- The Washington Times - Monday, August 1, 2005

New York Stock Exchange Chief Executive John Thain recently commented that in light of increasing competition and industry-wide consolidation there is a need to further expand and facilitate trading in a broader array of products, including options and other derivatives, if the exchange intends to compete on a global financial market stage. Hopefully, the right people on Capitol Hill were listening and stopped to consider what an utter regulatory nightmare such an ambitious (and necessary) undertaking would present under this country’s current, archaic regulatory structure.

If change is essential for the United States’ most important stock exchange to compete globally, shouldn’t the same hold true for America’s financial regulatory regime? There exists an urgent need to appoint a single financial services regulator to oversee all financial services in this country. This is especially true if the United States will remain an attractive location for financial-services-industry professionals to provide a full range of global financial services offerings to domestic persons and international clientele.

The FSR would essentially be an independent government agency, combining all the responsibilities of both the Commodity Futures Trading Commission and the Securities and Exchange Commission, while also overseeing the nation’s insurance and pension industries. The single entity would also exercise oversight of over-the-counter dealers of financial services who currently escape regulatory scrutiny. This will allow the United States to move towards a regulatory model already employed by most of the world’s other leading financial powers — having one agency that oversees stock, bond and futures trading, instead of maintaining two agencies which use different and often conflicting systems.

The current U.S. maze of relationships is an inefficient model. Consider the case of an institutional investor whose portfolio requires trading in both SEC- and CFTC-regulated financial markets. In order to trade in the United States, the investor must open two distinct accounts (a futures account and a securities account). This convoluted structure is in stark contrast to procedures in other financial centers, such as the United Kingdom, where only one account is required and where a single regulator oversees all financial markets.

The current U.S. system also adversely affects retail investors. Under securities rules, an individual may be barred from trading the component stocks of the S&P 500 because his broker determines him unsuitable. However, CFTC regulations might allow this same investor to trade a futures contract based on the S&P 500 index. A retail investor’s securities account is insured by the Securities Investor Protection Corporation, but no such protection exists for his or her futures account. Financial regulation in the United States becomes yet more complicated when dealing with options, which although a classic derivative, are regulated by either the SEC or CFTC, depending on the underlying instrument, or security futures, which are regulated by both the SEC and CFTC.

Many years ago, most countries recognized that there are two types of financial products: 1) traditional financial products such as equities and corporate debt, as well as derivatives of such instruments and 2) those based on tangible commodities such as wheat. Although there may be justification for having different trading rules for these different products, there is no justification for having different rules for the brokers granting access to these instruments. Again, outside the United States there is typically one set of rules that helps protect retail or private investors, whether they trade futures or securities, and different rules for institutional clients who are better able to take care of themselves.

Given that the CFTC and SEC are subject to different oversight committees in Congress, and given the current fundamental difference between the laws governing futures and securities trading, it will take some time to develop the framework for a single financial-services regulator and a consolidated law.

However, it is important that this law not result in a simple merger between the CFTC and the SEC. Instead, Congress should consider the establishment of a new agency which can start fresh, borrowing from the most effective laws and regulations that currently exist worldwide. Such a plan won’t happen overnight. But it is critical to having the United States remain a global leader in financial services. As a start in this process, both the CFTC and SEC could have the same persons appointed by the president as commissioners of both agencies. A slight change in the law empowering the SEC may be required to accommodate this, but it would be worthwhile.

In the end, it will be necessary for the United States to create an FSR to replace the current hodgepodge of regulators and regulations governing the financial-services industry in order to remain competitive in the global marketplace and more easily accommodate initiatives like that proposed by NYSE. The question is how quickly can we get there.

Gary DeWaal is Group General Counsel for Fimat Group, the securities and futures brokerage division of Societe Generale. He previously served as a senior trial attorney in the enforcement division of the Commodity Futures Trading Commission.



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