competition from 

foreign exchanges; however, for the most part they have garnered little trading interest to date. 

The Stabilization of the U.S. Market Share 

At the time of the Commission's 1994 Study, the U.S. exchanges' share of total worldwide futures 

trading volume had been falling steadily since mid-1980s. Specifically, between 1986 and 1993, the U.S. 

share decreased steadily from 79 percent to 47 percent. The 1994 Study attributed much of this decline to 

the initial introduction and growth of new markets abroad, rather than to the stagnation or over-regulation 

of U.S. markets. 

 Although the U.S. futures trading share continued to decline subsequent to the 1994 Study, falling 

to 42 percent in 1994 and to 37 percent in 1995, it has increased in each of the subsequent three years, to 

38, 41, and 43 percent, respectively.[10] And, while three years is insufficient to identify a trend, a 

stabilization of the U.S. share of world trading volume is consistent with the market maturity hypothesis 

that in the 1994 Study explained the earlier fall in the U.S. trade share. That is, successful new entrants to 

the global futures trading arena, emulating the success of the first financial futures contracts traded in the 

U.S. by satisfying local and regional risk management needs, ultimately eroded the global market share 

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of the U.S. in futures markets generally. This occurred despite continued, vigorous growth in U.S. trading 

volume. As non-U.S. futures markets developed and grew, it was to be expected that the U.S. share of 

worldwide trading volume would fall. At the same time, the explosive growth in foreign futures markets 

and volume that characterized the period examined in the 1994 Study appears to have slowed. This 

suggests that at some point the U.S. share would stabilize and that point may have arrived within the last 

three years. 

The Composition of Global Futures Markets 

 An important aspect of the market maturity argument summarized above is the notion that 

successful foreign futures markets were satisfying local or regional risk management needs rather than 

competing directly with U.S. markets. This feature of the global futures trading landscape was 

documented in some detail in the 1994 Study and continues to prevail. 

 Tables V and VI set out the 25 most active foreign futures contracts in 1998 and the foreign 

futures contracts that have grown the most in terms of trading volume since the 1994 Study, respectively. 

As these data show, the leading commodity futures and option contracts traded overseas are based on 

non-U.S. financial instruments, predominantly interest rate and equity index contracts. Fourteen of the 

top 20 foreign contracts, including the top nine, are financial products. Interest rates represent the most 

important commodity group, accounting for 58 percent of total foreign volume in 1998 compared to 52 

percent in 1993. Within this category, home-country or regional government bond and short-term interest 

rate contracts account for the vast majority of exchange trading activity overseas. 

 Over the period 1994 and 1998, 55 percent of the volume growth on foreign exchanges occurred 

in interest rate products, mostly government debt contracts. Other commodity groups accounting for 

substantial growth in foreign trading volume over this period are equity indexes and metals, representing 

23 and seven percent, respectively, of total growth in foreign volume during this period. Trading data for 

1999 show equity indexes growing most rapidly from the previous year. 

The most significant change in the composition of foreign futures markets since the 1994 Study 

has been the formation and success of EUREX, an all-electronic futures and securities exchange. 

EUREX, which was formerly known as the Deutsche Terminborse (DTB), was formed in 1998 by the 

merger of the German DTB and the Swiss exchange SOFFEX. Over the 1993-98 period, the combined 

exchanges generated over a 700 percent increase in trading volume. Between 1997-98 EUREX increased 

its proportion of world volume from five percent to 10 percent, and during early 1999 it recorded the 

largest volume of any exchange in the world. EUREX’s growth is largely attributable to record volume in 

its interest rate derivatives, particularly its German government debt products. In 1998, the long-term 

German government bond, known as the Bund, was the leading non-U.S. exchange-traded derivatives 

contract. Other high volume futures and option contracts on EUREX include the BOBL-medium term 

government debt, the SCHATZ, the two-year government note derivatives contract, and the DAX, 

German stock index contract. 

EUREX’s success may be associated not only with the presence of an active domestic cash 

market for its exchange-traded derivatives, but also with its method of trading. Indeed, trading in Bund 

futures, which previously traded actively by open outcry on the London International Financial Futures 

and Options Exchange (LIFFE) in the U.K., has shifted almost exclusively to the electronic EUREX 

market.[11] 

Further, the adoption of the euro as a common currency for 11 countries in Europe is a 

development that is already having important competitive implications for domestic as well as foreign 

exchanges. This has virtually eliminated currency and interest rate differentials in these 11 countries and 

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has altered the competitive landscape in Europe. It was widely anticipated that, after the 

introduction of the euro, business would no longer be able to support all of Europe's 22 futures 

exchanges. Many of these had been established and survived mainly on futures contracts based on their 

own nation's interest rates -- and those national rates have vanished in countries that have adopted the 

euro. 

A final development that underscores the importance of local or regional hedging needs is the 

introduction and immediate success of the Korea Stock Exchange's (KSE) KOSPI-200 futures contract in 

1998. The KOSPI-200 is an index of 200 Korean stocks. The KSE's contract traded nearly 18 million 

contracts in its first year and continues to have large volume in 1999. 

