Commodity Futures Trading Commission 

Office of External Affairs

Three Lafayette Centre 

 1155 21st Street, NW 

Washington, DC 20581 

 202.418.5080

Speech 

Building Regulatory Networks 

CFTC Acting Chairman Walt Lukken

(As Prepared For Delivery) 

FIA Annual Conference 

Boca Raton, Florida 

March 13, 2008 

I want to thank the Futures Industry Association (FIA), Richard Berliand and John Damgard for 

inviting me to speak this morning. I am grateful that the CFTC can join this event by holding 

our own foreign regulatory conference, which occurred yesterday. The synergies created by 

these two conferences enable a more robust dialogue between regulators and the industry, which 

benefits all involved. Thank you, John and Richard. 

These are extraordinary times for our markets. Commodity prices are at unprecedented levels 

that have not been experienced since the last World War. These higher prices have been caused 

by both macro-economic factors as well as micro fundamentals for given markets. Broadly 

speaking, the falling dollar, strong demand from the emerging world economies, Mideast

political unrest, detrimental weather and ethanol mandates have driven up commodity prices

across-the-board. On top of these trends, the emergence of the $500 billion plus sub-prime crisis 

last summer led investors to the liquidity, safety and positive returns that commodity futures 

provide. All U.S. exchanges have experienced record volume and settlements during this time

period, including one day in January in which the CME cleared and settled more than $12 billion 

worth of transactions—nearly six times its normal load. Needless to say, this is rarified air we 

are currently breathing. 

Despite these levels of prices and volume, the price discovery and risk management functions of

our markets and the plumbing of the clearing system have worked extraordinarily well. Not 

surprisingly, however, this stress in the markets has caused some cracks to appear. Just two

weeks ago, the news broke that an employee at MF Global incurred over $140 million of trading 

losses overnight while trading wheat futures. And of course, you are all well aware of the recent 

discovery of extraordinary, multi-billion dollar trading losses at Société Générale. In both of

these cases, the facts are still being uncovered, so we will have to wait to draw final conclusions.
Even so, these recent situations are a clarion call that should prompt us to consider the lessons 

we can learn from these unfortunate events. 

I have asked FIA to review the 1995 report on risk controls that it produced in the wake of the

Barings crisis to determine whether the findings should be updated given the current crises du 

jour. It is our collective responsibility, both industry and regulator, to remind ourselves of the 

dire consequences when risk controls go lax. We must remain diligent on this front. 

Because it is easy to get bogged down discussing crisis management when such episodes occur,

today I want to look at the broader picture for our agency. I recently took my four year old son

to the Smithsonian National Gallery of Art. This led us to the Impressionist wing where he went 

running uncomfortably close to a famous Monet painting. His comment to me was, “Daddy, this 

painting doesn’t make sense...it is just a bunch of dots.” But as I moved him back from the 

painting to my relief and that of the nearby guard, the light bulb had gone on for him and 

Monet’s Houses of Parliament came into view. Sometimes distance provides perspective. 

Today I want to take a step back and talk about a few of the strategic goals that this agency will 

pursue in the coming year. I have spoken about “smart regulation” in the past, which attempts to

instill a culture of compliance through the use of flexible, risk-based regulation. But today I 

want to hone our focus on the importance of networks in the furtherance of our regulatory

mission. 

Networks are an integral part of today’s digital society. We are all familiar with social networks

like Facebook and You Tube, communication networks like email and Internet blogs, and 

economic networks like eBay and for that matter, electronic exchanges. All of these networks 

have fundamentally impacted our daily lives and exist for a common reason--bridging likeminded individuals together to communicate information and ideas for the betterment of the 

individual as well as the network as a whole. In a relatively short period of time, technology has 

fundamentally changed the manner and speed in which humans interface with each other. 

To take advantage of the data and analytics to oversee this industry, the CFTC must think in 

terms of regulatory networks, which require substantial investments in two items: technology 

and relationships. I will significantly advance both items during my tenure. 

Technology: 

The CFTC uses technology primarily in the surveillance of markets and the monitoring of the 

financial integrity of clearing organizations and firms. Accordingly, the agency is pouring 

significant amounts of its capital into modernizing our surveillance network, which will pay off 

with enhanced market transparency and detection tools for CFTC staff. This year the agency

will increase technology personnel by 25 percent with the hope of nearly doubling the overall

technology budget by next year. 

One of the CFTC’s most critical missions is to detect and prevent price manipulation. The 

centerpiece of the CFTC’s market surveillance program is its technology-dependent large trader

reporting system. All futures commission merchants (FCMs) must report daily trade positions to

the CFTC, which are above a certain trading threshold. 

