Regulatory harmonization

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See also Credit default swaps, CDS clearing, CDS confirmation, CFTC, Derivatives and the SEC.

--- ***Lawmaking in the House on derivatives*** ---


Global harmonization efforts

SEC and UK FSA hold fifth consultation

"Securities and Exchange Commission Chairman Mary Schapiro and UK Financial Services Authority (FSA) Chairman Adair Turner and Chief Executive Hector Sants met in London today as part of the SEC-FSA Strategic Dialogue. The purpose of the Dialogue, established in 2006, is to engage at the senior levels of the two agencies on current matters affecting the U.S. and UK capital markets and areas of future collaboration. This was the fifth meeting of the Dialogue.

Some of the areas of mutual interest discussed during today's meeting included:

  • Corporate governance and executive compensation
  • Disclosure regimes around client asset risk
  • Regulation of hedge funds and investment advisers and the protection of customer assets
  • Market infrastructure, particularly relating to central counterparties for OTC derivatives
  • Market supervision
  • Cooperation on cross-border supervision

At the meeting, Chairman Schapiro along with Turner and Sants agreed that, given the linkages between the U.S. and UK markets, enhanced supervisory cooperation is critical to market integrity. Cooperative efforts between the staffs of the two agencies are increasing in areas such as oversight of credit rating agencies, hedge fund advisers and the clearing of OTC derivatives.

To facilitate this expanding cooperation, the two agencies plan to review the existing Memorandum of Understanding Concerning Consultation, Cooperation and the Exchange of Information Related to the Supervision of Financial Services Firms and Market Oversight, entered into by the SEC and the FSA in 2006. This memorandum of understanding is designed to promote the coordination of robust and sound supervision of cross-border financial institutions and markets.

Today's Dialogue meeting also provided the opportunity for the SEC and the FSA to continue discussions in the areas of corporate governance, particularly board risk oversight, and executive compensation. Consistent with the emerging international consensus, both agencies' current efforts seek to address, among other things, the intrinsic links between the types and degree of risk a regulated entity/registrant assumes and their corporate governance and compensation policies.

US Treasury testimony to the Senate Banking Comm

Prudential oversight has been strengthened. Capital requirements had been increased for risky trading activities, some off-balance sheet items, and securitized products. Principles had been developed for sound compensation practices to better align compensation with long-term performance. Banks were acting to put in place strengthened liquidity risk management principles.

Agreement had been reached to extend the scope of regulation to all systemically significant institutions, markets and products. Non-bank financial institutions, credit rating agencies, and hedge funds are being subjected to greater scrutiny, while the transparency and oversight of securitization and credit default swap (CDS) markets are being improved.

International cooperation is being reinforced. More than thirty colleges of supervisors have met to discuss supervision of large, globally active firms. The Financial Stability Board (FSB, previously the Financial Stability Forum – FSF) has been strengthened, including by expanding its membership to include all G-20 countries, promoting financial policy coordination and regulatory cooperation throughout the world.

Market integrity has been strengthened. The G-20 has acted to improve adherence to international standards in the areas of prudential supervision, anti-money laundering and counter financing of terrorism, and tax information exchange as part of a U.S. initiative to deal with jurisdictions that fail to commit to high-quality standards in these areas.

Core Principles for Effective Deposit Insurance Systems have been developed to protect depositors around the world in a more consistent fashion. On a personal note, I would commend Martin Gruenberg, a former staff member of this Committee and now Vice-Chair at the FDIC and chair of the International Association of Deposit Insurers, for his leadership on this front...

Compensation. Compensation practices at some firms created a misalignment of incentives that amplified a culture of risk-taking. Building on the principles developed by the FSB earlier this year, G-20 Leaders endorsed the implementation of standards to help significant financial institutions and regulators better align compensation with long-term value and risk management. National supervisors will review firms' policies and structures and impose corrective measures on those that fail to implement sound practices.

