The U.S. Treasury Department made some waves on March 31 with the release of its “Blueprint for a Stronger Regulatory Structure,” and the tsunami for the futures and options industry was its recommendation to merge the Commodity Futures Trading Commission (CFTC) and Securities and Exchange Commission (SEC). While several industry players applauded the Treasury’s study, those plaudits were usually a prelude to saying what is wrong with it.
In a statement, CME Group said, “There has not been sufficient understanding of the function of the differences of [the] rules in the two markets. The differences are organic, not accidental, and an effort to homogenize the two regulatory regimes is certain to cause more harm than good.”
While the blueprint recognizes the need for the SEC to adopt core principles modeled on the principles-based approach initiated by the CFTC with the Commodity Futures Modernization Act (CFMA) of 2000 prior to a merger, industry insiders were skeptical that those principles would be preserved. CFTC Commissioner Bart Chilton noted the importance of preserving the benefits of the CFMA. “If a merger were to occur that in any way hampered our ability to exercise this type of oversight authority, we would see a decline in innovation and competition in all of these areas,” he says.
CFTC Acting Chairman Walt Lukken in a written response to the proposal touched on both the model and function of the agency. “Any regulatory reform effort must preserve the benefits of the CFTC’s principles-based model and recognize the distinct functions of the futures markets and mission of the CFTC.”
Chicago Board Options Exchange (CBOE) Chairman and CEO William Brodsky says the options industry is just as innovative as the futures industry but is held back by regulatory issues, citing the three-year delay of CBOE bringing gold ETF options to the market as one example. Brodsky, who is in favor of a merger, in a way makes the case for the futures industry’s cautiousness. “There’s as much innovation coming out of the options side but we have to do it within the structure of the SEC, which is under a different regulatory regime. The Treasury report recognizes the issues that we’ve had and comes out with solutions.”
Futures Industry Association President John Damgard believes the industry recognizes that “there has to be some sort of harmonization between the cultures and the regulatory approach before anything would be gained by just cramming these two boxes together.” He says, “Merging the agencies is almost the wrong approach. What we really need is a fresh look at how this would best work and that involves creating a new agency.”
Penson GHCO CEO Chris Hehmeyer offered a fresh look in a letter to Treasury last November, suggesting a “twin peaks” regulatory structure, wherein the CFTC and SEC would be consolidated into two distinct divisions of a single agency with one division focused on capital formation and the regulation of public companies, and the other division focused on market participation, marketplace conduct and ensuring market integrity. The approach tries to distinguish areas better served by strict rules from those where a principles-based approach would be more efficient.
In perhaps one step towards harmonization, the SEC and CFTC signed a memorandum of understanding (MOU) to “formalize and extend cooperation” on March 11. While the MOU would be moot in the event of a merger, industry leaders say it’s a positive development. Brodsky calls the MOU “a recognition that there are problems that beg for resolution.”
Lukken says the MOU “should be given time to bear fruit,” and it probably will as most people agree it will be some time before the blueprint takes a more formal legislative form.
