Christopher Cox, chairman of the U.S. Securities and Exchange Commission (SEC) said he strongly supported a merger with the Commodity Futures Trading Commission (CFTC) during Congressional hearings on Thursday according to wire reports.
In a quote appearing in a Reuters’ story that must have sent chills up the spine of everyone involved in the futures industry, Cox said, "This would bring futures within the same general framework that currently governs economically similar securities."
The story goes on to say that U.S. Treasury Secretary Henry Paulson recommended such a merger in his regulatory reform “blueprint” published in March.
What the story doesn’t say is that Paulson said that before such a merger could take place the SEC needed to be overhauled and adopt core principles similar to the CFTC. “The SEC should use its exemptive authority to adopt core principles to apply to securities clearing agencies and exchanges. These core principles should be modeled after the core principles adopted for futures exchanges and clearing organizations under the Commodity Futures Modernization Act (“CFMA”),” stated the blueprint.
While market participants have long understood the logic behind such a merger, the fear from the futures side has always been that the size of the SEC would dictate that its policies would supersede those of the CFTC, even though the SEC’s recent track record in terms of its regulatory mandate has been poor. In contrast the CFTC structure has proven resiliant in recent market turmoil.
The Treasury's blueprint approach followed a “Twin peaks” model recommended to Treasury by Penson GHCO CEO Chris Hehmeyer. “Take markets and exchanges out of the SEC [jurisdiction] and put it in the CFTC and have the SEC control capital raising 10Qs, public companies; and have the CFTC side running exchanges, margins, portfolio margining risks and markets,” Hehmeyer says. “You let the SEC lawyers who monitor publicly held companies continue to do that but you take markets and exchanges out of the SEC and put it in to the CFTC and you rename them and combine them.”
Not exactly the way Cox described it. And while Cox will be long gone before any such merger takes place, his comments explains why so many on the futures side get nervous when they hear talk of a merger. As Hehmeyer says, “It is very important that the futures industry point out that the problems came from the regulated products on the securities side and that is what needs to be changed.”