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MONDAY MARCH 25, 1985.





Mr. WHITTEN. The Committee will come to order.

We have with us today, the Commodity Futures Trading Commission, represented by Ms. Susan Phillips, Chairman, Ms. Bayley, Executive Director and Mr. Banister. We will be glad to have you present your testimony as you see fit, either follow it in detail or you may hit the highlights. Those of you who might be new to the Committee, we would like to have a biographical sketch in the record.

(CLERK'S NOTE: The biographical sketches follow. The prepared statement of Ms. Phillips appears in full on pages 167 through 171. The explanatory notes appear on pages 172 through 264.)

SUSAN M. PHILLIPS Susan M. Phillips was appointed Chairman of the Commodity Futures Trading Commission on November 17, 1983. She has previously served as Acting Chairman from May 1983 to November 1983 and as a Commissioner from November 1981 to May 1983. Her term expires April 13, 1985.

Dr. Phillips was associated with the University of Iowa from 1974 and was on leave from her position as Associate Professor of Finance until 1984. She also served the University as Associate Vice President of Finance and University Services first on an acting, then permanent, basis from February 1979 to November 1981. During her last leave of absence from the University, July 1976 to July 1978, Dr. Phillips was a Brookings Economic Fellow and an SEC Economic Fellow.

Dr. Phillips is a member of the American Finance Association and the Southern Risk and Insurance Association, which she served as President (1978–1979) and in a number of other offices. She is also a member of the Board of Trustees of Agnes Scott College, from which she graduated with a B.A. in mathematics and chemistry in 1967. She is also a member of Phi Beta Kappa and Beta Gamma Sigma. Dr. Phillips received her M.S. in finance and economics in 1971 and Ph.D. in 1973, both from Louisiana State University. She has contributed to numerous books and publications, as well as presenting many research papers.

Dr. Phillips was born in Richmond, Virginia, and currently lives in Washington, D.C.


MOLLY G. BAYLEY Molly Bayley became Executive Director of the Commodity Futures Trading Co mission in April 1984. Prior to joining the Commission staff, Mrs. Bayley was employee of the National Association of Securities Dealers (NASD) for more than years. From 1979 to 1984 she served as Vice President of NASDAQ Operations.

Mrs. Bayley was recently elected to the position of nominating director on t board of the Association of Junior Leagues, Inc. Mrs. Bayley served the Juni Leagues of Washington, D.C. as Vice President from 1981 to 1982 and as Presider from 1982 to 1983.

A native of Spokane, Washington, Mrs. Bayley received her B.A. from Wellesle (Mass.) College in 1967 and later engaged in graduate study at Springfield (Mass College in 1979. Mrs. Bayley currently lives in Washington, D.C.

G. HUNTINGTON BANISTER G. Huntington Banister was appointed Director, Operations and Budget Section Commodity Futures Trading Commission, in November 1981. Prior to that time, he served for over two years as the Commission's budget and accounting officer.

Mr. Banister gained extensive financial management experience while serving almost seven years on active duty as a United States Army finance officer. He is a graduate of the Army's Command and General Staff College and the National De fense University's National Security Management Course. He is presently a colonel in the Army Reserves. His Federal civilian service began in 1972 as a budget analyst for the Interstate Commerce Commission. From 1976 to 1979, he was the budget officer of the Public Health Service's National Institute on Drug Abuse.

Mr. Banister received his Bachelor of Engineering Science degree from the Johns Hopkins University in 1962 and his MBA in finance from the American University in 1976.

He, his wife Linda, and their two daughters, Elizabeth and Caroline, reside in Springfield, Virginia.

Ms. PHILLIPS. Thank you very much, Mr. Chairman.

We are delighted to be here today. I do appreciate the opportunity to present the CFTC's fiscal year 1986 request. I have a long statement which I would appreciate being able to submit for the record, and I would just highlight portions of that statement at this time.

BUDGET REQUEST The fiscal year 1986 budget request for the Commission is $27.2 million. This is a reduction of $342,000 below the estimated FY 85 appropriation. The Commission's initial budget request which was sent to the Congress and to OMB was for $31.9 million. This would have allowed the Commission to cover its operating expenses, increases in those expenses and to add 51 staff members. Most of the increase requested was for enforcement and surveillance programs. OMB, however, reduced this request.

IMPACT OF THE REQUESTED FUNDING LEVEL In view of the growth in the regulated industry and the CFTC's increased responsibilities, the Commission appealed the OMB mark twice to remain at our current staffing level of 533 staff years. The appeals were denied. We anticipate that because of increased fixed operating costs, the $27.2 million level will require a reduction of the equivalent of 80 staff years from the current 533 staff year level. We will begin reviewing our operating costs carefully in the hope that we can save some of those staff years. However, because the Commission's budget consists of 70 percent personnel and almost

30 percent fixed operating expenses, it is difficult to find areas to cut other than personnel.

In addition, the Commission has begun to assess all program areas to ensure that resources are allocated to our highest priorities. The Commission will have to rely primarily on the states in the future to bring actions against persons not registered with the Commission. There may be some slowdowns in reparations, new contract designations, and rule reviews. Some projects may have to be deferred.

The Commission will not lift the moratoria that are currently in place on new leverage entrants, new leverage products or dealer options. The Commission will continue its commitment to industry self-regulation and look for additional responsibilities which can appropriately be shifted to self-regulation, to exchanges, and the NFA.

In conclusion, in this age of budget deficits, we are concerned about how we can function with less. The CFTC will do its best to carry out its responsibilities and to assure that our highest regulatory, enforcement and surveillance responsibilities are met.

I will be happy to answer any questions from members of the subcommittee.

Thank you very much.


