This week, the Commodities Futures Trading Commission and the Securities and Exchange Commission held joint meetings to discuss the harmonization of the two commissions’ regulatory regimes.

The first meeting, held on September 2, 2009, at the CFTC headquarters consisted of three panels. CFTC Chairman Gary Gensler’s opening statement outlined his three policy goals: adopting comprehensive regulation covering OTC derivatives, limiting regulatory overlap to those areas in which it is beneficial, and eliminating “bureaucratic turf battles.” During her opening remarks, SEC Chairman Mary Schapiro reiterated her support for the effort, stating that “many benefits could be achieved through greater coordination and harmonization between the SEC and the CFTC for regulation and oversight of similar types of financial instruments.”

Similar sentiments were expressed by the other Commissioners. CFTC Commissioner Michael Dunn stated in his opening remarks that, although “the markets and products we each regulate are more different than similar, it is each agency’s mission and duty to ensure that these markets function properly and are free from fraud and abuse.” CFTC Commissioner Jill Sommers stated in her opening remarks that she shared the frustration of “those who complain that our inability to resolve jurisdictional disputes or harmonize our regulatory approach for these products creates capital inefficiencies and delays in bringing beneficial financial tools to the marketplace.” SEC Commissioner Luis Aguilar also expressed his support for the harmonization efforts, but also took the opportunity to reiterate his desire that the SEC and CFTC be combined.

Panel One — Exchanges, Markets, Clearance and Settlement, and Margin Requirements

Panel Two — Exchanges, Markets, Clearance and Settlement, and Margin Requirements

Panel Three — Intermediaries

While most of the panelists were generally supportive of the harmonization efforts, Johnathan Short, of ICE Futures, argued that the two commissions should seek to create comparable, but not identical systems, warning that “core principles should be flexible enough to permit differences in regulation where the primary purposes of markets warrant such differences.” William Brodsky, of the Chicago Board Options Exchange, urged the SEC to move away from prescriptive regulation to the CFTC’s principles-based approach, saying that the tension between the two systems caused unnecessary delay and frustration, a point to which Lawrence Leibowitz, of NYSE Euronext and Wayne Lithringshausen of Options Clearing Corp., agreed.

The second joint meeting, held on September 3, 2009 at SEC headquarters, consisted of two panels. Chairman Schapiro opened the meeting by highlighting the need to address portfolio margining, a topic discussed the day before.

Panel One — Enforcement

Panel Two — Investment Funds

  • Richard Baker, Managed Fund Association
  • Sharon Brown-Hruska, NERA Economic Consulting
  • Kathleen Moriarty, Katten Muchin Rosenman
  • Michael Butowsky, Mayer Brown
  • Michael Connelly, Association of Financial Professionals

Daniel Roth, President of the National Futures Association, argued that rather than worrying about the areas where multiple agencies have jurisdiction, attention should focus on areas in which it is clear that neither agency has authority. Specifically, Roth pointed to the uncertainty created by recent legislation and court decisions dealing with forex products. Richard Baker, President of the Managed Funds Association, expressed his association's support for efforts to bring all investment advisors, including private pools, under the regulatory authority of the SEC and CFTC. Further, Baker supplied his preferred framework for the regulation of OTC derivative products.

Over the two days, at least twelve topics were referenced as requiring action by the commission in order to achieve greater regulatory harmonization:

  1. Product listing: self-certification or prior approval;
  2. Exchange and clearinghouse rules: self-certification or prior approval;
  3. Risk-based (“portfolio”) margining with cross-margining of futures and securities products;
  4. Fungibility and competition among execution platforms;
  5. Uniform customer account and bankruptcy/insolvency regime;
  6. Market structure: separate versus linked markets;
  7. Standards for prosecuting market manipulation;
  8. Punishing insider trading in derivatives markets;
  9. Customer protection: suitability or disclosure;
  10. Customer protection: fiduciary obligations for intermediaries;
  11. Mutual recognition of entities regulated by foreign jurisdictions; and
  12. Principles-based versus rules-based regulatory oversight.

The Obama administration has requested that the two Commissions report to Congress identifying existing conflicts and recommending legislative fixes by September 30.