The joint meeting was organized for the purpose of promoting better collaboration between these two agencies, a goal that FIA has long championed as critical to effective oversight and intelligent regulation.
“I commend Chair Atkins and Acting Chair Pham for holding this roundtable and setting the stage for a new era in SEC-CFTC collaboration. An open dialogue is exactly what we need to improve collaboration between these two government agencies for the benefit of all market participants,” said Lukken.
The two agencies invited Lukken to draw on his experience in Congress and the CFTC to provide his insights on the history of coordination between the two agencies. Prior to leading FIA, Lukken worked for the Senate Agriculture Committee during the passage of the Commodity Futures Modernization Act of 2000. He subsequently served as a CFTC commissioner for seven years, which included leading the agency as acting chair during the financial crisis of 2008.
After leaving government service, he ran a derivatives clearinghouse regulated by the CFTC that required approvals from the SEC and Federal Reserve to operate its portfolio margining system. That experience gave him a real-world perspective on the challenges facing institutions subject to oversight by multiple regulators.
Summary
FIA urges the SEC and CFTC leadership to consider the following points as they work towards more effective collaboration.
- Smart regulation plays a critical role in the success of the US financial and commodity markets.
- Effective collaboration among regulators is essential to ensuring proper oversight and a clear path to innovation.
- The pace of change is quickening. We must have a regulatory structure that can keep up. Flexibility and a pro-innovation mindset are critical.
- Given the rapid evolution of financial markets technology, effective collaboration among regulators is critical to ensure that they can detect and prevent emerging forms of fraud, market manipulation and systemic risk.
- Failures to harmonize regulations across these two agencies in the past have resulted in impractical and unusable regulatory structures, most notably in the case of single stock futures.
- Establishing bright lines between jurisdictions and avoiding dual oversight and overlapping regulations will provide regulatory certainty and accountability, which are critical to allowing innovative products and business models to come to market.
- FIA recommends several actions that will improve collaboration between these two agencies to promote responsible innovation, conduct joint rulemakings, and create shared definitions and taxonomies.
- In the pursuit of effective collaboration, we must not jeopardize the specialized expertise that both agencies bring to the oversight and regulation of their respective core markets.
- Certain features of the CFTC approach to market regulation – including its exclusive federal jurisdiction, its reliance on principles rather than prescriptions, and its mission focus on innovation – have kept it nimble and adaptable as novel products and approaches have come online.
Lukken statement on SEC-CFTC collaboration
To complement his remarks at the roundtable, Lukken released the statement below on the benefits of SEC-CFTC collaboration.
Strong market regulators = America first in finance
“America has the premiere capital and derivatives markets in the world. This is due, in no small part, to the United States having two best-in-class regulators for the markets they oversee.
“In the past 25 years, we have seen five different memorandums of understanding aimed at facilitating and encouraging coordination between the agencies, including one I signed with SEC Chair Chris Cox in 2008 around novel products.
“All have been well-intentioned. But, if we are honest, they have not been enough. We must approach the problem differently and, importantly, with the American public in mind.
“This roundtable is a great example of how we can go beyond well-intentioned statements and put in place meaningful, regular and structured engagement between the two agencies.
“Tone from the top is important. And public accountability is equally so.
The CFTC’s unique structure
“As we discuss ways to encourage innovation and coordination between agencies, I would note some of the provisions within the CFTC structure that have encouraged innovation in the derivatives markets over the years.
“It begins with the agency’s mission that requires the CFTC to promote responsible innovation and fair competition. With the passage of the CFMA, Congress also gave the agency principles-based regulation and self-certification of products and rules to provide flexibility and encourage new approaches. To promote responsible innovation, Congress also provided the agency with its 4(c) authority to exempt products out of its jurisdiction if, after public notice and comment, it deems it in the public interest. These tools, in combination with the agency’s exclusive jurisdiction and state preemption, have allowed the agency to foster new ideas and products over the years.
Harmonization can prevent failures
“As we think through ways to improve the harmonization between agencies, it may prove useful to discuss where jurisdictional disputes have led to regulatory and market failure. One example is security futures products.
“Single stock futures were banned in the US until passage of the CFMA in 2000. That law established a joint regulatory structure for the products with dual responsibilities for both agencies. While there was great excitement with the launch of this new class of products, only two exchanges ever registered as security futures exchanges and neither remains in business today. Critics blame the dual regulation for their demise. Others blame the equities-style margin requirement on a futures-style product. In many ways the product was doomed from its start.
What are the lessons to be learned?
“First and foremost, we need bright jurisdictional lines so people know what rules apply to which product to support the innovative nature of our markets. The markets want clear, legal certainty and one set of rules. I know Paul mentioned this last week, and I agree wholeheartedly.
“Second, dual regulation does not work. Regulatory systems are indeed holistic systems that make it difficult to pick and choose rules from two regulatory frameworks and expect that to work. These hybrid structures create uncertainty, unnecessary costs and lowest-common-denominator thinking.
“While we should avoid dual regulation, strong information sharing, cooperative examinations and coordinated enforcement are imperative to serve both agencies’ interests. This is similar to how domestic regulators have successfully recognized foreign regulatory approaches. If it works across international borders, surely it can work between two US agencies three miles apart.
“Lastly, political will and accountability matters. If harmonization is left to the respective staff members of both agencies, it will never be achieved. I have tremendous respect for the staff of both agencies, but their roles are to enforce their respective laws—not to take risks on innovative new structures. That is the role of the Commissions, and they must be the ones that drive harmonization.
“With those lessons, I offer these four suggestions to the Commissions.
Four ideas for the future
“First, the agencies should permanently reinstate the Joint Advisory Committee and amend its mission statement to include the promotion of responsible innovation in our markets. This will help bring public accountability and prioritization to the harmonization efforts of SEC and CFTC.
“Second, this Joint Advisory Committee should have the authority to conduct joint rulemakings on hybrid instruments that straddle securities and commodity futures. The agencies could discuss creating “safe harbors” for innovative products or expedited approval structures for market issues like portfolio margining. This could be enormously beneficial for new products like digital assets but also traditional assets like treasuries, security futures products and single-named credit default swaps.
“Third, the Joint Advisory Committee could tackle creating shared definitions and taxonomies for hybrid instruments and digital assets. Developing a common language and approach to new products will be key to their success.
“Lastly, the agencies could begin cross-agency training and systematic secondment to improve the knowledge and trust levels of both agencies. Coordination requires trust and more cross-pollination among staff would surely benefit these efforts.
“The pace of change is undoubtedly quickening in our markets. We must have a regulatory structure that can keep up with the markets.”
