Regulatory Cooperation Prelude to a Merger Proposal?
Treasury's new model could include combining the SEC and CFTC
March 24, 2008
Though the recent cooperation agreement signed by the Securities and Exchange Commission and Commodity Futures Trading Commission will help build a "closer working relationship," according to the regulators, some are calling it a first step. A merger proposal from the Treasury Department could be imminent.
Treasury is expected to soon release a blueprint for bringing the securities industry's regulatory structure up to date. Robert Steel, Treasury undersecretary for domestic finance, on Feb. 7 told the New York Society of Security Analysts that the agency will propose a "newly designed model" for the financial services industry, incorporating "wholesale changes."
Treasury's Web site says the plan will seek to "improve efficiency, reduce overlap, strengthen consumer and investor protection and ensure that financial institutions have the ability to keep pace with evolving markets." Comments were solicited in an October notice in the Federal Register.
"Politicians want to get out in front" of the issue with advance moves increasing ties between the two regulators, said a source who declined to be named. He added that the SEC-CFTC agreement may have been designed to smooth the way for a potential merger.
The division between the SEC and CFTC has been blurring as high-volume electronic trading becomes ever more prevalent and the distinctions between equities and futures contracts become less clear. "Given the substantial overlap, it would not be a shock that there would be some sort of merger," says Jeffrey Plotkin, partner in New York-based law firm Day Pitney and former assistant regional administrator of the SEC's New York office. Such a merger would be driven by "electronic products, and the fact that these new products do not fit into a cubby hole. To bring some order to the process certainly makes sense."
One group advocating for the creation of a single regulator is the Securities Industry & Financial Markets Association (Sifma). In a Nov. 21 letter to Treasury in which it lists a number of recommended structural reforms, Sifma notes that "the first step toward these goals is the consolidation of the CFTC and SEC."
Sifma argues that, historically, separate regulation of the securities and futures markets was useful because they operated in dramatically different fashions and rarely interacted. "Today the commodities markets have evolved into markets primarily trading futures on financial instruments and options on those futures," says the letter. "The past distinctions between the commodities and securities markets have disappeared for the most part, leaving what many consider a single financial market."
According to Sifma, "the merger of the SEC and CFTC would provide tremendous efficiencies and cost-savings without compromising regulatory objectives."
Should Treasury suggest a merger, the task will not be simple. "We do not believe it is practical to attempt to combine or unify securities and futures regulation in the United States at this time," NYSE Euronext said in its Nov. 26 comment letter. The problem, said the exchange, is that the industry cannot reasonably "expect to be able to completely reorganize our existing regulatory system within an acceptable timeframe."
A merger would require an act of Congress, where oversight is split: The House and Senate agricultural committees supervise the CFTC; the SEC is overseen by the House Commerce Committee and the Senate Banking Committee. Not only could turf battles present a problem, but time is running out for the current administration to mount major initiatives.
