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CFTC, SEC May Need More Time to Iron Out Jurisdictional Conflicts

The heads of the Commodity Futures Trading Commission (CFTC) and the Securities Exchange Commission (SEC) last Wednesday said they were making progress in harmonizing the jurisdictional areas of the two agencies, but they told House lawmakers they may need more time beyond a Sept. 30 deadline to submit a final report to Congress.

"We certainly will not hesitate to ask for more time," said CFTC Chairman Gary Gensler during a House Financial Services Committee hearing, which heard testimony on the agencies' efforts to comply with the Obama administration's financial regulatory reform proposals (see NGI, June 22). The two agencies might have an interim report addressing oversight of the over-the-counter (OTC) derivatives market ready for Congress by Sept. 30, he noted.

SEC Chairman Mary L. Shapiro said she and Gensler "[were] committed to getting as much done as we can by Sept. 30. [But] if we need more time, we'll ask for more time" because "it's very important that we get this right."

Despite the harmonizing efforts, House lawmakers agreed the two agencies should be separate. "There is no point in wasting energy in trying to consolidate them when there would be no chance of that happening," said committee Chairman Barney Frank (D-MA). He further commended Gensler and Shapiro for working together, saying jurisdictional turf fights "represent Washington at our worst."

Rep. Spencer Bachus of Alabama, the ranking Republican on the panel, echoed the sentiment, saying, "We're going to continue to have two separate agencies. That's apparent."

But critics, such as the Chicago Board Options Exchange, support merging the two agencies. Having two agencies apply different rules to similar financial products creates uncertainty in the market, they contend. Absent a consolidation of the CFTC and SEC, they believe the Obama administration is going to have to clearly spell out the jurisdiction of the two bodies.

"We expect the Obama administration to submit draft legislation on regulatory reform of the OTC derivatives market as early as [this] week, which would, among other things, delineate authority between the SEC and CFTC, as well as establish stronger capital and margin requirements for OTC transactions," said energy analyst Whitney Stanco of Washington Research Group.

The CFTC and SEC "have tremendous agreement around most issues," but "there is a very narrow area where we are not in full accord, and that is with respect [to] whether broad-based indices [OTC derivatives or swaps] should be regulated by the SEC or CFTC," Shapiro said. "Our view is that securities-related derivatives ought to be under SEC jurisdiction," while the CFTC would have primary responsibility for other OTC derivatives, including derivatives related to interest rates, foreign exchange, commodities, energy and metals, she told the House committee.

"As we go through our harmonization process...we will discover that there are lots of areas where our rules approach things differently. [On] those, I don't even know that we'll have particular disagreement. Some won't be able to be harmonized because...the nature of the markets and the products is quite different," Shapiro said.

Gensler said the SEC and the CFTC will hold joint hearings in August and September to address overlaps or inconsistent rules between the two agencies. He further indicated that a decision on position limits in the energy futures markets, which will be the subject of CFTC hearings this week, will probably be forthcoming in the fall (see related story).

One House lawmaker called trading of OTC derivatives "societal useless betting," and suggested that trading of these instruments be banned, particularly where the parties do not have an insurable risk.

Neither Gensler nor Shapiro supported a ban. "I think where there's no insurable risks and it's merely a matter of two parties speculating...the answer is that there has to be sufficient capital and dealer regulation protections in place to make sure that we don't end up walking down the same path again," Shapiro said.

Shapiro favors SEC registration of hedge fund advisers, which "gets us access to everything we need as a regulator."

The Obama administration's sweeping financial regulatory reform plan, which was released in mid-June, called for Congress to amend the Commodity Exchange Act (CEA) and securities laws so that the CFTC and the SEC would "have clear, unimpeded authority to police and prevent fraud, market manipulation and other market abuses involving all OTC derivatives."

To ensure the transparency of OTC derivatives, Congress was further urged to amend the CEA and securities laws to require the clearing of all standardized OTC derivatives through regulated central counterparties, as well as to authorize the CFTC and the SEC to impose record keeping and reporting requirements (including audit trails) on all OTC derivatives.

Obama's reform package also supports giving the CFTC the authority to set position limits on OTC derivatives that "perform or affect a significant price discovery function with respect to regulated markets." It requires hedge fund advisers to register with the SEC as well.

The White House outlined the reforms in an 85-page white paper, which was forwarded to Congress. Capitol Hill lawmakers have been working on many of the same issues.

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