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This amount and detail of trade data collected and analyzed at the CFTC is unprecedented among 

regulatory agencies. The CFTC staff not only monitors daily positions of all large traders, but 

also has the ability to look at the minute-by-minute trades of these market participants during 

times when there is a heightened risk of manipulation, such as end-of-day trading periods. This 

system also allows staff to quickly look at the positions of traders for a given contract listed on 

multiple exchanges, such as the linked natural gas and oil contracts trading both on NYMEX and 

ICE. Where previously it would have taken weeks to obtain and assess a particular trader’s daily

positions, including those positions across markets, we can now perform that same analysis in

less than a minute. And soon, we will have the capability to monitor and analyze a trader’s 

intraday trading activity virtually in real-time. 

Two weeks ago, the CFTC and Actimize, a leading provider of transactional risk management 

technology for the financial services industry, announced a major partnership for the further

development of our trade practice surveillance network. The new trade practice system will 

automate basic trade surveillance as well as perform timely and customized analyses of all

trading activity. Significantly, this system will facilitate the detection of trading abuses across

multiple exchanges, a function that only the CFTC can perform. 

As we all know, the format of the data is as important as the technology itself. With the help of 

the exchange and trader communities, the CFTC hopes to foster the development of an industry

standard for exchange data through the enrichment of the existing FIXML data tagging format. 

With CFTC encouragement, a futures industry data committee is expected to propose changes to 

the international body that sets such standards in the near future. In addition, the agency is

exploring the greater use of XBRL, which is another data standard for financial statements. It is 

my hope that, by speaking the same data language, network synergies will develop as regulators 

and market participants are better able to communicate and add value and functionality to their

information systems. I strongly support such efforts. 

Relationship Regulation 

In addition to technology networks, there exists a second critical network that can sometimes be 

overlooked in this brave new cyber-based world—and that is the human network. Collaboration 

and relationship-building in a flat world is absolutely necessary in order for government 

authorities to do their job. Regulators must stay engaged with each other in order to make 

informed decisions for the public good. 

No matter the size of the agency, individual regulators do not have the resources to sufficiently 

monitor the breadth of the global marketplace. We must rely on the expertise of other regulators,

both domestic and foreign, in fulfilling our public mission. These relationship-building efforts 

begin close to home with my membership on the President’s Working Group on Financial

Markets. Led by the Secretary of the Treasury and consisting of the Chairmen of the Federal 

Reserve, SEC and CFTC, the PWG meets regularly to share information and ideas about today’s 

inter-related marketplace. The synergies created by such collaboration are significant and prove

vital in times of market stress. 

As the evolution of the securities and futures markets continues, one of our most important 

regulatory relationships is with the SEC and there is much work we can do to rationalize our 

differing approaches to regulation. Earlier this week, the SEC and CFTC took a historic step in 

improving and formalizing our regulatory coordination of the marketplaces we oversee. With

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our Commissions’ support, Chairman Cox and I signed a memorandum of understanding (MOU) 

that will help the agencies share information as well as coordinate our review of novel derivative 

products that have attributes of both securities and futures. We took the MOU out for its first 

ride by seeking public comment on two gold ETF products to be listed by OneChicago and 

CBOE. As a longtime proponent of principles, I am pleased with the MOU’s inclusion of 

principles that will guide the agencies when addressing future novel derivative products. 

These principles reaffirm the importance of encouraging product innovation, market neutrality, 

competition, and legal certainty, consistent with the agencies’ respective regulatory schemes. 

Additional topics we plan to tackle under this agreement include portfolio margining and foreign

equity indices. Like all relationships, this one will require work and there will be bumps in the

road but Chairman Cox and I are committed to further rationalizing our differing regulatory

structures using this agreement as a roadmap going forward. 

When we’re not busy collaborating with the SEC, we are likely coordinating with FERC on our

respective enforcement missions. The CFTC and FERC stand shoulder to shoulder in the U.S. 

government’s efforts to ensure that the energy markets remain free from manipulation. Both 

Chairman Kelliher and I have respectfully acknowledged that the agencies have a difference of 

legal opinion on interplay between the CFTC’s exclusive jurisdiction and the FERC’s new 

enforcement powers, which will likely be resolved by the courts. Despite these differences, we 

both recognize the growing need for our agencies to cooperate in overseeing these markets 

within the bounds of our legal authority. With Congress’ recent grant of manipulation authority 

to the FTC for petroleum products, the CFTC has also reached out to the FTC to open a dialogue 

regarding our respective enforcement mandates in order to coordinate our investigative programs 

and to avoid duplication of effort. 