Cross-border banking resolution. The global financial system is more interconnected than it has ever been and the crisis affected financial firms without regard to their legal structure, domicile or location of customers. G-20 Leaders agreed to establish crisis management groups for the major cross-border firms and to strengthen their domestic frameworks for resolution of financial firms. Further, it was agreed that prudential standards for the largest, most interconnected firms should be commensurate with the costs of their failure.

Over-the-counter (OTC) derivatives. The OTC derivatives markets, which were mainly used to disperse risk to those most able to bear it, also allowed hidden concentrations of risk to build up. G-20 Leaders built on the work already undertaken in this area, agreeing that all standardized OTC derivative contracts should be traded on exchanges or electronic trading platforms and cleared through central counterparties by end-2012. Further, they affirmed that non-centrally cleared contracts should be subject to higher capital requirements...

...Throughout the crisis, a number of bodies, in addition to the G20, have helped the international community advance its work in strengthening the international financial system.

Let me be clear – international cooperation is not new. For many years, independent standard setting bodies – such as the Basel Committee on Banking Supervision, the International Organization of Securities Commissions and the International Association of Insurance Supervisors – have brought together regulators from key countries with the aim of fostering cooperation and forging more consistent global standards.

But one body, the Financial Stability Board (FSB), has played a critical role and I would like to highlight it as its history provides meaningful insights into why it is such a useful tool for us today. It was founded in 1999 as the Financial Stability Forum (FSF), in the aftermath of the Asia financial crisis, by the G-7 Finance Ministers and Central Bank Governors. Secretary Geithner, then the Under Secretary of the Treasury for International Affairs, played a seminal role in its establishment. It was charged to promote international financial stability through enhanced information exchange and international cooperation in financial market supervision and surveillance. The unique feature of the FSF was that it brought together G-7 central bank, finance and regulatory officials, plus officials from a number of other financial centers, with the heads of the key standard setting bodies. The focus was not so much on the global macroeconomic situation but on financial sector developments and vulnerabilities as well the work of the standard setting bodies.

At the outset of the crisis in September 2007, the G-7 Finance Ministers and Central Bank Governors asked the FSF to analyze the causes and weaknesses producing the crisis and provide recommendations to increase the resilience of markets and institutions. The FSF issued its first report in April 2008 and an update in October of that year. The report set forth recommendations on: strengthened prudential oversight of capital, liquidity and risk management; enhancing transparency and valuation; changes in the role and uses of credit ratings; strengthening the authorities' responsiveness to risks; and robust arrangements for dealing with stress in the financial system.

These recommendations have been at the center of the international consensus on the necessary steps to overhaul the global financial regulatory system and tackle the root causes of the crisis and were reflected in the November 2008 and April 2009 G-20 Leaders Declarations.

Reconstituted as the Financial Stability Board in April 2009, with an enhanced mandate and membership now encompassing all G-20 countries, the FSB has been a key venue for preparation for both the London and Pittsburgh Leaders Summits. Further, the expansion of the FSB to include all G-20 members has meant that officials around the world are working together to put in place best practices, that are designed to help reduce the potential scope for future regulatory arbitrage.

Mr. Chairman, while my testimony today focuses on the role of the G-20, FSB and international standard setting process, the Treasury participates in many other bodies with a view to fostering international financial market cooperation. In particular, we have strong and ongoing dialogues with the European Commission through the US/EU Financial Markets Regulatory Dialogue, Japan, China, India, our NAFTA partners and many more countries. These fora offer us the opportunity to delve deeper on a bilateral basis into financial market issues and share our views on the international agenda.