Structural and Technological Change in the Global Futures Industry 

In addition to the growth in the volume of futures and option trading in foreign jurisdictions, a 

recent increase in exchange merger activity and the formation of alliances among various exchanges, as 

well as the introduction of new technologies, will have a significant impact on the global competitiveness 

of U.S. exchanges. The effects of these changes have been to concentrate trading activity among fewer 

distinct entities, thereby altering the organization of the industry. Such changes ultimately alter the way in 

which exchanges compete to attract volume to their markets. This section reviews some of the recent 

mergers and alliances that have taken place and the implications they have with respect to the industrial 

organization of the industry. In addition, the role that new technologies, in particular electronic 

communications and trading, are playing in the restructuring of the industry is examined. 

Mergers and Alliances 

Since the completion of the 1994 report, the structure of the futures markets throughout the world has 

changed dramatically as exchanges in the U.S. and worldwide have merged and formed alliances with 

one another. By merging and forming alliances, exchanges hope to capture scale efficiencies by 

combining similar functions from separate exchanges, such as administration tasks and clearing. They 

also hope to create a larger customer base by providing betteraccess to a greater variety of contracts than 

previously available at either of the exchanges. The greater assortment of available contracts at a 

particular exchange may reduce costs due to scale efficiencies derived from trading on a single exchange. 

Exchange users are then better off to the extent that such benefits are passed on to them. 

In 1994, the two largest futures exchanges in New York, NYMEX and Commodity Exchange, Inc. 

(COMEX), consolidated their operations to create the fourth largest exchange in the world. At the time of 

the merger, the exchanges indicated that the merger would result in greater efficiencies in clearing, floor 

operations, order execution, staffing and training.[12] Exchange representatives also expressed the view 

that the merger will allow the exchange to increase its emphasis on market research and development.[13]

Under the terms of the merger, members of NYMEX and COMEX gain trading access to certain 

contracts on each other's exchanges thereby potentially boosting liquidity in those contracts. 

 A second consolidation that has taken place in New York City’s futures markets has been 

undertaken by the New York Cotton Exchange and its affiliates (NYCE) and the Coffee, Sugar and 

Cocoa Exchange (CSCE) to create the New York Board of Trade (NYBOT). The NYCE was established 

in 1870 and has primarily traded cotton throughout its history. The CSCE, created in a previous merger of

the Coffee and Sugar Exchange and the New York Cocoa Exchange, has primarily traded coffee, sugar, 

and cocoa over its lifetime, but has recently added cheese, milk products, and butter to its mix. Other 

divisions and subsidiaries of NYCE trade orange juice, stock indexes, and currencies. In addition, 

FINEX, the financial division of NYCE, in 1994 created FINEX Europe in Dublin, Ireland, as a 

complementary trading facility located in Europe. 

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A more novel endeavor of the NYBOT is a joint venture between NYBOT and Cantor Fitzgerald, 

L.P., a large primary dealer and interdealer brokerage firm in U.S. Treasury securities. In 1998, the CFTC

approved the creation of the Cantor Financial Futures Exchange (CFFE). The CFFE is a computer-based 

trading system for futures contracts on U.S. Treasury securities. Trading is conducted on the Cantor 

System, a trading system also used by Cantor’s subsidiary, Cantor Fitzgerald Securities, LLC, which 

operates in the U.S Treasury security cash market as an interdealer-broker. NYCE is responsible for 

CFFE’s self-regulatory responsibilities and clearing functions. Under the system, authorized users of the 

system enter orders for their own or for their customers' accounts via a terminal keyboard into the Cantor 

System for matching by a computerized algorithm. An advantage that the partnership between the CFFE 

and NYBOT brings to the marketplace is that customers of the NYBOT have ready access to a variety 

futures and option contracts in addition to the cash market for government securities. 

In Europe, in 1998 the German DTB and the Swiss SOFFEX merged to form EUREX. The 

emergence of EUREX has been notable for its “capture” of a significant volume of trading in Bund 

futures from LIFFE. Generally, once an exchange has established a significant level of trading in a 

contract, it is very rare for another exchange to establish significant trading levels on like contracts. 

Within a very short time period, however, EUREX has become the dominant market for Bund futures. In 

1993, LIFFE traded more than three times as many Bund contracts as were traded on the DTB. By 1998 

the Bund contract on EUREX was the leading non-U.S. exchange-traded futures contract, trading nearly 

five times as many Bund contracts as that traded on LIFFE. Differences in regulatory structures between 

the British, Swiss, and German systems have not been suggested as playing a role in the shift. The 

regulatory jurisdiction applicable to trading on LIFFE and EUREX has remained the same throughout the 

shift in Bund trading volume to EUREX. 

While some exchanges have sought to increase the size of their networks through mergers, others 

have sought out alliances and linkages with other exchanges, particularly overseas. In 1984, the CME and 

SIMEX created a trading link between exchanges that established the Mutual Offset System, allowing 

market participants to establish or offset positions on either exchange. Use of the system covers 

currencies, interest rates, and equity indexes. On February 8, 1999, the two exchanges agreed to extend 

the Mutual Offset System to the year 2004. In early 1999, the CME, Société des Bourses Françaises 

(SBF) and SIMEX established an alliance giving members of the exchanges trading privileges and the 

ability to cross margin positions with respect to each other's contracts traded though the CME’s 

GLOBEX2 trading system. In September 1999, it was announced that Brazil’s BM&F would join the 

alliance. Even more recently, the CBT has entered into discussions with EUREX to create a link between 

the two exchanges. While the details of a linkage have yet to be determined, the linkage would be 

designed to create a common electronic global trading platform, giving members and customers of each 

exchange access to each other's product. 

