Acting Chairman Walter Lukken of the Commodity Futures Trading Commission (CFTC) Tuesday called for “courageous regulatory reform” in the United States that would include scrapping the CFTC, Securities and Exchange Commission (SEC) and various banking regulators and setting up an entirely new and different framework to avoid future meltdowns.
“I believe the United States should scrap the current outdated regulatory framework in favor of an objectives-based regulatory system consisting of three primary authorities: a new Systemic Risk Regulator, a new Market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,” he 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 to make way for the future appointment of President-elect Barack Obama.
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.
“Regulation by objective rather than function will ensure that all products and institutions are properly overseen based on identified public risks rather than futile and difficult determinations of whether an instrument is a security, a future or a swap contract. Under this approach, the Systemic Risk Regulator would have broad access to information from the entire marketplace to monitor concentrations of risk while the Market Integrity and Investor Protection regulators focus more specifically on their respective missions.”
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, to adopt a more consistent principles-based regulatory approach, Lukken said. He noted that one of the lessons from the current crisis has been that the existing rules-based regulatory approach failed to keep up with the speed and innovation of the financial markets. The principles-based approach would help “prevent institutions from making end runs around static rules when such actions violate a broader public policy.”
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. Simple merger is a recycled idea when bold solutions are needed” (see Daily GPI, Oct. 28).
To hasten the reform process, “I support the creation of a bipartisan select congressional committee to study the way forward on financial reform. The formation of such a committee seems almost a necessity, given the multiple committees of jurisdiction on this topic,” he said.
“As long-term reform takes shape, policymakers also should consider the interim step of creating a unified regulatory board — consisting of the heads of the Federal Reserve, the SEC and the CFTC — that would facilitate the sharing of market information and be armed with joint rulemaking and exemptive authority to eliminate regulatory gaps and duplications that currently exist in the system. While each agency remains independent, this unified regulatory board would have the benefit of preserving the expertise of each agency while formalizing the coordination that is needed to oversee the entirety of the marketplace, including over-the-counter products.”
Lukken believes that regulators can take immediate steps to shore up the financial system, while providing policymakers with some breathing room to consider reform proposals for next year.
“In the near term, regulators should continue to aggressively advance efforts by market participants to create a clearinghouse for credit default swaps. I am a strong proponent of these initiatives. Clearing brings enhanced transparency, standardization and risk management to these products at a time when it is most needed,” he said.
On the global front, immediate steps can be taken as well. “This week global leaders will meet in Washington, DC, as part of the G20 [19 of the world’s largest national economies, plus the European Union] to discuss broad principles on how to move forward as an international community to address this financial crisis…One global idea that should be seriously discussed is standardizing the sharing of international market data among regulators, which would allow authorities quicker access to market information from around the world in their policing of the financial system,” Lukken noted.
“I think it would be a monumental mistake for this [futures] industry to put up roadblocks to reform and not engage in a constructive dialogue…Today I ask this industry — in one of my final addresses on this commission — to help policymakers find a ‘smart’ regulatory solution for the betterment of the markets and the American public as a whole.” Lukken’s speech is available on the CFTC website at cftc.gov.
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