Rarely do business leaders who must deal with regulators criticize those regulators so openly, but there is no getting around the lack of respect heaped on the Securities and Exchange Commission (SEC) recently by those in the futures industry. Craig Donohue was dripping with disdain for the SEC when he compared the possibility of the SEC merging with the Commodity Futures Trading Commission (CFTC), during a panel at the Futures Industry Association’s (FIA) annual expo in Chicago, to a fictitious merger of Toyota and Ford with the Ford family running the business.
His point was clear. The SEC’s prescriptive rule model and massive bureaucracy does not work in the modern financial world, and until they can straighten up their act, any potential tie up of regulators — where the mere size of the SEC would dictate that its model would survive — would risk all the gains of principles-based regulation that were achieved in the last CFTC reauthorization in 2000. The current reauthorization process of the CFTC is frozen. A possible link in the reauthorization chain, the U.S. Farm Bill, deadlocked since early November, was stranded in the Senate on Dec. 3. Even if the bill is passed in December, lawmakers say the final bill will likely not be sent to the White House until early March.
CFTC Commissioner Michael Dunn, chairman of the CFTC’s Agricultural Advisory Committee, says the biggest roadblocks to reauthorization are provisions addressing energy and retail futures fraud, and that the Congress is still working on the Farm Bill to be passed. Dunn says there’s still no agreement on how to best enhance the transparency of the energy markets or ensure that the commission has jurisdiction over retail futures fraud.
Merger?
The reason there has been more substantive talk of late regarding a possible merger of regulators is that there are more and more areas where the two cross paths. Issues of products falling under both the futures and securities label as well as the ongoing issue of portfolio margining of both futures and securities in a single account has led to controversy. Jurisdictional battles have led to delays in getting new products to market, which is an issue in a worldwide competitive marketplace.
Speaking at a panel at the FIA’s annual expo on Nov. 29, CFTC Commissioner Bart Chilton made the case for greater cooperation between the two agencies while maintaining that a merger would be the wrong thing at this time. Chilton said periodic and public accountability sessions with the SEC and CFTC were needed, and said that a Memorandum of Understanding (MOU) should be set up as a permanent regulatory structure. “I can’t believe that there’s no MOU on new product approval…no wonder the industry is frustrated,” Chilton said.
William Brodsky, chairman and CEO of Chicago Board Options Exchange (CBOE), called Chilton’s comments “refreshing,” but remained skeptical about the CFTC’s ability to accomplish those goals. He raised concerns about international competition, and said London had the best overarching regulatory structure. FIA President John Damgard, moderator of the panel, concurred, saying, “Modernization is necessary for the U.S. to remain in the forefront” of the industry.
It was CBOE that waited months to get their credit-derivative-based option product approved as Eurex got the jump on them and it is partly anecdotes like that that led the Treasury Department to review the U.S. financial regulatory structure in its larger review of the competitiveness of U.S. capital markets.
In a comment letter to the Treasury, Penson GHCO CEO Chris Hehmeyer recommends a “Twin Peaks” approach where a single regulator would be split into two divisions: one in charge of capital formation and the regulation of public companies and the other focused on market participation, conduct and ensuring market integrity. “The division focused on capital formation would be primarily rules based while the division focused on financial markets participation, marketplace conduct and market integrity would be principles-based,” writes Hehmeyer. Eventually, under this plan, the two regulators would be combined. That could be a problem for the futures side, which is happy with its regulator. It is companies like Penson, that operate both on the futures side and securities side, that would benefit from better regulatory cooperation.