New Technologies 

 The emergence of new computer and communication technologies is also playing a critical role in 

the restructuring and redefinition of the trading environment of the futures industry. The dramatic 

increase in computing capacity and concomitant fall in computer prices have given the exchanges an 

inexpensive means to list new contracts and to link operations. As discussed above, several exchanges 

have established computerized trading links enabling members and customers of exchanges to trade each 

other's contracts. The availability of cheap computer capacity has also meant that exchanges have the 

ability to replace relatively expensive populated trading floors with less costly computerized trading 

systems. 

 The most dramatic shifts from trading floors to computerized trade matching systems have taken 

place in Europe. In 1998, Marchè á Terme International de France (MATIF) adopted electronic trading 

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alongside the trading of its contracts on the floor of the exchange. Within weeks the majority of volume 

had shifted to the electronic platform. As mentioned above, EUREX, which uses an electronic trading 

platform, has become the primary market for trading Bund futures, displacing LIFFE, at the time a pitbased exchange, as the dominant market. 

 The impact that technology, in particular electronic communications, will have on the futures 

industry and trading platforms is currently a subject of great debate. While many in the futures industry 

express the view that electronic trading will eventually take the place of the trading pit, advocates of the 

trading pit are just as adamant in their position that trading pits offer superior quality trade executions. 

While electronic trading systems may require lower trading fees than traditional exchanges, when the 

market impact cost of executing a large trade is considered, it is not clear that electronic exchanges 

always offer a lower total cost of trading. The relative success of the two platforms ultimately will be 

determined by the marketplace. Nevertheless, it is interesting to examine the impact that electronic 

technology is having on the traditional trading pit, not only as a potential replacement but also as a 

potential complement. 

 The popular debate over electronic technology is centered on if or when electronic trading 

systems will replace the pit. However, it should be noted that this technology is also being accessed in 

support of pit trading. Sophisticated electronic communications and computer systems are at the core of 

certain alliances between exchanges. A proposed linkage between the CBOT and EUREX, and the 

alliance between the CME, SBF and SIMEX are made possible by high-speed communications networks 

and sophisticated computers. These partnerships allow the exchanges to increase the size of their 

networks and offer a greater variety of contracts to each other’s members and customers, thus enhancing 

the value of their offerings to their customers. 

 Technology is also changing the way in which pit-based exchanges are able to deliver orders to 

the floor of the exchanges and in turn route them back out for clearing. By tradition, or necessity, pitbased exchanges largely were a paper-based operation. Orders were delivered to the pit on slips of paper, 

transaction fills were recorded on paper and sent back out through runners to be confirmed and cleared 

through runners. As communication technologies have advanced, much of the order routing system is 

being replaced by the telephone and computer. For example, the major U.S. exchanges are increasing 

their use of automated systems to route orders from brokerage firms to the correct floor booth, broker, 

clerk, or electronic trading systems.[14] Other electronic systems allow brokers and clerks to handle 

customer orders more efficiently. 

The significance of these automated order routing systems is that they help pit-based exchanges to 

compete with electronic exchanges in areas where electronic systems are believed to have an advantage—

reduced transaction costs, more rapid trade matching and clearing, and enhanced audit capability. In 

essence, the trading pit is becoming a hybrid system in which the only nonelectronic feature of the 

traditional pit that remains—the actual matching of a trade and the liquidity supplied by floor traders 

willing to take the other side of a trade—is that feature which is often identified as the pit’s greatest 

advantage. 

In assessing the current debate on pit trading versus electronic trading, proponents of pit trading 

focus on the ability of a large population of floor traders to provide liquidity and match trades better than 

electronic systems. They argue that electronic systems lack the ability to convey information found in the 

pit setting to participants in an electronic system. This failing, they argue, gives a distinct advantage to 

the pit-based system. Others, however, question exactly what information found on the trading floor is 

useful or point out that, where it is useful, such information could be introduced to the electronic 

marketplace. Kollock (1997)[15] asks the question, “[b]ut what is it in particular about open outcry that 

makes it such a useful ‘interface’?” He indicates that research has not been able to identify the crucial 

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elements of open outcry nor how they work. Kapustiak (1988)[16] notes that open outcry works

because locals are willing to stand in the pit and make a market. They do this, however, because they 

make money by virtue of having the advantage of seeing and hearing things that traders away from the pit 

do not. He goes on, though, to argue that much of this information could be incorporated into an 

electronic trading system. Some information that he identifies as being potentially useful are participation 

levels, trader identification, action and activity indicators, order distributions, and technical indicators. 

As stated above, the ultimate platform or platforms on which futures trading is based will depend 

on demand from the market and the ability of exchanges to adapt themselves to those demands and offer 

customers the greatest value. To the extent that pit trading efficiently offers value to customers, that 

system will endure. To the extent, however, that electronic systems can replicate the advantages of the pit 

and offer them at a lower cost to customers, then that trading system will prosper and grow. 

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III. U.S AND FOREIGN REGULATORY SYSTEMS 

 On the basis of trends in market data alone, U.S. futures markets have remained competitive with 

foreign futures markets in spite of the rapid growth of the latter since the late 1980s. As discussed above, 

the growth of foreign futures trading has been based almost exclusively upon localized commodities and 

financial instruments as opposed to products or instruments underlying U.S. futures markets. 

