The US Securities and Exchange Commission (SEC) and the Commodities Futures Trading Commission (CFTC) should be merged into a single entity to consolidate futures and securities regulation in the US, a former SEC commissioner argued yesterday.
Speaking in a panel discussion at the Securities Industry and Financial Markets Association (Sifma) market structure conference in New York on May 20, former SEC commissioner Annette Nazareth lamented that regulators are forgoing an opportunity to consolidate supervisory bodies with overlapping jurisdictions. Nazareth is now a partner at law firm Davis Polk in Washington, DC, and served as director of market regulation at the SEC between 1998 and 2005 and as an SEC commissioner from 2005 to 2008.
"If ever there was a time we should be able to make really far-reaching reforms, then it should be now. So it is very troubling to see that a merger between the SEC and CFTC is pretty much off the table for a year or two – which means it will be off the table for decades. There is absolutely no logic for that," she said. "We are the only country in the world that separates futures regulation from securities regulation. It was probably a mistake when it was done and now is really the time to consolidate it."
Nazareth's comments were echoed by Alan Beller, a partner at law firm Cleary Gottlieb in New York and a former director of corporation finance at the SEC. "From a policy point of view, there is no good reason to have the two agencies separate, and my own view is not only should the SEC and the CFTC be under one roof but also the combined agency ought to have broader jurisdiction over financial products generally. I can't think of a good reason other than political difficulty to not have regulatory consolidation, but I am very pessimistic it will happen," he said.
While supervisory authority for commodity futures, options and derivatives clearing organisations lies with the CFTC, the SEC has oversight of clearing agencies and securities markets. This has led to uncertainty in the past over whether regulation of derivatives markets lies exclusively with one regulator, both or neither.
Derivatives dealers have argued that contracts such as credit default swaps are exempt from regulation by either party, as they are negotiated and traded between 'sophisticated parties' and so are excluded from regulation by the CFTC under Section 2(g) of the Commodity Exchange Act and by the SEC under Section 206A of the Gramm-Leach-Bliley Act.
For derivatives to be fully regulated under a combined SEC-CFTC, one of the congressional committees overseeing the two agencies – the House Committee on Financial Services or the House Committee on Agriculture – would have to agree to surrender its authority as supervisor of the new consolidated entity, another major impediment to consolidation.
"The problem is it would be extraordinarily difficult to do because congressional committees simply don't vote to reduce their jurisdiction," said Beller.
The panel bemoaned the "nonsensical alphabet soup" of maintaining four separate banking regulators and advocated not only merging the SEC and CFTC, but also consolidating the Office of the Comptroller of the Currency (OCC) with the Office of Thrift Supervision (OTS). However, Nazareth warned political necessities could lead to the creation of a fifth banking supervisor in the form of a ‘systemic risk regulator' proposed by Treasury secretary Timothy Geithner.
"The OCC and the OTS do seem to be the lowest of the low-hanging fruit but I'm not convinced they will be [consolidated] in the first round of changes. That would be very positive if they were. If we were to create another regulator that really would be ill-advised and although it doesn't seem believable, it is actually possible in this political environment we could end up with more regulators. It's almost preposterous," Nazareth noted.
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