cash, based on a rate or price determined in a separate highly liquid market with a very large or virtually unlimited deliverable supply. furthermore, prices established in otc transactions do not serve a price - discovery function. thus, even if the price of an otc contract were somehow manipulated, the adverse effects on the economy would be quite limited. with respect to fraud and other unfair practices, the professional counterparties that use otc derivatives simply do not require the protections that cea provides for retail investors. if professional counterparties are victimized, they can obtain redress under the laws applicable to contracts generally. the working group also considered whether the introduction of centralized mechanisms for the trading and settling of what heretofore have been purely bilaterally negotiated and settled transactions would give rise to a need for additional regulation. in the case of electronic trading systems, the working group concluded that regulation under the cea was unnecessary and that such systems should be excluded from the act, provided that the contracts are not based on non - financial commodities with finite supplies and that the participants are limited to sophisticated counterparties trading solely for their own accounts. electronic trading of such contracts by such counterparties, it was reasoned, would be no more susceptible to problems of manipulation and fraud than purely bilateral transactions. it was suggested that some limited regulation of such systems might become necessary in the future if such trading systems came to serve a price - discovery function. but it was agreed that creation of a regulatory system for such systems in anticipation of problems was inappropriate. as i have already noted, the vast majority of otc derivatives simply are not susceptible to manipulation. thus, even if those contracts come to play a role in price discovery, regulation of the trading mechanism might still be unnecessary. in the case of clearing systems for otc derivatives, the working group concluded that government oversight is appropriate. clearing tends to concentrate risks and responsibilities for risk management in a central party or clearinghouse. consequently, the effectiveness of the clearinghouse ’ s risk management is critical for the stability of the markets that it serves. depending on the types of transactions cleared, such oversight might appropriately be conducted by the cftc under the cea. alternatively, it might be conducted by the securities and exchange commission, the federal reserve, the office of the comptroller of the currency, or a foreign financial regulator that one of the us regulators has determined satisfies appropriate standards. provided such government oversight is in place, otc transactions that would otherwise be excluded from

authority to create an exemption for otc derivatives that reduced legal uncertainty for a wide range of transactions and counterparties. unfortunately, some subsequent actions by the commission called into question market participants ’ understanding of the terms of the 1993 exemption. now, under the leadership of chairman rainer, the commission is considering reaffirming and expanding the terms of the 1993 exemption. nonetheless, even with such an important and constructive step by the commission, legislation amending the cea would remain critically important. the greatest legal uncertainty affecting existing otc transactions is in the area of securities - based contracts, where the cftc ’ s exemptive authority is constrained. furthermore, as events during the past few years have clearly demonstrated, regulatory exemptions, unlike statutory exclusions, carry the risk of amendment by future commissions. principles of regulation imposing government regulation on a market can impair its efficiency. thus, when evaluating the need for government regulation, one must clearly identify the public policy objectives of the regulation. as the working group ’ s report discusses, the primary public policy purposes of the cea are to deter market manipulation and to protect investors against fraud and other unfair practices. we must of course assess whether government regulation is necessary to achieve those objectives. the regulatory framework of the cea was designed for the trading of grain futures by the general public, including retail investors. because quantities of grain following a harvest are generally known and limited, it is possible, at least in principle, to manipulate the price of grain by cornering a market. furthermore, grain futures prices are widely disseminated and widely used as the basis for pricing grain transactions off the futures exchanges. the fact that grain futures serve such a price - discovery function means that if attempts to corner a market result in price fluctuations, the effects would be felt widely by producers and consumers of grain. otc derivatives the president ’ s working group has considered whether regulation of otc derivatives is necessary to achieve these public policy objectives of the cea. in the case of financial otc derivatives transactions between professional counterparties, the working group has agreed that such regulation is unnecessary and that such transactions should be excluded from coverage of the act. importantly, the recommended exclusion would extend to those securities - based derivatives that currently are subject to the greatest legal risk from potential application of the cea. the rationale for this position is straightforward. otc transactions in financial derivatives are not susceptible to - that is, easily influenced by - manipulation. the vast majority of contracts are settled in