Furthermore, the U.S. share of world futures trading volume has stabilized and even risen slightly in 

recent years. Nevertheless, this chapter examines the domestic and foreign futures regulatory systems in 

order to determine (1) the extent of international regulatory parity, and (2) whether there are competitive 

problems caused by the U.S regulatory system. 

CFTC Regulatory Program 

 The CFTC is an independent agency created by Congress in 1974 to regulate commodity futures 

and option markets in the United States.[17] The bases identified by Congress in the CEA for regulating 

the futures markets in the public interest are the markets' price discovery and risk-shifting functions.[18]

In implementing the CEA, the CFTC is responsible for fostering the economic utility of futures markets 

by encouraging their efficiency, monitoring their integrity, and protecting market participants from 

abusive trade practices and fraud. 

 As discussed in detail above, since the CFTC was created, futures trading has expanded rapidly, 

beyond the domain of traditional agricultural and other physical commodities. U.S. futures and option 

exchanges now trade futures and option contracts based on a vast array of nontraditional commodities, 

including foreign currencies, U.S. and foreign government securities, U.S. and foreign stock indexes, 

macroeconomic indexes, electricity, and weather data. These products are traded on 11 futures exchanges 

designated as contract markets under section 5 of the CEA by the CFTC.[19] Along with these exchanges 

and the National Futures Association (NFA),[20] as of September 1998, the CFTC regulated the activities 

of 214 commodity brokerage firms, 43,400 salespeople, 9,448 floor brokers, 1,375 commodity pool 

operators, 2,531 commodity trading advisors, 1,348 floor traders, and 1,163 introducing brokers.[21] 

 The CFTC's regulatory and self-regulatory regimes provide three basic types of protection for 

futures exchanges and their customers. First, the financial integrity of the marketplace is protected by 

requirements applicable both to intermediaries acting for customers in regulated transactions and to the 

exchanges on which such transactions are executed. These include minimum capital requirements, 

financial reporting requirements, and customer funds protections on the one hand and exchange clearing 

and settlement systems and procedureson the other. 

Second, market integrity and efficiency are protected by statutory and regulatory requirements 

designed to assure the competitiveness and transparency of exchange markets. The CEA prohibits 

manipulation and fraud, mandates open and competitive execution of trades, and proscribes certain 

trading abuses. In addition, the CFTC requires markets subject to its regulation to disseminate publicly 

information on prices, trading volume, and open interest and to maintain records sufficient to permit 

reconstruction of trading and to detect and punish abuses. Market integrity is also supported by CFTC 

review of new products and exchange rules and by long-standing exchange and Commission market 

surveillance systems and procedures. 

Finally, the futures regulatory framework incorporates a number of important customer 

protections that include fitness screening and registration of futures professionals and various disclosure 

and sales practice requirements. 

In its 1994 Study, the Commission committed itself to maintaining a flexible, cost-efficient 

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regulatory program. Since then it has adopted a number of initiatives to reduce the regulatory 

burden on U.S. exchanges. These regulatory reform measures are listed in table VII. 

Important Regulatory Similarities and Differences 

 Although countries may employ different means of establishing an effective regulatory structure, 

most countries with internationally active futures exchanges appear to share certain common regulatory 

concerns for customer and market protection (including financial integrity). Indeed, such markets, as well

as the regulatory frameworks within which they operate, appear to have more similarities than 

differences. As discussed more fully below, the international harmonization of regulatory schemes has 

been facilitated by the work of the International Organization of Securities Commissions (IOSCO).[22] 

For example, there is a general recognition that organized markets require prudent standards to 

function properly. The content and complexity of regulatory systems may differ from jurisdiction to 

jurisdiction, often based on the particular regulator's experiences. However, most regulators worldwide 

recognize that to serve as commercially viable risk management and price discovery vehicles, their 

markets must meet -- and must be perceived as meeting -- international standards of integrity in business 

conduct, as well as financial and market supervision. Accordingly, despite differences in infrastructure, 

efforts are being made by various international jurisdictions to assure that their standards of market 

supervision and customer protection meet commonly accepted thresholds. 

In the context of discussions of international competition, the following specific distinctions 

between the U.S. and foreign regulatory systems have received significant attention recently. 

Product Approval 

Most jurisdictions, recognizing the benefits of a "government stamp of approval," require 

regulatory approval of futures and option products that are traded. However, the scope of this review 

and its implementation in practice appear to vary from jurisdiction to jurisdiction.[23] 

In this regard, CFTC staff recently surveyed the statutes and regulations of 10 jurisdictions in nine 

countries with substantial futures and option trading volume.[24] All 10 jurisdictions require that futures 

exchanges be formally authorized or recognized by a regulatory authority. Moreover, 7 of the ten 

jurisdictions (Australia, France, Italy, Ontario, Quebec, Singapore, and Spain) require prior regulatory 

review (resulting in approval or the absence of an objection after notice) of the conditions, terms, and 

specifications of proposed new futures and option contracts: three jurisdictions (Ontario, Singapore, and 

Spain) require specific approval, two (Australia and France) have an "objection only" procedure, and two 

others (Italy and Quebec) have a combined approval/objection procedure. One country (U.K.) has an 

informal review procedure and two countries (Germany and Switzerland) delegate the review function to 

the exchange management. Those jurisdictions with formal review procedures stipulate time frames for 

approval or objection that range from five to 30 days. 

