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INTERVIEW - Not all SEC, CFTC rules must be harmonized

WASHINGTON (Reuters) - Although the Obama administration wants securities and futures regulators to harmonize their rules, it does not make sense for the two agencies to align all their regulations, the head of the Securities and Exchange Commission told Reuters on Thursday.

Traders work on the floor of the New York Stock Exchange, April 2, 2009. REUTERS/Brendan McDermid/Files

The SEC, which regulates securities, and the Commodity Futures Trading Commission, which oversees futures, have been asked to develop recommended rule alignments by September under the White House’s plan to reform financial regulation.

Many securities, such as options on certain types of exchange traded funds, now fall under the jurisdiction of both regulators. At the same time, credit default swaps, widely blamed for contributing to the global financial meltdown, have fallen through regulatory cracks.

SEC Chairman Mary Schapiro said the SEC and CFTC will put together a team to go through areas where the agencies have differences in rules and approaches.

But she said: “At the end of the day, it probably does not make sense to harmonize everything because some of these products are quite different and certainly the market structures are quite different.”

Schapiro said aligning the SEC and CFTC’s rules against fraud and manipulation will be tackled early in the process.

The Obama administration’s ambitious reform plan stopped short of calling for the SEC and CFTC to be merged into a single agency after lawmakers warned of the budget and oversight battles that would result within Congress.


Schapiro said privately traded derivatives should be more tightly regulated but not banned outright as global policymakers attempt to crack down on a shadowy product that has been blamed for helping fuel the financial crisis.

The United States and European Union are pushing to regulate the $450 trillion over-the-counter derivatives market after credit default swaps nearly toppled American International Group, forcing a massive government rescue of the insurer.

The U.S. government wants to reduce the risks that derivatives can pose to the economy by having them cleared through central counterparties and potentially traded on exchanges -- a proposal supported by Schapiro.

But Schapiro said there is a place for over-the-counter derivatives, often customized financial instruments used as a hedge against price fluctuations or to spread risk. A core part of this market is divided between London and New York.

“I understand that there are going to be hedging and other needs for institutions that might not fit a standardized model,” Schapiro said.

“But we need to nevertheless have a handle on what those products are, how they’re being used and what are the risks presenting to financial counterparties,” she said.

The Obama administration has proposed that standardized derivatives to be traded on exchanges and cleared in clearinghouses. It wants the users of derivatives to have a capital cushion to act as a buffer against losses.

A key question is what will be deemed a standardized contract and subject to mandatory processing through central clearing houses.

Financial regulators such as the SEC, CFTC and Federal Reserve are working at defining a standardized derivative and are looking at parameters such as volume and standard documentation.

The SEC and the CFTC are also hashing out ways to share oversight of derivatives markets.

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