Wed, Dec 2, 2015
Welcome Guest
Free Trial RSS
Get FREE trial access to our award winning publications
Opalesque Futures Intelligence

Regulators & Courts: Futures vs. securities regulation: Can harmony be achieved?

Thursday, October 15, 2009

In Search of Harmony

Coordinating the oversight of futures and securities markets is on the agenda as Congress moves from medical insurance legislation to financial regulation. But it is not clear how and to what extent this will be done.

Among those calling for changes is Duncan Niederauer, the chief executive of NYSE Euronext. "We're still concerned with gaps in SEC and CFTC regulation," he said at a September 24th conference of the Investment Company Institute, the mutual fund trade association.

He argued for the regulation of over-the-counter derivatives and the so-called dark pools, private trading venues that have increasingly attracted hedge funds and mutual funds-taking away business from regulated exchanges such as the NYSE.

While many people in Washington think the equity market is a bastion of transparency and regulation, he says, in reality 40% of trading is opaque and largely unregulated, with private pools that do not display quotes and liquidity. He said NYSE pays 80% of compliance costs and can't tolerate different regulatory burdens; there has to be a one-level playing field.

Futures exchanges themselves are not seen as a problem. Walt Lukken, senior vice president at NYSE, said that they don't see systemic risk in futures markets where hedge funds are trading. These markets continued to function during the 2008 crisis and were not a problem.

Nevertheless, there are questions about the separate oversight of futures and securities markets. Arguments for consolidating regulation address the need to fill what are seen as regulatory gaps. But merging the Commodity Futures Trading Commission with the Securities and Exchange Commission, as recommended by the US Treasury last year, now appears to be unlikely.

Disparate Missions

Few people appreciate the differences between securities and futures, says Erik Sirri, a former director of the SEC Division of Trading and Markets and currently professor of finance at Babson College. It is more complicated than just merging agencies because the underlying markets and laws are different, he suggested at the ICI conference.

One sharp distinction is that professional traders dominate futures markets, whereas retail investors are a big part of the stock market. The markets perform different functions. Futures markets do not raise capital for companies, instead they enable the shifting of risk to those willing to take it and the determination of prices.

These market characteristics make for distinct regulatory missions. The SEC focuses on investor protection while the CFTC's priority is the working of the market. Mr. Sirri said that innovation is easy in futures-a new contract can be introduced quickly and if it does not work, it disappears. So products come and go all the time. By contrast, the SEC takes the opposite approach, taking time to consider a product's design and how investors will fare with it.

One result of this divergence: getting approval for options on exchange-traded funds took years. The CFTC saw these as a commodity options but the SEC regarded them as securities options, since ETFs trade on the NYSE.

Chart a Path

Another area where the dissimilar missions show up is when a trader, such as a hedge fund, fails. The SEC wants to freeze the assets by way of protecting customers, but from the CFTC point of view, that will disrupt trading and may threaten systemic market integrity.

Flash orders, which the SEC has moved to ban, is another point of difference. The SEC regards it as unfair that flash orders allow one group to get information not available to others. But for the futures market, this is not an issue.

Mr. Sirri argues that even if the agencies were merged, these differences would remain within the single organization. He favors harmonizing regulations now while leaving the option of agency integration down the road, as the issues are worked through.

So far the Obama administration does not appear to have specific suggestions. A white paper calls on the SEC and the CFTC to chart a path to harmonization and joint regulation but there are a host of issues, says Jeffrey Brown, senor vice president at Charles Schwab & Co.

This article was published in Opalesque Futures Intelligence.
Opalesque Futures Intelligence
Opalesque Futures Intelligence
Opalesque Futures Intelligence
Today's Exclusives Today's Other Voices More Exclusives
Previous Opalesque Exclusives                                  
More Other Voices
Previous Other Voices                                               
Access Alternative Market Briefing

  • Top Forwarded
  • Top Tracked
  • Top Searched
  1. David Einhorn's hedge fund plunged 5.2% in November, set for 2015 loss[more]

    From David Einhorn’s main hedge fund at Greenlight Capital fell 5.2 percent in November and is poised for only its second losing year in almost two decades. The losses bring the fund’s yearly drop to almost 21 percent, according to an e-mail sent to clients that was obtained by Bloomb

  2. Other Voices: Hedge fund marketing and the selling cycle[more]

    By Bruce Frumerman. How long is the selling cycle now? That’s a question my financial communications and sales marketing consulting firm has been asked on a regular basis by hedge fund firm owners and sales people, ever since we opened the doors to our firm in 1987 pre-crash. Wa

  3. People - Solus Alternative Asset Management adds chief strategist from BTIG[more]

    From Daniel Greenhaus joined hedge fund manager Solus Alternative Asset Management as managing director and chief strategist. He will work closely with Chris Bondy, Solus’ chief economist, managing director and executive vice president, said Chris Pucillo, CEO and chief investmen

  4. Commodities - Stung by oil, distressed-debt traders see worst losses since '08[more]

    From It’s mid-November, but for investors who trade in the debt of distressed companies, the year’s already done -- and they lost. Hedge funds that specialize in the debt are grappling with their worst declines in seven years. Funds managed by Knighthead Capital Management, Candlewood

  5. Regulatory - Major changes in partnership audit procedures contained in 2015 Budget Act[more]

    Contained in the Bipartisan Budget Act of 2015, signed by President Obama on November 2, is a rather complex provision that materially changes how partnerships are audited. Generally effective for tax years beginning after December 31, 2017, the so-called “TEFRA” and “Electing Large Partnership” rul