International Regulatory Responses to Derivative Crises: The Role of the U.S. Commodity Futures Trading Commission

Born, Brooksley | January 1, 2001

Over the past decade, as derivatives markets – and particularly the over-the-counter (“OTC”) market – have become increasingly global in nature, the U.S.. Commodity Futures Trading Commission (“CFTC”) – the federal regulatory agency that oversees futures and commodity option trading’ – has played an active role in fostering international regulatory cooperation. The technology of the information age, allowing instant communication and electronic trading, has revolutionized financial markets, instituting around-the-clock, around-the-globe trading, globally active market users and market intermediaries, and an increasing pace of market innovation. Market crises now have the potential for widespread financial impact and require international regulatory response. The 1997-1998 Asian financial crisis that caused equity and currency markets to tremble demonstrated more vividly than ever before that world markets are inextricably linked through related products and common market participants. Events that occur in one market can and frequently do cause global regulatory concerns. The shocks to the world financial system caused by several recent crises illustrate that this is true for derivatives markets as well as securities and currency markets.The CFTC has taken a leading role in encouraging international cooperation to address the issues of systemic risk posed by linked markets and global market participation and in facilitating worldwide adoption of higher regulatory standards. This article focuses on these international activities of the CFTC in the past decade and particularly on its reactions to three international derivatives crises occurring in the mid-to-late 1990s – the Barings Plc. failure in 1995, Sumitomo Corporation’s manipulation of the copper markets in 1995 and 1996, and the collapse of Long-Term Capital Management L.P. in 1998. The article describes the CFTC’s response to those crises and particularly the CFTC’s efforts to work with foreign regulators to fashion international protections against the harmful widespread repercussions that such crises may have. The resulting international actions have contributed significantly to the effectiveness of regulation of the global derivatives markets and have laid the foundation for higher levels of international regulatory cooperation and harmonization in the future.