You mentioned the action of the OMB. What request was made of the Office of Management and Budget for your agency, do you know?

Ms. PHILLIPS. We requested $31.9 million originally and the Office of Management and Budget reduced that to $27.2.

OPERATION OF THE CFTC Mr. WHITTEN. When was your agency separated from the Department of Agriculture and how was it done?

Ms. PHILLIPS. In 1974, it was done by an amendment to the Commodity Exchange Act.

Mr. WHITTEN. I have seen the many places where someone like the Office of Management and Budget has seen fit to limit the number of people while increasing the responsibilities.

The other thing I noticed here is that you have vacancies all over the lot in the Department of Agriculture. Everybody who has a responsibility seems to have moved someplace else. Of course, you are not in the Department of Agriculture. Most of the problems that I see today come because the Office of Management and Budget hasn't gone along with the Congress in providing adequate personnel to direct performance. They give them responsibilities, then they take away the personnel that would make it operate all right.

Tell us how you go about performing your functions? Everybody does not agree with me but it strikes me that it worked a whole lot better when you were part of the Department of Agriculture, where there were spot checks, than it does now. I am mentioning this so you might describe to me where you may have improved and how t Commission operates.

Ms. PHILLIPS. Yes, sir, I will certainly try. Since the CFTC w separated from USDA and set up as an independent agency, the have been a number of contracts that have been approved. In fa before CFTC was set up, there were a number of contracts th were not regulated, and, thus one of the purposes of the 1974 A was to bring under one roof regulation of all futures contracts.

There were currencies, for example, traded in an unregulate fashion. There are a number of contracts now trading that reall go far a field of USDA's endeavor, on agricultural contracts, and fact, last year for the first time, over half of the contracts tradin in this country were not agricultural contracts. So, I think that th scope of responsibility has changed somewhat.

I would say that in many ways we do perform in much the sam fashion as the CEA did in terms of a spot check approach. By that I mean, we do rely on self-regulation, and we are increasingl going in that direction. What we intend to do as soon as all of ou programs are fully in place is to have the exchanges or NFA be or the front line. They are dealing with the users in the market on a day by day basis. We serve them in an oversight or in an auditing capacity, and overlook and audit via a sampling approach what it is they do.

Now, there are certain responsibilities that we cannot delegate to the self-regulatory organizations, such as enforcement. In that sense, I think we probably differ from the old CEA. I think our goal is to become a self-regulatory oversight agency in the fullest sense of that term.

HANDLING MARKET EMERGENCIES Mr. WHITTEN. I spoke to a group here sometime ago about starting the trading in futures which was somewhat different from the way it had been heretofore. I also read about where they have the money market on the exchanges, where you bet one way or the other on whether the value of money is going up or down.

What do you permit in your operations in a way of notice? I introduced a bill some weeks ago which passed the House 294 to 115, which called on the Farmers Home Administration to guarantee funds to make a crop this year while we argue about all the rest of it.

In connection with that, four or five times an embargo was placed on the export of American farm commodities, with disastrous results in many cases. I also point out many cases where the middleman had bought from the farmer and our government stopped him from exporting. The government paid the middleman, but the farmer who produced the crop wasn't paid anything.

What arrangements do you have for dealing with the markets to take care of unexpected actions by the Federal Government. After a man has bought a futures contract relying on the law of supply and demand under existing law, what do you do if suddenly the government comes out and says you can't export, which is bound to influence the price on the domestic market? Do you have any notice of that, or do you make any adjustment between the con

tracts that are out there, or does the man just have to take his losses because the State Department said we can't export it? Do you make allowances in adjusting outstanding contracts under those conditions?

Ms. PHILLIPS. We have very extensive emergency powers and
Mr. WHITTEN. You can't control the State Department?

Ms. PHILLIPS. No, sir, you are absolutely correct. We would work with USDA in trying to determine the extent of the embargo. If an embargo were going to be put into place-and it has happened one time since the CFTC has been in existence—the Commission could take emergency action and stop trading.

Mr. WHITTEN. You stopped the trading, but you can't go back and rearrange the contracts that were affected?

Ms. PHILLIPS. No, sir. If we declare an emergency action, we could at that time order liquidation only trading, or order that the contracts be traded out at a certain price. We have no prescribed course of action: you would have to look at each situation to determine the appropriate actions in view of whatever the situation hap

Mr. WHITTEN. Well, since the farmer's debt has increased to $212 billion, you would have a ripe field in which to study, wouldn't you?

Ms. PHILLIPS. Yes, sir.

Mr. WHITTEN. Have you been requested to do such a study by the Department of Agriculture or anyone else?

Ms. PHILLIPS. No, sir.

pens to be.


Mr. WHITTEN. You have testified here as to the effect of reducing your funds. How will you go about enforcement? Tell me for the record. When we go to the floor we are going to need this information. What would you do under those conditions? How would you go about enforcement? If OMB cuts off your people, what is the effect?

Ms. PHILLIPS. Certainly, a reduction in enforcement personnel is going to have an effect; there is no doubt about that. I would say that we are relying increasingly on the exchanges as a first line of defense, and we are asking them to improve some of their reporting systems. For example, we have asked for improved reporting so that our investigations could be less resource intensive.

Mr. WHITTEN. Have I been right and am I right now in believing that the exchanges have an interest in maintaining their reputation?

Ms. PHILLIPS. Absolutely, yes, sir.

Mr. WHITTEN. If you spot check and find out that there are problems, do you have any trouble getting them to move in as soon as you show evidence? I am talking about general terms.

Ms. PHILLIPS. In general terms, we have, I think, good relationships with the exchanges, although I would say there is a healthy tension. Sometimes, we must prod them a little more than perhaps we would like, but that is our job. If they do not move appropriately, then we would take action.

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