Financial Regulatory Forum

Exchanges differ on SEC-CFTC rule alignment

September 3, 2009
CFTC | SEC | USA

cftc   By Christopher Doering and Rachelle Younglai
   WASHINGTON, Sept 2 (Reuters) – Major exchanges differ on how far U.S. securities and futures regulators should align their rules, with CME Group <CME.O> – the largest derivatives exchange operator – arguing against a one-size-fits-all rule.
   The Commodity Futures Trading Commission and the Securities and Exchange Commission began an unprecedented joint meeting on Wednesday, part of 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 are 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,” said CME Group Chief Executive Craig Donohue.
   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 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 research director.
   But there was broad support for aligning rules aimed at lowering risk in clearing securities, futures and options.
   Currently, futures have to be margined separately from, options and securities. If a Wall Street firm wants to trade futures, it must post margin for that product with the clearinghouse. If it wants to trade related options or  securities, it must post separate margin for those products.
  
   UNIQUE MEETING
   The 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 by the end of September that identifies their conflicts and makes recommendations on how to resolve them.
   “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.”
   Thursday’s session will be hosted by the SEC, beginning with a discussion on enforcement issues.
   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.
  
   WORKING TOGETHER
   For the first time since the CFTC was established in 1974, the four futures commissioners and five SEC commissioners met together to hash out their differences.
  “There are times when these differences are appropriate, but at other times, they could stifle competition, increase costs or limit investor protection,” Gensler said.
   Schapiro told the hearing she was confident the two agencies 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 may be hard to break.
   CFTC Commissioner Jill Sommers said the futures and equities markets serve “fundamentally different purposes” and require “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. For more stories on the CFTC curbing speculation in commodities, please see [ID:nCFTCREG] (Reporting by Rachelle Younglai and Christopher Doering; Editing by Tim Dobbyn) ((rachelle.younglai@thomsonreuters.com; +1 202 898 8411)) Keywords: FINANCIAL REGULATION/SEC CFTC 
  
Wednesday, 02 September 2009 23:16:39RTRS [nN02373991] {C}ENDS

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