 In the U.S., Part 5 of the CFTC regulations establishes policies and procedures under which the 

CFTC reviews proposed futures and option contracts to assure that they meet the requirements of sections 

5 and 5a of the CEA. In April 1997, the Commission by rule expedited its review and approval of new 

contracts.[25] Under that "fast-track" procedure, applications for designation of certain cash-settled 

futures and option contracts are deemed to be approved 10 days after receipt, and others 45 days after 

receipt. The Commission is also considering permitting exchanges to list contracts for trading without 

prior Commission approval.[26] 

Large Trader Reporting Requirements 

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Under Part 17 of CFTC rules, brokers are required to report the daily futures and option positions 

of any trader that owns or controls a position in any delivery month of a commodity that equals or 

exceeds the reporting levels specified in CFTC rule 15.03. The firm also must identify the persons who 

own or control those reportable positions by name and address. The CFTC also may make special calls 

for information on futures commission merchants and foreign brokers carrying accounts for traders with 

large positions and on large traders themselves.[27] 

 Most foreign regulatory authorities have the ability to request information from markets and 

traders subject to their jurisdiction. However, the majority of such markets (including all of the major 

markets) do not require the routine reporting of large positions, either by traders or by brokers, to relevant

regulatory authorities. Although the lack of a reporting system may appeal to some traders, particularly 

foreign entities not accustomed to providing business information to regulators on a routine basis, the 

CFTC nevertheless believes that its reporting requirement is necessary to permit it to surveil the markets 

and to respond promptly to questions about market participation and events. The relative burden of the 

CFTC's large trader reporting system is ameliorated, however, by the electronic filing of most data and by 

upward adjustments to reporting levels as markets become more active.[28] [28] 

Regulation and International Competition 

Concerns over the effect of U.S. regulation of futures markets on their international 

competitiveness had been expressed even prior to the establishment of the CFTC. During the hearings 

that preceded the passage of the Commodity Futures Trading Commission Act in 1974, for example, a 

witness representing the NYCSE, the NYCE, and the COMEX stated that the regulation of U.S. futures 

markets in world commodities (e.g., coffee, sugar, cocoa, and silver) could mean that "futures business in 

the world commodities would shift....entirely to competing foreign exchanges."[29] In fact, however, the 

U.S. share of world futures trading volume in each of these world commodities remains significant. Over 

the 1994-1998 period, U.S. trading volume in each of these commodities increased and the U.S share of 

total world futures and option volume averaged close to 65 percent for sugar, about 50 percent each for 

coffee and cocoa, and about 85 percent for silver. By comparison, in 1973, just prior to the establishment 

of the CFTC, the U.S. market shares were 55 percent for sugar, 54 percent for coffee, 31 percent for 

cocoa, and 81 percent for silver.[30] 

Among contracts traded in both the U.S. and overseas, competition between the U.S. and U.K. 

copper futures markets has been marked. Trading in copper futures started on the LME in 1877 and on 

COMEX in 1933 and volume in the LME contract is five to six times greater than that on the COMEX. 

Although the LME’s futures contract permits delivery at various locations around the world, while the 

COMEX contract specifies U.S. delivery only, both exchanges view the contracts as direct competitors. 

 In April 1995, the LME established delivery points for its copper futures contract in the U.S. 

in a direct challenge to COMEX's dominance of the North American market. COMEX officials at that 

time expressed concern that the LME copper contract would adversely affect its market share due to less 

comprehensive regulation. They characterized the LME as a market with no price transparency, no audit 

trail, and a margin system based solely on credit. Later, in 1997, the COMEX lengthened the trading 

hours for its copper contract by one hour and fifteen minutes to broaden the trading overlap with the 

LME. In addition, in 1998 the COMEX made a number of technical rule changes to its existing copper 

futures contract which may improve the competitive posture of the existing futures contract in 

comparison to that offered on the LME. 

 In response to the emergence of pricing anomalies in the U.S. and London markets, the CFTC 

launched a formal investigation of activity in the copper market. This investigation, conducted in 

collaboration with regulators in the U.K., uncovered evidence of an alleged manipulation of the LME 

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copper market involving, among others, Sumitomo Corporation. This manipulation is alleged to have 

caused copper prices in the U.S. futures and cash markets to become artificially high. In May 1998 

Sumitomo agreed to pay a record civil monetary penalty of $125 million in a settlement with the CFTC 

for its involvement in the manipulation.[31] In June 1999 subsidiaries of Merrill Lynch paid a civil 

monetary penalty of $15 million in settlement of the CFTC's complaint charging them with aiding and 

abetting a manipulation.[32] 

In the aftermath of the Sumitomo affair, the British regulators, after a six-month review, 

concluded that the LME needed to improve its self-regulatory standards and practices.[33] The LME 

accepted all of the recommendations without reservation and by the end of 1997 action had been taken on 

all of them, implementing the majority. Accordingly, many of the regulatory disparities between the 

markets have been narrowed and they will be narrowed further if the proposed changes in the draft 

Financial Services & Markets Bill are enacted.[34] 

COMEX's market share of trading volume of copper futures and options contracts has actually 

increased a bitsince the LME established its U.S. delivery points. In 1995, trading in COMEX copper 

futures stood at about 12 percent of the global market. This share has increased gradually each year since, 

to nearly 15 percent for 1998, and 16 percent for the first seven months of 1999. 

