mr. greenspan offers some considerations as a guide for government decisions on regulating the financial markets remarks by chairman of the board of governors of the us federal reserve system, mr. alan greenspan, at the financial markets conference of the federal reserve bank of atlanta held in coral gables, florida on 21 / 2 / 97. i am pleased to participate once again in the federal reserve bank of atlanta ’ s annual financial markets conference. as in previous years, the reserve bank has developed a conference program that is quite timely. changes in technology have permitted the development in recent years of increasingly diverse financial instruments and intensely competitive market structures. the rapid evolution of products and markets has led many to conclude that market regulatory structures, many of which were established in the 1920s and 1930s, have become increasingly outdated. some see new products and markets not covered by government regulation and fear the consequences of so - called “ regulatory gaps. ” others see old government regulations applied to new instruments and markets and fear the unintended consequences of what seems unnecessary and burdensome regulation. nowhere have these tensions been more evident than in the ongoing debate over the appropriate government regulation of derivative contracts, a debate which has varied in intensity but has never fully subsided for at least ten years. recent efforts by members of the senate agriculture committee to clarify and rationalize the regulation of derivative contracts under the commodity exchange act have once again placed these contentious issues on the front burner. in my remarks today i shall proffer a set of considerations that i find quite valuable as a guide to decisions about the need for government regulation of financial markets. i shall then review the history of government regulation of derivative contracts and markets in the united states and consider the current regulatory structure for those products and markets in light of these considerations. market regulation i would argue that the first imperative when evaluating market regulation is to enunciate clearly the public policy objectives that government regulation would be intended to promote. what market characteristics do policymakers seek to encourage? efficiency? fair and open access? what phenomena do we wish to discourage or eliminate? fraud, manipulation, or other unfair practices? systemic instability? without explicit answers to these questions, government regulation is unlikely to be effective. more likely, it will prove unnecessary, burdensome, and perhaps even contrary to what more careful consideration would reveal to be the underlying objectives. a second imperative, once public policy objectives are clearly specified, is to evaluate whether government regulation is necessary for those purposes. in making such evaluations, it is critically important

act did not make any fundamental changes in the objectives of derivatives regulation. however, it expanded the scope of the cea quite significantly. in addition to creating the commodity futures trading commission ( cftc ) as an independent agency and giving the cftc exclusive jurisdiction over commodity futures and options, the 1974 amendments expanded the cea ’ s definition of “ commodity ” beyond a specific list of agricultural commodities to include “ all other goods and articles, except onions,... and all services, rights, and interests in which contracts for future delivery are presently or in the future dealt in. ” in one respect, this was sweeping deregulation, in that it explicitly allowed the trading on futures exchanges of contracts on virtually any underlying assets, including financial instruments. only onion futures, banned in 1958 as the presumed favorite plaything of manipulators, remained beyond the pale. in another respect, however, this was a sweeping extension of regulation. given this broad definition of a commodity and an equally broad interpretation of what constitutes a futures contract, this change brought a tremendous range of off - exchange transactions potentially within the scope of the cea. in particular, it could be interpreted to extend the broad prohibition on off - exchange trading of futures to an immense volume of diverse transactions that never had been traded on exchanges. the potential for the legality of a wider range of transactions to be called into question did not go unnoticed during debate on the 1974 act. in particular, the treasury department proposed language excluding off - exchange derivative transactions in foreign currency, government securities, and certain other financial instruments from the newly expanded cea. this proposal was adopted by congress and is known as the treasury amendment. in proposing the amendment, treasury was primarily concerned with protecting foreign exchange markets from what it considered unnecessary and potentially harmful regulation. the foreign exchange markets clearly have quite different characteristics from markets for agricultural futures - - the markets for the major currencies are deep and, as some central banks have learned the hard way, they are extremely difficult to manipulate. furthermore, participants in those markets, primarily banks and other financial institutions, and large corporations, would not seem to need, and certainly are not seeking, the protection of the cea. thus, there was, and is, no reason to presume that the regulatory framework of the cea needs to be applied to the foreign exchange markets to achieve the public policy objectives that motivated the cea. indeed, the wholesale foreign exchange markets provide a clear and compelling example of how private