Last week, the US Department of Treasury called for more coordination between the Commodity Futures Trading Commission and the Securities and Exchange Commission in its second report issued in response to President Donald Trump’s Core Principles for the federal regulation of the US financial system published earlier this year. (Click here for background on the Core Principles in the article “Making Regulation Great Again: President Trump Requires Loss of Two Regulations for Every New One and Orders Review of All Financial Services Laws and Rules” in the February 5, 2017 edition of Bridging the Week.)
Overall, Treasury’s second report offered 91 separate recommendations – many with subparts – for making US capital markets more competitive with foreign markets, as well as for making regulation of US capital markets more efficient and effective to foster economic growth. Specifically, Treasury’s second report addressed debt, equity, commodities and derivatives markets, central clearing, and other related matters. Treasury’s first report – issued in June – addressed the depository system, including banks, savings associations and credit unions, and proposed substantial amendments to the Volcker Rule. (Click here for background in the article “US Department of Treasury Recommends Modifications to Volcker and Bank Capital Rules, and Rationalization of Financial Regulation” in the June 18, 2017 edition of Bridging the Week.)
Although Treasury acknowledged that the bifurcation of securities and derivatives markets regulation “is a unique feature of the U.S. financial regulatory system” compared to the rest of the world, it said merging the CFTC and SEC “would not appreciably improve on the current system.” Instead, the agencies should “focus on effecting changes that truly promote efficiency.” Consistent with this objective, Treasury recommended that the CFTC and SEC “continue their joint outcomes-based effort to harmonize their respective rules and requirements, as well as cross-border application of such rules and requirements.”
Among other ideas, Treasury also proposed that:
- the SEC and states continue considering ways to reduce the costs of securities litigation for issuers while protecting investors, perhaps by authorizing companies to resolve disputes through arbitration;
- the SEC consider expanding the definition of “accredited investor” to expand the pool of potential investors in restricted new securities offerings;
- the SEC adopt rules to address conflicts of interests attributable to maker-taker rebates and payment for order flow arrangements;
- the SEC consider whether exchanges and alternative trading systems should harmonize their order types;
- the CFTC simplify and consolidate all guidance and no-action letters issued following the adoption of the Dodd-Frank Wall Street Reform and Consumer Protection Act. This should include, as appropriate, amending rules that “have proven to be infeasible or unworkable”;
- the SEC and CFTC clarify the cross-border scope of their regulations and make such rules compatible with foreign rules to “avoid market fragmentation”;
- the CFTC maintain the swap de minimis threshold at US $8 million;
- the CFTC complete its position limit rules, while ensuring appropriate hedging exemptions for end users and considering a risk management exemption; consider limits “based on the risk of manipulation” by potentially only having limits for spot months of physically delivered contracts; and evaluate deliverable supply “holistically,” for example by considering the global physical market not just the US market; and
- the CFTC consider rule changes to authorize swap execution facilities to use “any means of interstate commerce” to execute swaps governed by a trade execution requirement that “are consistent with the ‘multiple-to-multiple’” component of the SEF definition.
As part of its recommendations, Treasury also advised that the CFTC and SEC evaluate potential “operational, structural and governance improvement of the self-regulatory organization framework.” According to Treasury, during its industry outreach it heard from some member firms “that the SROs have gradually become less transparent and more opaque, arbitrary and prescriptive in fulfilling their self-regulatory functions, weakening the traditional connection with markets and their members.”
Treasury also called for the CFTC and SEC to use their existing authority under law to grant warranted exemptions from legal provisions and for Congress to restore the CFTC’s ability to grant exemptions from swaps requirements that was restricted by Dodd-Frank in order “to allow the agencies to evolve with the marketplace and properly tailor their oversight to those activities posing the highest risk [while] facilitat[ing] emerging and innovative technologies.”
Most of Treasury's recommendations could be implemented through regulatory action; however, in some cases an amendment to law would be necessary.
My View: Although it will take a few weeks to fully digest and evaluate all of Treasury’s recommendations regarding capital markets in the second report, it appears on first blush that the report contains many thoughtful ideas that, if adopted, will contribute to more efficient and competitive markets without sacrificing investors’ or other market participants’ protections. Let the studying, and better yet, implementing begin!