Merged SEC/CFTC Best Choice for Systemic Risk Oversight
Aite Group has issued a useful background note on likely changes to the regulatory structure for listed and over-the-counter derivative financial instruments.
It also examines how disparate groups – from loan originators to hedge funds – will be affected by the restructuring; it considers the possibility of a transaction fee/tax on futures and equity options transactions, as well as mandating the clearing of over-the-counter (OTC) derivatives through an exchange clearing house.
“While everyone can agree that regulatory changes are needed, a one-size-fits-all solution does not seem to exist. The one consistent cry out of Washington is for a systemic regulator that can oversee the entire financial marketplace and prevent firms from creating a cascading affect on other markets.The major problem is the possible designation of certain firms being a potential systemic risk. Having such a designation would create an unfair marketplace for those firms that are not deemed a potential risk. They would not be able to compete against others who would have the implied backing of the Fed Reserve and Treasury.”
Aite Group believes that the best solution would be for a sufficiently funded unified regulator that can be created from the existing structure.
Making the Federal Reserve the systemic regulator is not a long-term solution as it needs to concentrate on managing its massive portfolio, which will eventually need to be unwound.
Instead Aite suggests a combination of the Securities and Exchange Commission and the Commodity Futures Trading Commission is best suited to the task.
“The argument against merging the two agencies has revolved around the different regulatory philosophies that the agencies currently employ. The SEC rules-based versus the CFTC principle-based ways of regulating. Aite Group believes that a principled based way of regulating is more efficient as it provides regulators with flexibility in dealing with new and complex situations that cannot be anticipated by specific rules. The reality is that the majority of the U.S. Congress is not comfortable with a complete principle-based model. They are more in favor of a hybrid approach to regulation and this fact gives more credence to the likelihood of a combined agency.”
The 22-page Impact Note contains seven figures and two tables and is available from Aite.
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