While the outgoing chairman of the Commodity Futures Trading Commission (CFTC) called for "courageous regulatory reform" in the United States that would include scrapping the CFTC, Securities and Exchange Commission (SEC) and various banking regulators for a whole new framework, Democratic Commissioner Bart Chilton called for fast action and "real-time, real world solutions."
"I believe the United States should scrap the current outdated regulatory framework in favor of an objectives-based regulatory system consisting of three primary authorities: a new Systemic Risk Regulator, a new Market Integrity Regulator and a new Investor Protection Regulator," Acting Chairman Walter Lukken said at a Futures Industry Association gathering in Chicago.
The divisions would function as follows:
Lukken called for the regulatory reforms after announcing that he would step aside as acting chairman and CFTC commissioner after the inauguration to make way for an appointment by the new president.
His proposed objectives-based regulatory framework "focuses on risks from macro to micro levels and would be a radical departure from the current structure. The different functions of the CFTC, as well as the SEC and the various banking regulators, would be dispersed among these three regulatory authorities," Lukken told futures industry executives.
This broad restructuring would have to be preceded or accompanied by a complete rewrite and modernization of the laws and regulations governing the financial markets, including the securities and futures laws.
The oft-proposed idea of merging the CFTC and the SEC will not solve the problem, according to Lukken. "In Washington, this [proposed merger] is code for the larger SEC -- along with its rules-based model and culture -- taking over the principles-based CFTC. In my view, this would be ineffective and would only reinforce our outdated regulatory structure."
<>Lukken also called for immediate steps such as unified oversight of the credit default swaps (CDS) market, while providing policymakers with some breathing room to consider reform proposals for next year.
Within days of Lukken's remarks, the President's Working Group on Financial Markets said it was moving to oversee the successful implementation of central counterparty services for CDS to reduce the "systemic risk" associated with counterparty credit exposures and to boost transparency in the market. The CFTC, SEC and the Board of Governors of the Federal Reserve System also signed a memorandum of understanding that establishes a framework for consultation and information sharing on issues related to CDS central counterparties.
Chilton, whose name is being tossed about as possible CFTC chairman in the incoming Obama administration, said he agrees with Lukken that the agency should move aggressively to oversee clearing of credit default swaps.
"This is indeed a laudable goal. It is but one part, however, of a comprehensive review of regulatory oversight of the OTC [over-the-counter] derivatives market, sorely needed in the United States. We need the ability to see into these 'dark markets,' as well as the ability to act should we detect problems," he said.
Chilton urged Congress when it reconvenes for a lame-duck session this week to work toward passage of HR 6604, or some version of the bill, that would provide the CFTC with "precisely such authority."
Regulatory reform "on a grand scale [as proposed by Lukken] may come sometime in the future, but in the here-and-now we have the responsibility, as well as the authorities, to address serious market issues with real-time, real-world solutions," he said.
"In the interim, there are some things we can do now," Chilton said. "The CFTC and the SEC can use their existing authorities to cooperate and coordinate more effectively on the regulatory oversight of cross-jurisdictional products. The agencies can work together to enhance market integrity and customer protections. We can promote the clearing of OTC derivatives under our respective oversight authorities, bringing needed transparency to these markets. The CFTC should move aggressively to utilize all available administrative authorities regarding OTC transactions, including re-analysis of noncommercial hedge exemptions and classifications of traders."
Chilton, who has been a CFTC commissioner since August 2007, is one of the few individuals being mentioned to be CFTC chairman when President-elect Obama assumes office. Chilton has been one of the more outspoken commissioners, particularly in opposition to proposals to merge the CFTC and the SEC.
In November 2007, Chilton said a merger of the two agencies "doesn't make sense" and would be ill-advised (see NGI, Nov. 19, 2007). "Let's not 'Dial M for Merger.' It would be a grave mistake, would not result in the putative efficiencies espoused by its proponents, and would do nothing in the way of improving the competitiveness of U.S. markets."
But a year later Chilton seems to have toned down his position on the merger in light of the market tumult. "Many at the CFTC have maintained a 'hell no, we won't go' stance with regard to [a] merger, for some good and sound reasons. Merging a smaller agency like the CFTC with a larger one like the SEC normally means only one thing -- the small agency ends up in the other's basement and the issues of the smaller agency (in this case, the one with responsibility for oversight of futures) become less of a priority," and that "would be bad for consumers and businesses," Chilton said in late October.
"That doesn't mean, however, that -- given the events of recent months -- the issue of merger should be off the table. Things have changed since the last time the issue was debated."
Others being discussed as possible candidates for the CFTC chair include current CFTC Commissioner Michael V. Dunn; Daniel Waldman, a partner with the law firm of Arnold & Porter LLP and former CFTC general counsel; and Geoffrey Aronow with the law firm of Bingham McCutchen LLP, the Legal Times reported.
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