PUBLIC SUBMISSION | As of: February 11, 2009 Tracking No. 803636d9 Comments Due: November 23, 2007 Late comments are accepted |
Docket: TREAS-DO-2007-0018
Review by the Treasury Department of the Regulatory Structure Associated with Financial Institutions
Comment On: TREAS-DO-2007-0018-0001
FR Notice: Review by the Treasury Department of the Regulatory Structure Associated with Financial Institutions
Document: TREAS-DO-2007-0018-0012
Comment on FR Doc #
Shady Side, MD,
Thank you very much for the opportunity to comment regarding your blueprint
to ?streamline? financial services regulation.
For a lot of people, ?streamlining? is a codeword used as justification for, among
other things, a merger of the CFTC and SEC. While I applaud the Department?s
effort to try to make government work better and enable our financial services to
be more competitive, such a consolidation would be a mistake from my
perspective.
In 2000, Congress passed the Commodity Futures Modernization Act (CFMA)
that made a fundamental change in the way the CFTC works. The CFMA moved
the CFTC to a ?principles-based regulation,? which means that broad principles
are set for which the agency expects industry adherence. Principles-based
regulation is in stark contrast to the top down, proscriptive type of regulator that is
used in most of government.
This principles-based approach has allowed our domestic futures and options
industry to capture the value of new products without long delays. Which, in turn,
helps hedgers, speculators and consumers. And it has helped foster the
incredible growth we have seen in the futures industry. For example, the BIS
Quarterly Review for September 2007 indicates a remarkable growth in derivative
financial instruments traded on organized exchanges in North America?from 82.8
million futures in December 2005 to 121.8 million futures in June 2007 (an
increase of 47.4%), and from 43.7 million options in December 2005 to 87.3
million options in June 2007, an incredible increase of 100%.
In addition, the CFTC?s regulatory structure has helped foster change in the
fundamental way markets are organized: from the traditional, member-owned
entities of the former century to the demutualized shareholder-owned businesses
of today. And the results of that can be seen in the exchanges? market
capitalization figures: as of November 7th, the market cap of the CME Group was
$35.18 billion, compared to the market cap of the New York Stock Exchange at
$23.71 billion and the NASDAQ at $5.2 billion.
The financial world looks to the United States as a global leader in the futures and
options industry.
The CFTC and the SEC, while both financial regulators, oversee two completely
different types of markets, and consequently have two completely differently sets
of statutory and regulatory schema. You could put them both in the same
building, but they would still have two different sets of laws to carry out, two
different sets of regulatory responsibilities, and two different Congressional
mandates.
There are certainly products, such as derivatives of commodity-based exchange-
traded funds, for example, that may appear to fall between the two agencies?
jurisdictional lines. But these hybrid products are going to raise difficult issues
regardless of whether there is one regulator or two.
The point is, any alleged efficiencies just aren?t there. Just look at the merger of
securities and futures regulators in the United Kingdom in 2000: at best, it?s
equivocal whether that merger resulted in any tangible regulatory efficiency. In
addition, isn't it intellectually lazy to attempt to justify a proposed merger based
on potential efficiencies? Shouldn't there be concrete advantages to such drastic
change (e.g., competitive advantages), in order to justify such a move? there is
currently no evidence of those. It is a given that our system differs from others
around the world, but that doesn?t make it inferior, and it certainly doesn?t mean
that we should conform to European or Asian models of regulation.
The CFTC has already adopted a principles-based regulatory approach that allows
innovation and competition to flourish without undue regulatory impediments and
get products to market faster. Its regulatory system is an example of the
solution, not the problem. The SEC, on the other hand, is an example of the
classic, old-style, prescriptive regulator, and the difference between our two
systems shows why it would be such a mistake to merge the SEC and the
CFTC. Why would you want to merge an agency with a system that is working?
well, fostering innovation and competition, with another agency with a
fundamentally different mandate?
There are certainly cross-jurisdictional products between the SEC and the CFTC.
Rather than overreact and jump to agency merger, the experience with cross-
jurisdictional products shows that concrete efforts need to be made to harmonize
efforts between the CFTC and SEC for these types of products. Improved
communication and harmonized approval processes would avoid, for example, the
months-long wait that that occurred with the credit event options approval effort.
So, the focus should be on efforts to resolve the actual problems created by two
agencies? different statutes and mandates, not merely putting those problems
under one roof. What really should be the focus of the conversation is how to
improve the lines of communication, not advocating how to fix a regulatory
oversight system that isn?t broken.
Former Federal Reserve Board Chairman Alan Greenspan has discussed this
topic. He said, ?I feel that we would probably be ill served by too much
consolidation because it is very likely to lessen the interest in the development of
new products.? His warning about stifling innovation certainly has proven true in
the past?just look at security futures products, and the moribund growth in those
dually-regulated products. It just doesn?t make sense to take the CFTC, which
has operated so successfully utilizing the principles-based system since 2000,
and merge it with an agency whose regulatory philosophy is fundamentally
incompatible with such an approach.
All too often, prescriptive rules and regulations don?t anticipate potential issues, or
conversely, they go too far and over-prescribe solutions to problems that don?t
exist. Someone once said, ?If all you?ve got is a hammer, everything looks like a
nail.? Well, if all you?ve got in your command and control regulatory toolbox is one
thing, that?s what you?re going to pound away with, right or wrong. The CFTC?s
principles-based regulation gives it the flexibility to select (or allow the market to
select) the right regulatory tool for the job. The SEC doesn?t approach things that
way because that?s not their regulatory system, and it would be a mistake to lose
the flexibility the CFTC has by merging it with the SEC.
Proponents of merger should be asked to specify what further efficiencies and
economies would be generated by merging the CFTC with another agency with a
fundamentally different approach. From what we?ve seen abroad, the results
aren?t there to justify merger of the two agencies based on efficiency or
competitiveness arguments. Unless and until we see that, I remain firmly on
the ?no merger? side of the line.
Thank you again for the opportunity to comment.