In general, the U.S. regulatory regime does not appear to have been a significant factor in the loss 

of U.S. market share relative to total world trading volume. There exist no examples of a foreign futures 

exchange developing (or, for that matter, being introduced) while a similar domestic contract was being 

reviewed by the CFTC. There have been no foreign futures contracts introduced since the 1994 Study that 

could be construed as being directly competitive with U.S. futures markets. Nor has there been an 

apparent outflow of U.S. trading volume to foreign markets in those commodities traded both in the U.S. 

and abroad, despite U.S. reporting or other regulatory requirements. In any event, as discussed in the 

following section, most international futures regulators cooperate readily to enforce protections common 

to their regulatory schemes and, over time, have tended to harmonize their regulatory systems thereby 

reducing any regulatory incentives to the movement of trading volume from one jurisdiction to another. 

International Regulatory Harmonization 

As the trading statistics reviewed above demonstrate, there is a lack of solid evidence supporting 

the notion that disparities in regulatory schemes are having significant effects on the U.S. competitive 

position. World futures regulators are in any event working to harmonize national regulatory regimes so 

that regulation does not unnecessarily impede market access, investment decisions, and economic 

innovation. As a corollary result, the opportunities or incentives for regulatory arbitrage are being 

reduced. 

 The best practices guidance principles adopted at a meeting of derivatives regulators in Tokyo in 

1997 demonstrate an international consensus on how to regulate commodity derivatives markets and a 

commitment on the part of regulators to enhance their regulatory effectiveness. They also form a 

framework within which increasing harmonization of regulation may develop. 

Specifically, at the end of the Tokyo meeting, the regulators issued a Tokyo Communiqué that, 

among other things, endorsed two guidance papers, one on best practices for the design and/or review of 

commodity contracts and another on market surveillance and information sharing. This guidance 

represents the first occasion on which regulators responsible for overseeing commodity derivatives 

markets have agreed to international standards for the supervision of these markets. In September 1998, 

IOSCO's Technical Committee adopted versions of these guidance papers that were expanded to cover 

financial derivative contracts in addition to physical commodity futures.

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IV. CONCLUSIONS 

 As with the Commission's 1994 Study, this report has attempted to assess the international 

competitiveness of U.S. futures exchanges by examining domestic and international trends in trading 

activity, domestic and foreign regulatory developments, and major changes in the modus operandi of 

world exchanges. Moreover, the findings of this report are very similar to the findings of the 1994 Study. 

 Specifically, the current study found continued steady and vigorous growth in U.S. futures trading 

activity and in the number and diversity of instruments traded domestically since 1994. Furthermore, 

while non-U.S. trading volume also has grown vigorously, the U.S. share of world trading volume 

appears to have stabilized over the past five years -- indeed, that share increased in 1998 (from 40.5% to 

42.5%) for the first time since the initial development of financial futures abroad in the early 1980s. In 

1994, the Commission attributed the falling U.S. share of world trading activity to the proliferation of 

new, rapidly growing markets abroad combined with the maturity of U.S. markets. The more recent 

evidence suggests that non-U.S. markets are now maturing themselves and experiencing steady but 

somewhat slower growth. Also similar to the 1994 Study, the current inquiry has found no examples of 

head-to-head competition between a U.S. futures contract and a similar foreign contract in which the U.S.

contract has "lost out" to the foreign market. 

The market evidence, then, appears to clearly describe a vigorous and innovative U.S. futures 

industry that has remained competitive internationally. 

Focusing on regulation per se, both the 1994 Study and the current study found that the various 

regulatory schemes employed around the globe exhibit greater similarities than differences, even in the 

area of product approval. Indeed, significant market events that occurred over the period studied have had 

the effect of infusing greater harmony into the international regulatory matrix. Shifts in market activity 

that have taken place in the global futures industry since the mid 1980s appear to have resulted from the 

continued market maturation process, nonregulatory cost considerations, and technological change rather 

than from international regulatory disparities. At the same time, the CFTC's commitment, first made in 

the 1994 Study, to work toward maintaining a flexible, cost-efficient regulatory program without 

sacrificing market integrity and customer protections, continues. This commitment remains strong, 

especially in light of the increasing pace of technological change. 

In sum, neither trends in the locus of trading activity nor regulatory developments over the last 

five years suggest an erosion of U.S. futures markets' global competitive position. However, to the extent 

that the movements toward electronic trading systems and exchange consolidation that were observed 

over the period of this study continue into the future, the competitive structure of global futures markets 

is likely to change significantly. The Commission is committed to continued regulatory flexibility in the 

face of these trends. However, it is likely that the potential cost savings generated by these trends, and not 

the nature of the differences among the regulatory systems of various nations, will be most important in 

shaping the composition and trading interest of the global futures industry in the twenty first century. 

 

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*Only products comparable to those regulated by the CFTC are included in the above totals. Futures and 

options on futures are included; options on individual stocks and stock indexes are not included. 

[1] As now defined in section 1a(10) of the Commodity Exchange Act (CEA), 7 U.S.C. 1a(10). 

[2] At the time of publication of this report, 1998 was the last full year for which trading data were 

available, but data for the first seven months of 1999 had also been released. As a consequence, the study 

period is defined as 1994-1998, but data for January through July 1999 are used to supplement the 

analysis where relevant. 

