On June 29, 2018, the U.S. Commodity Futures Trading Commission (CFTC) and the U.S. Securities and Exchange Commission (SEC, and together the Commissions) announced that the Commissions approved a memorandum of understanding (2018 MOU) regarding coordination and information sharing between the Commissions. CFTC Chairman Christopher Giancarlo observed that the 2018 MOU “will enhance our oversight efforts and reduce unnecessary complexity, and lessen costs on both regulators and market participants.”1
The 2018 MOU2 updates and supersedes an earlier MOU that the Commissions executed regarding areas of “common regulatory interest” in 2008 (2008 MOU).3 The 2018 MOU is largely consistent with the 2008 MOU, but has some important differences, including the following:
- The 2018 MOU addresses the expanded jurisdictions of the Commissions as a result of Dodd-Frank.4 Dodd-Frank authorized the CFTC to regulate the U.S. swaps market, which makes up approximately 95 percent of the overall U.S. over-the-counter (OTC) derivatives market and covers interest rate swaps, index credit default swaps (CDS), foreign exchange (FX) swaps, certain types of equity swaps, and other commodity swaps (including swaps on energy and metals).5 The SEC has parallel authority over the U.S. security-based swaps market, which is about 5 percent of the overall U.S. OTC derivatives market and consists primarily of swaps on individual securities or loans.6
- The 2018 MOU provides greater detail on procedures related to sharing information. These procedural topics include (i) exchanging supervisory information, including information regarding examinations; (ii) maintenance of information; and (iii) use of shared information in examinations, civil cases, research or any other activities.7
- The 2018 MOU clarifies its scope vis-a-vis other agreements between Commission staff. With respect to the enforcement agendas of the Commissions, the 2018 MOU acknowledges the Commissions’ ongoing practice of “sharing information between their enforcement divisions, pursuant to customary access requests and grants” and makes clear that the 2018 MOU will not change any existing practices or agreements between those divisions.8
The Commissions expect to cooperate by means of ongoing informal consultations, periodic meetings, written requests and other practical arrangements.9
The 2018 MOU is notable as much for its messaging as for its content in the wake of calls to review existing financial regulations with a focus on minimizing rules and streamlining regulations. In February 2017, President Trump issued an executive order10 that authorized the U.S. Treasury Department (Treasury) and other agencies to prepare a report reviewing “the extent to which existing laws, treaties, regulations, guidance . . . promote the Core Principles [for financial regulation]”11 set out by the administration.12
In keeping with its authorizing order, the first Treasury report — which reviewed regulations on banks, savings associations and credit unions13 — and the second report — which covered capital markets14 — made numerous recommendations on improving regulatory efficiency by reducing or harmonizing existing regulations. The second report directly addressed the regulatory responsibilities of the Commissions15 and recommended that “[t]he roles of the SEC and CFTC, and the management of regulatory overlaps and areas for harmonization, [be] evaluated.”16 The second report further suggested that the Commissions make the review of how the swaps and security-based swaps markets are regulated a “high priority.”17
The 2018 MOU seemingly addresses these Treasury recommendations directly in its preamble, in stating:
The SEC and CFTC recognize that enhanced coordination and cooperation concerning issues of common regulatory interest is necessary in order to foster market innovation and fair competition and to promote efficiency in regulatory oversight . . . The SEC and CFTC further recognize that through increased coordination and cooperation, the agencies can facilitate the introduction of novel derivative products or other products to market users and investors, and enhance the functioning of the underlying markets.18
This MOU, together with the CFTC’s July 3, 2018, announcement that Chairman Giancarlo named former SEC lawyer Matthew Daigler as his senior counsel,19 could be understood to signify a more collaborative approach by the Commissions. Enhancing the Commissions’ harmonization efforts could be helpful to market participants in a number of existing and emerging joint regulatory areas, including the following:
- Trade Reporting. The CFTC and SEC swap transaction reporting rules are each very prescriptive, which has traditionally created problems for market participants in addressing the different requirements set out by each Commission.20
- Product Categories. Market participants have similarly voiced concerns regarding the “swap,” “security-based swap” and “mixed swap” definitions and called for the Commissions to provide clearer descriptions of the products captured by each term.21
- Virtual Currencies. Both the CFTC22 and SEC23 have asserted jurisdiction over virtual currencies, under their respective authorities to regulate commodities24 and securities offerings.25 The joint regulation over virtual currencies necessarily requires the Commissions to interpret the scope of their jurisdiction over the virtual currency market.
Greater collaboration between the Commissions in these and other areas may forestall or at least reduce the number of instances in which the Commissions offer differing approaches that affect market participants who are subject to regulation by both.