SEC, CFTC coordination worries exchange chief

WASHINGTON — Two agencies with oversight of the financial markets on Wednesday started coordinating their rules to eliminate differences involving similar types of investments, while the head of a major U.S. exchange said those efforts could do “more harm than good.”

The Securities and Exchange Commission, the government’s primary markets watchdog, and the Commodity Futures Trading Commission — which oversees the trading of oil, gas and other commodities as well as financial instruments — have battled in the past over regulatory turf.

But as lawmakers craft an overhaul of the nation’s financial rules and consider the Obama administration’s sweeping proposal, the two agencies recently reached an agreement on sharing regulation of the over-the-counter derivatives market.

Derivatives are traded in a $600 trillion unregulated market worldwide. Their value hinges on an underlying investment or commodity, such as currency rates, oil futures or interest rates; they are designed to reduce the risk of loss from the underlying asset.

“We believe these markets are actually highly dissimilar,” said Craig Donohue, CEO of CME Group Inc., owner of the Chicago Mercantile Exchange, referring to those regulated by the two agencies. Melding their regulations could do “substantially more harm than good.”

William Brodsky, the CEO of the Chicago Board Options Exchange, recommended the SEC — which uses a rules-based approach to regulation — get closer to the principles-based approach of the CFTC. The CFTC’s method gives more discretion to how exchanges operate and is less likely to delay the approval of new financial products, he said.

The executives’ remarks came during a joint public meeting of the agencies to gather input on the “harmonization” of their regulation of derivatives and other financial markets.

“As we seek to provide consistency in our regulations over financial markets, our focus must remain on protecting the American public,” CFTC Chairman Gary Gensler said.

Also Wednesday, the CFTC announced that it will begin new efforts to enhance transparency of the markets Friday by improving its weekly report on the futures contracts positions held by commercial and noncommercial traders to provide fuller disclosure of the market data.

Other witnesses at the agencies’ meetings slated to wrap up Thursday include officials of NYSE Euronext, which runs the New York Stock Exchange; the California Public Employees Retirement System, the nation’s largest public pension fund; the Futures Industry Association; Consumer Federation of America; the Financial Industry Regulatory Authority, the securities industry’s self-policing body; the AFL-CIO labor federation; and the Managed Funds Association, representing the hedge fund industry.

Under the two agencies’ new accord on regulating derivatives, credit default swaps and other derivatives related to securities — underlying stocks, bonds, options — would fall under SEC supervision. Primary oversight for the others — derivatives tied to interest rates, commodities, currencies, energy and metals— would go to the CFTC.

Credit default swaps, accounting for an estimated $60 trillion of the derivatives market, are meant to insure against loan defaults.

Close coordination between the two agencies will be required, and they must reconcile their regulations to eliminate differences, overlaps and gaps in supervision.