SEC and CFTC harmonization efforts

Image:SEC logo.jpg

The SEC and CFTC announced on August 19, 2009, that the two agencies intend to conduct joint hearings on September 2, 2009, and September 3, 2009, at the headquarters of the CFTC and the SEC, respectively. These hearings are part of both agencies' efforts to respond to President Barack Obama's call in June for the two regulators to recommend changes to statutes and regulations that would eliminate differences with respect to similar types of financial instruments. Both agencies must submit a report to the U.S. Congress by September 30, 2009, in which they:

  • Identify all existing conflicts in statutes and regulations with respect to similar types of financial instruments
  • Either explain why those differences are essential to achieve underlying policy objectives with respect to investor protection, market integrity and price transparency, or make recommendations for changes to statutes and regulations that would eliminate the differences

The purpose of the joint meetings appears to be to harmonize the statutes and rules of the two agencies. The Treasury proposal also calls for the total harmonization of SEC and CFTC regulations for the OTC derivatives markets.

CFTC and SEC announce creation of Joint Advisory Committee on Emerging Regulatory Issues

Commodity Futures Trading Commission Chairman Gary Gensler and Securities and Exchange Commission Chairman Mary Schapiro today announced the formation of a joint committee that will address emerging regulatory issues. The establishment of the Joint CFTC-SEC Advisory Committee on Emerging Regulatory Issues was one of the 20 recommendations included in the agencies’ harmonization report issued last year.

The joint committee will develop recommendations on emerging and ongoing issues relating to both agencies. The first item on the committee’s agenda is conducting a review of last Thursday’s market events and making recommendations related to market structure issues that may have contributed to the volatility, as well as disparate trading conventions and rules across various markets.

To orient the Committee’s work, the staff of the CFTC and SEC will provide to the Committee on Monday their joint preliminary findings regarding last Thursday’s market events.

“It is important that we hear from this prominent panel of market practitioners, academics and former regulators about emerging risks in our markets,” Chairman Gensler said. “It is critical that the CFTC and SEC hear from the panel together because our markets are so intertwined. I am particularly interested in the Committee’s first focus: advising on courses of action in response to the lessons learned from the market events of May 6.”

“As last week’s events remind us, our markets are increasingly interrelated and interdependent so we need to appreciate how events in one arena can potentially impact investors and markets elsewhere,” said Chairman Schapiro. “The Joint Committee will serve an essential role in addressing that challenge.”

The Committee’s charter provides for a broad scope of interest, including:

  1. Identifying of emerging regulatory risks;
  2. Assessing and quantifying of the impact of such risks and their implications for investors and market participants; and
  3. Furthering the CFTC’s and SEC’s efforts on regulatory harmonization.

Chairman Gensler and Chairman Schapiro will serve as co-chairs of the Joint Committee.

Members of the Joint Committee include (additional members will join in the coming days):

  • Maureen O’Hara, Professor of Management, Professor of Finance, Cornell University
  • Brooksley Born, Former Chair of the CFTC
  • David Ruder, Former Chair of the SEC
  • Jack Brennan, Former Chief Executive Officer and Chairman, Vanguard
  • Robert F. Engle, Michael Armellino Professor of Finance at the NYU Stern School of Business
  • Richard Ketchum, Chairman and Chief Executive Officer, FINRA
  • Susan Phillips, Dean and Professor of Finance, The George Washington University School of Business

CFTC and SEC Harmonization report - October 16, 2009

Report summary

"...Since the 1930s, securities and futures have been subject to separate regulatory regimes. While both regimes seek to promote market integrity and transparency, securities markets are concerned with capital formation, which futures markets are not. The primary purpose of futures markets is to facilitate the management and transfer of risk, and involve management of positions in underlying assets of limited supply. Certain securities markets, such as securities options and other securities derivatives markets, also facilitate the transfer of risk. The unique capital formation role of certain securities markets has informed the manner in which the two regulatory regimes have developed and, in part, explain differences between the regulatory structures of the CFTC and the SEC.

