A House discussion draft that would give the Federal Reserve new powers over federal market regulators got a cool reception from regulators and the House Agriculture Committee Tuesday.

The discussion draft, which was hammered out by House Financial Services Committee Chairman Barney Frank (D-MA) and the Treasury Department, would establish a new regulatory structure to address system risks and head off a replay of last fall’s financial meltdown. Both the Commodity Futures Trading Commission (CFTC) and the Securities and Exchange Commission (SEC) would sit on a multi-agency Financial Services Oversight Council, which would monitor stability of the financial system and address threats to that stability.

Under questioning by House Agriculture Committee Chairman Collin E. Peterson (D-MN), CFTC Chairman Gary Gensler agreed that the draft legislation 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 also would have backup authority to step in if regulators do not act quickly to address developing problems identified by the council.

“So we’re going to take someone who has no experience and put them in charge…It sounds like [that] to me.” Peterson said. Because the futures market did not contribute to the financial meltdown last fall, he noted that there was no reason to change its regulatory structure.

“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 discussion 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 discussion draft “has some aspects that we do have to address,” such as gaps in the regulatory system, 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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