U.S. market regulators in bid to end turf war

September 2, 2009

sec   By Rachelle Younglai and Christopher Doering
   WASHINGTON, Sept 1 (Reuters) – The two main U.S. agencies regulating securities and futures markets will begin an unprecedented meeting on Wednesday in an attempt to resolve longstanding conflicts laid bare by the financial crisis.
   “It’s pretty historic. It’s the first time the two commissions will meet,” said Bart Chilton, a commissioner from the Commodity Futures Trading Commission. “Businesses and exchanges have suffered because of our lack of coordination.”
   The Securities and Exchange Commission and the CFTC have bickered over jurisdiction for years.
   Weak regulation of the $450 trillion private derivatives market has been blamed in part for causing the crisis, intensifying demands that they end their turf wars.
   Prodded by the Obama administration and lawmakers, who have removed the threat of a merger for now, the agencies will hold a two-day meeting that will see the CFTC host the first day, and the SEC the next.
   Over two dozen people are due to address the assembled commissioners, a broad sampling of exchange officials, market participants, and academics.
   At the core of most SEC-CFTC disputes is whether a product is a security or a commodity future. The divide has delayed approval of products, much to the dismay of investors and other market participants.
   It took regulators more than three years, for example, to to resolve options on gold exchange traded funds.
   The SEC argued they were options on a security because the underlying ETF was traded on the New York Stock Exchange. The CFTC said they were a commodity option because it was an option on an ETF on gold. In the end the SEC let it trade as a product on a securities exchange and the CFTC granted an exemption.
   Regulatory disputes have consumed agency resources and created uncertainty in the marketplace as to how products will be regulated. The CFTC takes a more flexible, principles based approach to regulating exchanges and clearing organizations. The SEC abides by strict rules to regulate stock exchanges.
   The question of jurisdiction is crucial to the post-crisis push to oversee over-the-counter derivatives and credit default swaps, a financial instrument at the heart of American International Group’s <AIG.N> near collapse and government rescue.
   “There is no doubt the issue of OTC derivatives raises the age-old problem of who regulates securities that have equity as their basis,” said William Brodsky, the chief executive of the Chicago Board Options Exchange, in a recent interview with Reuters. “An AIG credit default swap — is that a security or a future and what rules apply and how do you enforce it,” he asked? Brodsky will be testifying at the hearings this week.
   But the tension between the agencies goes beyond jurisdiction to matters of style and plain survival.
   CFTC commissioners have long abhorred the SEC’s inflexible, rules-based approach to regulation in favor of one embracing principles, and are afraid of being swallowed up by the much bigger securities regulator.
   The idea of combining the two agencies also rankled their respective Congressional committees. Recognizing the political headwinds, the White House stopped short of recommending a merger between the two agencies as part of its plan to overhaul the country’s financial regulatory framework.
   Instead, the administration asked the agencies to give Congress a report by the end of September that identifies conflicts and makes recommendations on how to resolve them.
   The administration’s request is not binding, but SEC Chairman Mary Schapiro and CFTC Chairman Gary Gensler are under pressure to work more closely.
   Schapiro, a former chairman of the CFTC, has a deep understanding of futures markets and may be uniquely positioned to help bridge the divide.
   “I don’t think Mary has imperialistic ambitions toward the CFTC,” said John Coffee, a securities professor at Columbia Law School. “There is no sense of rivalry. Mary is not seen as the enemy. She is not seeking to take their turf. They are talking about divvying up the gray world of derivatives,” he said. (Reporting by Rachelle Younglai and Chris Doering; Editing by Tim Dobbyn) ((rachelle.younglai@thomsonreuters.com; +1 202 898 8411)) Keywords: FINANCIALREGULATION/SEC CFTC
Tuesday, 01 September 2009 23:02:51RTRS [nN01505942] {C}ENDS

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