[3] This would include both traditional, open outcry exchanges and electronic trading systems. This 

report does not address over-the-counter (OTC) derivative transactions, which was the subject of a 

separate congressionally-mandated CFTC study (see, The Report of the CFTC: OTC Derivative Markets 

and Their Regulation (October 1993) (study required by the Conference Committee that considered the 

FTPA, Pub. L. 102-962, 106 Stat. 3590)). Regulatory issues surrounding OTC derivatives markets also 

are currently being studied by the President's Working Group on Financial Markets. 

Moreover, the information presented on U.S. and foreign markets is restricted to those markets under 

CFTC jurisdiction and comparable foreign markets. Thus, the data include all regulated exchange-traded 

commodity futures contracts and all options on such futures contracts (options that can be exercised into 

an underlying futures contract). However, options on stock indexes and options on individual stocks, 

Table I

World Exchange-Traded Futures and Option Trading Volume 

By Calendar Year (in millions of contracts)

 

 

 U.S. Volume as a

World U.S. Non-U.S. Proportion of

Year Volume Volume Volume* World Volume

1986 272 216 56 79% 

1987 368 275 93 75% 

1988 412 295 117 72% 

1989 491 323 168 66% 

1990 556 341 215 61% 

1991 577 325 252 56% 

1992 706 365 341 52% 

1993 890 421 469 47% 

1994 1247 527 720 42% 

1995 1336 490 846 37% 

1996 1317 499 818 38% 

1997 1367 555 812 41% 

1998 1482 631 851 43% 

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products falling under the jurisdiction of the Securities and Exchange Commission (SEC) pursuant to

section 2(A)(1)(B) of the CEA, have been excluded. 

[4] Data presented in this report principally are drawn from the Futures Industry Association's (FIA's) 

U.S. and international volume reports. Other data sources include the FIA's Futures and Option Fact 

Book and the International Futures and Option Databook as well as information obtained directly from 

several foreign exchanges. Information for this report was also compiled from material maintained by the 

CFTC for regulatory and/or informational purposes. Exchange and contract activity are measured in 

terms of reported trading volume (the number of futures and option contracts traded during a given period 

of time). For commodities where both a futures contract and an option on that futures contract are traded 

on the same exchange, data regarding the number of traded contracts and trading volume are reported in 

terms of the single underlying commodity -- not as two distinct contracts -- in view of the complementary

nature of a particular futures contract and the option based on that same contract. 

 

[5] All tables are contained in an appendix at the end of this report. 

[6] During the first seven months of 1999, EUREX led all other exchanges in total volume of trading. 

Prior to this year, the CBT had led all domestic and foreign exchanges in trading volume at least as far 

back as comparable data have been available. 

[7] The remainder was composed of energy products (13 percent) and metals (five percent). 

[8] The rankings of some of the domestic contracts below the top five, however, did shift on the basis of 

January-July 1999 volume. The relatively new CBT Dow Jones Industrial Average and CME S&P 500 EMini futures and option contracts moved up in the rankings while European currency futures and options 

moved down. 

[9] The Commission approved 58 new futures and option contracts in 1998, 58 in 1997 and 70 in 1996. 

[10] For the period January-July 1999, the U.S. share of total world trading volume was 42 percent. 

[11] See pp. 19-22, infra. This rapid shift of trading from an open outcry to an electronic exchange has 

raised significant competitive concerns among the U.S. exchanges about whether they too could lose 

markets to a rival electronic exchange. The sole exclusively electronic exchange in the U.S., the CFFE, 

trades U.S. Treasury futures which compete directly with CBT Treasury contracts. To date CFFE has not 

attracted a significant trading volume. 

[12] See, Thompson, R. Patrick, “Merger of Two Largest New York Exchanges Will Result in Operating 

Efficiencies, Largest Physical Commodity Exchange Worldwide,” Swiss Futures and Options 

Association Review, June 1995. 

[13] See, Rappaport, Daniel, “New York Mercantile Exchange Launches Effort to Enhance, Build 

COMEX Division Copper Markets,” Swiss Futures and Options Association Review, January 1995. 

[14] Electronic order routing systems include the Computer Order Management, Entry and Timing 

(COMET) system and Electronic Clerk (EC) system at the CBT and the CME Universal Broker Station 

(CUBS) system at the CME. These systems facilitate the filling of brokers’ order decks, reducing the 

paper flow and chances for transcription errors and outtrades.

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[15] See, Kollock, Peter, “Market Morphing,” Futures Industry, October/November 1997, pp. 15-17. 

[16] See, Kapustiak, Wendell, “The Electronic Local,” Futures Industry, December/January 1998, p. 16. 

[17] Section 2(a)(1)(A)(i), 7 U.S.C. 2 of the CEA provides that: 

The Commission shall have exclusive jurisdiction, except to the extent otherwise provided 

in paragraph (B) of this paragraph, with respect to accounts, agreements (including any 

transaction which is of the character of, or is commonly known to the trade as, an 

"option," "privilege," "indemnity," "bid," "offer," "put," "call," "advance guaranty," or 

"decline guaranty"), and transactions involving contracts of sale of a commodity for future 

delivery, traded or executed on a contract market designated pursuant to section 5 of this 

Act or any other board of trade, exchange, or market, and transactions subject to regulation 

by the Commission pursuant to section 19 of this Act . . . . 

[18] See section 3 of the CEA, 7 U.S.C. 5. 

[19] Before an exchange may trade a specific commodity future or commodity option, the exchange must 

be designated under section 5 of the CEA as a "contract market" for that future or option by the CFTC. 

