Exchanges differ on harmonization of U.S. regulators

By Reuters Staff
September 2, 2009

Gary Gensler (R), chairman of the Commodity Futures Trading Commission, and Mary Schapiro, chairman of the Securities and Exchange Commission, testify before the House Financial services committee during a hearing on   the Obama Administration's financial regulatory reform proposals  on Capitol Hill in Washington July 22, 2009. REUTERS/Yuri Gripas (UNITED STATES POLITICS BUSINESS) By Christopher Doering and Rachelle Younglai
WASHINGTON, Sept 2 (Reuters) – Major exchanges differed on how far U.S. securities and futures regulators should align their rules, with the world’s largest – the Chicago Mercantile Exchange – arguing against a one-size-fits-all rule.

The Commodity Futures Trading Commission and the Securities and Exchange Commission were holding an unprecedented joint meeting on Wednesday in an effort to resolve longstanding conflicts that have been laid bare by the financial crisis.

Prodded by the Obama administration and lawmakers, who have removed the threat of merging the agencies for now, the SEC and CFTC were hearing from exchanges, consumer groups, enforcement officials and other experts on how to end their turf fight.

But some participants thought the differences were important and worth preserving.

“These significant, intrinsic differences between derivatives and securities markets are likely to be eviscerated by a one-size-fits-all regulatory regime, undermining the value of both markets,” Craig Donohue, head of the Chicago Mercantile Exchange, told the hearing.

However, the Chicago Board Options Exchange, which had to wait more than three years for an option on an exchange traded fund involving gold to be approved by the regulators, urged more harmonization by the agencies.

“This disparity between the two approaches poses severe domestic and international competitive disadvantages to SROs (self-regulatory organizations) and inhibits innovation in the securities markets,” said William Brodsky, CBOE chairman.

The Consumer Federation of America, warned against aligning the rules at the expense of effective regulation. “Financial innovation, which nearly destroyed our economy, must take a back seat to safety and soundness,” said Mark Cooper, the federation’s director of research.

The unique two-day meeting started half an hour late as CFTC Chairman Gary Gensler missed his train because he was taking his daughter to her first day of school.

Gensler and SEC Chairman Mary Schapiro sat side by side, exchanging smiles and occasionally leaning back for private conversations.

The White House has urged the agencies to give Congress a report that identifies their conflicts and make recommendations on how to resolve them by the end of September.

“The American people are not interested in bureaucratic turf battles,” said Gensler. “All options should be on the table, and there should be no sacred cows.”

RULES VS PRINCIPLES
Regulatory disputes have consumed the SEC and CFTC’s resources and created uncertainty in the marketplace as to how products will be regulated.

Weak regulation of the $450 trillion private derivatives market has been blamed in part for causing the financial crisis, intensifying demands for the agencies to make peace.

Historically CFTC commissioners and the exchanges they regulate have abhorred the SEC’s stricter, rules-based approach to regulation.

Exchanges under the CFTC’s supervision have more freedom to determine how they operate. Under the SEC’s less flexible approach, exchanges are required to comply with numerous, prescriptive regulations — a system feared by those currently regulated by the CFTC .

At the core of most SEC-CFTC disputes is whether a product is a security or a commodity future.

The IntercontinentalExchange Inc argued at the meeting for a standard set of rules that would allow the SEC and CFTC to protect market integrity and reduce systemic risk. Though, ICE senior vice president Johnathan Short said the rules should be flexible enough to adapt to changing market conditions.

WORKING TOGETHER
For the first time since the CFTC was established in 1974, the four futures commissioners and five SEC commissioners met together to start hashing out differences.

The members of each agency flanked their chairmen in Wednesday’s session, held in the CFTC’s hearing room. Thursday’s meeting will be held at the SEC’s headquarters.

“There are areas where the CFTC and SEC regulate similar products, practices or markets, but do so differently,” Gensler told a packed room of market experts and lawyers.

“There are times when these differences are appropriate, but at other times, they could stifle competition, increase costs or limit investor protection,” he said.

Schapiro told the hearing she was confident the two agencies also will be able to work together and said greater coordination would reduce regulatory arbitrage, promote product innovation and rebuild confidence in U.S. markets.

But years of division will be hard to break.

CFTC Commissioner Jill Sommers said the futures and equities markets serve “fundamentally different purposes” and require different “divergent” regulatory schemes.

The question of jurisdiction is crucial to a post-crisis push to oversee the private derivatives market and credit default swaps, at the heart of American International Group’s <AIG.N> near collapse and government rescue.

While the two agencies may have their differences, Gensler said they are committed to bringing the full over-the-counter derivatives market under regulation.

“Shame on us if we can’t resolve some of these things …maybe from your perspective we just need adult supervision. Hope we can resolve these issues without having mom and dad step in and help us,” said CFTC Commissioner Bart Chilton.

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