Futures regulator calls for major overhaul

By Ros Krasny

CHICAGO (Reuters) - Financial agencies need to press ahead with "a complete rewrite and modernization" of the U.S. regulatory system, the top U.S. futures industry regulator said on Tuesday.

"The United States should scrap the current outdated ... framework," said Walter Lukken, acting chairman of the Commodity Futures Trading Commission.

"If any opportunity and time would allow us to do this, this is the time," Lukken told reporters after a speech to the Futures Industry Association meeting in Chicago. "We should think boldly."

A key lesson from the financial market crisis now well into its second year is that the current approach "was not able to keep up with the speed and innovation of the financial markets," he said.

But Lukken said he would not be around at CFTC to advance that new direction.

A Republican who was appointed to the futures agency in 2002, Lukken said he would resign as acting chairman when Barack Obama is sworn in as U.S. president in January, and leave the commission shortly after that.

Lukken said an "objective-based" regulatory framework would be a great advance on the current product-driven framework, and could improve financial market transparency, especially in the realm of now-unregulated over-the-counter markets.

"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," he said.

Lukken told reporters that the overhaul could take "years" to develop and implement.

As an interim step, policy-makers should consider creating a "unified regulatory board" made up of the heads of the Federal Reserve, CFTC and Securities and Exchange Commission.

That board would be armed with joint rulemaking and exemptive authority to eliminate regulatory gaps and duplications that currently exist in the system, he said.

CDS CLEARINGHOUSE MOVES CLOSER

Lukken said it was also crucial to advance efforts under way to develop a clearing house for credit default swaps.

Announcements could be made soon on approvals for the creation of one or more CDS clearing houses made by major derivatives exchanges, he told reporters.

Competing proposals with slightly different elements have been floated by CME Group and InterContinentalExchange Inc with the CFTC and the New York Fed, respectively.