A House draft measure that would place the Federal Reserve in the role as back-up regulator in the futures and securities markets got a cool reception from regulators and the House Agriculture Committee last Tuesday.

The proposal, which was hammered out by House Financial Services Committee Chairman Barney Frank (D-MA) and the Treasury Department, would give the Federal Reserve the ability to override actions by the CFTC and SEC. And the agencies would not be able to challenge the Federal Reserve in court.

The Federal Reserve would have backup authority to step in if regulators do not act quickly to address developing problems identified by a proposed multi-agency Financial Services Oversight Council, on which the CFTC and SEC would sit. The council would monitor the stability of the financial system and address threats to its stability. By overhauling the regulatory structure, Congress is seeking to head off a replay of last fall's financial meltdown.

"So we're going to take someone [Federal Reserve] who has no experience and put them in charge...It sounds like [that] to me." House Agriculture Committee Chairman Collin E. Peterson (D-MN) said. There is no reason to change the regulatory structure of the futures market since it was not to blame for the financial meltdown last year, he said.

"If our concerns are not addressed" in the Financial Services Committee legislation, "we'll be back again," Peterson said.

"You [CFTC] would be reporting to the council [and the Federal Reserve]...If they determine that the CFTC remedy was inappropriate...they can immediately override the CFTC," said Rep. Frank Lucas of Oklahoma, the ranking Republican on the agriculture panel. "Ultimately the Fed would be the 12-ton regulator at the end of the line."

"Even if one can make a persuasive argument that the futures markets needs more regulation...no one can credibly argue that the Federal Reserve Board ought to be the primary regulator. In fact, I would argue that it isn't and shouldn't be a market regulator at all. It is a central bank and the maker of monetary policy.

"Why this Congress would have interest in throwing the baby out with the bathwater is beyond me, but that is exactly what Chairman Frank's...draft does. It takes competent regulators and an effective regulatory scheme and subordinates them to an ultra-regulatory scheme that hasn't shown the ability to effectively and efficiently use the power it has or demonstrate any particular expertise in this very specialized, nuanced market."

The proposal "has some aspects that we do have to address," such as gaps in the regulatory system, CFTC Chairman Gary Gensler said. And while "we want to strengthen our regulations and fill the gaps...I think we've been well served with independent [market] regulators" that are not subordinated to other regulators, he noted.

The "proposals to have a council and the Federal Reserve involved...has the potential of setting up multiple regulators overseeing markets and market functions in the United States. While it is important to enhance oversight of markets by both the SEC and CFTC, I think Congress would want to closely consider whether it's best to set up multiple regulators," Gensler said.

He said the proposal goes too far by authorizing the Federal Reserve to effectively regulate securities, futures and derivatives clearinghouses. The Federal Reserve would be able to set standards and review and approve rules to address risk management policies and procedures, timely clearing and settlement of transactions, capital and financial resource requirements.

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