Section 5 of the CEA sets out the criteria which an exchange must satisfy before it may be designated as 

a contract market for a particular contract. Among other things, section 5 requires that the trading of the 

contract will fairly reflect the general value of the commodity, that measures exist for the prevention of 

manipulation of prices and that trading will not be contrary to the public interest. 

[20] The NFA is a registered futures association under section 17 the CEA, 7 U.S.C. 21, and part 170 of 

the CFTC's regulations. 

[21] See 1998 edition of CFTC Annual Report. 

[22] In this regard, the IOSCO Technical Committee agreed in 1990 that the core goals of regulation 

should be: (1) financial safety, including the integrity of clearinghouses and market participants; (2) 

fairness, including fiduciary and related customer (investor) protection concerns; and (3) market 

efficiency and integrity. The differences in regulatory structures by which these goals are achieved may 

be explained by a number of factors, including different cultural and national customs and practices and 

legal or juridical distinctions among jurisdictions. In addition, differences in the nature and structure of 

markets, for example, pit trading as compared to screen-based trading or other electronic trading 

mechanisms, and differences in the nature and design of products may have important influence on the 

structure of regulation. 

[23] An October 1992 IOSCO paper, "Contract Design of Derivative Products on Stock Indices," 

illustrates common concerns related to approval. It reflects an international consensus that exchanges and 

regulators should take account of certain specified criteria relevant to the underlying index in designing 

or reviewing a derivative product based on a stock index. More recently, as discussed in the following 

section, commodity futures regulators representing 16 jurisdictions issued a communiqué at the end of a 

conference held in Tokyo in October 1997 that endorses a set of best practices for the design and review 

of commodity contracts. 

[24] See "Futures Exchange and Contract Authorization Standards and Procedures in Selected 

Countries," Office of International Affairs, Commodity Futures Trading Commission, August 3, 1999. 

The jurisdictions included in the review are Australia, France, Germany, Italy, Canada (Ontario and 

Quebec), Singapore, Spain, Switzerland, and the United Kingdom. 

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[25] 62 FR 10434 (March 7, 1997). 

[26] 64 FR 40528 (July 27, 1999). 

[27] 17 C.F.R. Part 21, and C.F.R. Part 18. These requirements form the basis of the CFTC's market 

surveillance program. Information from the CFTC's large trader data base has been found to be 

invaluable for monitoring market conditions and the financial and operational viability of relevant firms 

and, later, to reconstruct market activities. See Report of the Presidential Task Force on Market 

Mechanisms (Brady Report) (January 1988). 

[28] It is noted that both the CBT and the CME objected to a recent Commission proposal to raise 

reporting levels for a significant number of contract markets (64 FR 5400, February 3, 1999). The CBT 

claimed that the higher proposed levels would "have an adverse affect on financial surveillance activities" 

even though they would not likely "hinder....market surveillance activities." The CME objected to the 

proposal on the grounds that "it [the CME] is best suited to determine appropriate levels for its contracts."

[29] S. Rep. No. 93-1131, 93d. Cong., 2d. Sess., 26 (1974). 

[30] Not all of these contracts may be directly competitive because of the quality distinctions that pertain 

to the underlying commodities. For example, the active NYBOT coffee contract requires delivery of 

arabica coffee, while the most active foreign coffee futures contracts require delivery of robusta coffee. In 

contrast, the NYBOT cocoa and world sugar contracts are based on commodities that are also the basis of 

foreign futures contracts. Other U.S.-traded commodity futures contracts that are directly competitive 

with foreign contracts include gold, silver, and heating oil. The U.S. markets generally have held their 

market share for both types of contracts. 

[31] Sumitomo simultaneously agreed to pay £5 million to the U.K. regulator, the Securities and 

Investment Board (SIB), to cover the cost of its investigation. Under its authorizing legislation SIB was 

unable to seek a civil sanction. 

[32] Merrill Lynch, Pierce, Fenner & Smith (Brokers and Dealers) Ltd. (MLBD) simultaneously settled a 

disciplinary action brought by the LME for breaches of its rules including its rule against assisting clients 

in manipulating or attempting to manipulate the market. MLBD agreed to pay a fine of £6.5 million. 

Charges remain pending against other respondents. 

[33] Among its recommendations for change were: enhanced market monitoring, with strengthened large 

position reporting, more and suitably experienced staff and more extensive use of technology; changes to 

the LME's rules and to the monitoring and enforcement of them, to reflect fully the regulatory obligations 

owed by its members to its customers and to the market as a whole; more systematic information sharing 

with British regulators, the London Clearing House and internationally; and improvements in market 

transparency. 

[34] The U.K. Government has published a draft Financial Services & Markets Bill which will reform 

the regulation of financial services in the U.K. The proposed bill will enable the Financial Services 

Authority (FSA), the successor to the SIB as the U.K. financial regulatory authority, to impose civil 

sanctions in relation to conduct by any person which breaches basic precepts set out in the legislation 

with regard to market manipulation and information misuse. The bill will confer power on the FSA to 

promulgate a code of conduct that will indicate in broad terms the types of conduct which are likely to 

fall afoul of the statutory precepts. When these changes are made, the FSA will have similar powers to 

investigate and discipline individuals for market manipulation as the CFTC has under the CEA. These 

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changes were undertaken in response to the Sumitomo affair.

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