The importance of these relationship networks extend beyond our borders. The CFTC has long 

been an international leader in coordinating its efforts with its foreign counterparts. The CFTC 

was one of the first to embrace the “mutual recognition” concept for foreign jurisdictions dating

back twenty years for foreign brokers and ten years for foreign exchanges. The agency is a 

leading member of the International Organization of Securities Commissions (IOSCO) where 

international standards and ties are strengthened. 

One important foreign partner worth highlighting is the United Kingdom’s Financial Services

Authority, given our similar principles-based regulatory schemes and our oversight 

responsibilities of linked crude oil products. By strengthening this relationship over the last

several years culminating with a groundbreaking MOU on market surveillance, our agencies 

have set a sound precedent for other foreign regulators as they seek to create a borderless global 

regulatory network. Such international ties are critical if the world’s regulators are to be 

effective in policing the global marketplace. 

Before closing, I would like to step a bit closer to the canvas for a moment to mention a couple 

of the items on the agency’s immediate “To Do” list. 

It is my hope that in the coming days the CFTC will publish a concept release on the proper 

regulatory treatment of event contracts and markets. Event contracts are generally structured to 

direct a given payout when a certain event occurs, such as the Consumer Price Index exceeding 5 

percent, the Dow surpassing 15,000 or a particular candidate being elected President of the 

United States. Given the Commodity Exchange Act’s purpose of promoting price discovery and 

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risk management through hedging, fundamental questions must be answered: Is it appropriate 

that we regulate these event contracts and markets, and if so, in what manner? Does an event

contract need to have an economic purpose in order to invoke the CFTC’s jurisdiction? How do 

we distinguish these contracts from pure gambling? The CFTC is evaluating how these markets 

should develop and how to ensure that the proper protections are in place. I encourage this 

industry to provide us with your informed views on this concept release once it is published. 

The CFTC also will move to finalize its proposal on self regulation and corporate governance 

conflicts of interest. Independence in exchange self-regulation and governance is significant to 

ensuring these public markets are regulated and functioning properly. I hope that the CFTC will 

republish this proposal with clarifications to the definition of “public director” in the near future. 

Energy and enforcement will always remain a focus, especially given the current market 

conditions. With the recent BP manipulation settlement as proof, the CFTC is fortunate to have

one of the premiere derivatives enforcement programs in the world. The success of this program

is largely due to the great work of our enforcement division under the leadership of Greg Mocek. 

During his six years at the helm, the Commission has assisted criminal authorities in locking up

over 200 offenders and obtained more than $2 billion in fines and restitution—much of this 

levied against those who believe they can manipulate the energy markets. With the price of oil 

above $100 a barrel and its gravity pulling the entirety of the energy sector higher, the CFTC and 

its enforcement program will continue to maintain a zero tolerance policy toward anyone who

attempts to manipulate or disrupt the pricing in these important markets. 

Also on the energy front, the Commission recently formed the Energy Markets Advisory 

Committee (EMAC), which was a recommendation from the CFTC’s Exempt Commercial 

Market report last fall. Still in its early formation stage, the EMAC will consist of a good crosssection of stakeholders in our industry and the public, and it is meant to improve dialogue among 

those involved in, and affected by, the energy trading business. We have had an outpouring from 

groups wanting to participate, and we hope to have our first meeting in the next several months. 

I’ll quickly mention that the CFTC’s reauthorization is still pending but nearing finalization. 

The legislation, which is part of the larger Farm Bill conference, would authorize the CFTC for

five more years and provide the agency with additional authority for significant price discovery 

contracts traded on exempt commercial markets, such as the InterContinental Exchange. The bill 

also would clarify the CFTC’s fraud authority over retail foreign currency trading, where we 

have witnessed a plague of scams in recent years. The passage of CFTC reauthorization 

legislation would be a significant accomplishment for this agency, and I am pleased that 

Congress is nearing its completion. 

In closing, I would say that I learned some valuable lessons that day at the art museum with my 

son. First, never trust a four year old with priceless art. Second, and more importantly, stepping 

back is imperative for gaining perspective. I strongly believe that the CFTC is well positioned 

going forward to meet domestic and global challenges. Our current progressive regulatory 

scheme will dramatically benefit from advancing these relationship and technology networks in 

an effort to more effectively accomplish our critical mission. However, networks and 

technology alone cannot take the place of solid judgment. That is why conferences such as these 

are so important for helping regulators understand the industry they oversee so we can make

informed decisions and advance the public interest. FIA is an important partner on this front and 

I appreciate your inviting me to speak here this morning. 

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