Because of the role of certain securities markets in capital formation, securities regulation is concerned with disclosure – including accounting standards related to such disclosure, while commodities regulation is not. For example, because futures markets for physical commodities concern regulation of instruments which reference a limited supply of an underlying asset, regulation permits imposition of position limits. Position limits in the securities markets is important for different reasons, namely to mitigate the potential for derivatives to be used to manipulate the market for underlying securities. This Report does not address all of these differences between the regulatory regimes.

Moreover, the rapid development of the market in complex financial instruments known as derivatives, large parts of which neither agency has had the authority to regulate, has created significant regulatory gaps. These gaps, which are discussed at some length in the Treasury White Paper and currently are the subject of deliberation before Congress, are also not covered in this Report.

The focus of this Report, however, is on a number of issues that emerged through the agencies’ public deliberations as the matters most relevant to a reconciliation of the two agencies’ statutory and regulatory schemes. Drawing on the input received from the September Meeting and others, this Report reviews and analyzes the current statutory and regulatory structure for the CFTC and the SEC in the following areas:

  1. product listing and approval;
  2. exchange/clearinghouse rule changes;
  3. risk-based portfolio margining and bankruptcy/insolvency regimes;
  4. linked national market and common clearing versus separate markets and exchange-directed clearing;
  5. price manipulation and insider trading;
  6. customer protection standards applicable to financial advisers;
  7. regulatory compliance by dual registrants; and
  8. cross-border regulatory matters.

These subjects are not exclusive, but the ones most emphasized by the public and in the agencies’ review.

The Securities and Exchange Commission and Commodity Futures Trading Commission proposed expanding oversight of exchanges and sharing market surveillance data as part of 20 recommendations to close regulatory gaps.

The agencies, in a joint report to Congress today, responded to the Obama administration’s request to strengthen regulation of financial industries. “Government could have done more” to prevent the financial crisis, the administration said in June when it sought the plan to “harmonize” rules.

The report is a “pretty good opening salvo in terms of both finding ways to work together practically” and filling in gaps between the agencies, Geoffrey Aronow, a former director of enforcement for the CFTC, said in a telephone interview today. “Almost all of these issues have been lurking in one form or another for years.”

The need for greater collaboration between the agencies, which regulate futures and securities markets, has previously prompted calls to merge them, an option not among the report’s recommendations. Former SEC Chairman Christopher Cox told Congress last year that he “strongly” supported a merger.

The SEC and CFTC urged Congress in the 96-page report to approve legislation that would subject money managers to a uniform fiduciary standard whether they invest in securities or futures. A fiduciary duty requires that investment firms put clients’ interests before their own.

‘Legal Certainty’

The agencies said they want Congress to establish clear guidelines for jurisdiction over new financial products. Such legislation should establish “legal certainty” about which agency regulates which products and establish a review process to ensure that “jurisdictional disputes” are resolved quickly, the SEC and CFTC said.

When the SEC and CFTC have disagreed over which agency has jurisdiction “there occasionally have been lengthy delays attendant to bringing new products to market,” the agencies said in the report. “The lack of legal certainty is costly and confusing to market participants and it can impede innovation” and “undermine competition.”

The agencies will “work up some language” to put the recommendations into effect and share it with lawmakers already pursuing regulatory overhaul legislation, CFTC Chairman Gary Gensler said on a conference call with reporters today.

“This report is another step forward in our efforts to reform the regulatory landscape,” Mary Schapiro, chairman of the SEC, said on the call. “We will help to rebuild confidence and protect the integrity of our markets.”

The report was released more than two weeks after a Sept. 30 deadline set by the Obama administration.

Public Disclosure

The agencies will try to align their public-disclosure obligations for hedge fund managers in securities and futures, they said in the report. The regulators also plan to deal with the disclosure of performance track records and record-keeping requirements.

The report calls for legislation to enhance the CFTC’s authority over exchanges and clearinghouses and their compliance with existing law, provisions reflected in financial overhaul measures already being discussed in Congress.

Some of the changes would reverse “limitations that were put on the CFTC” in the Commodity Futures Modernization Act of 2000, said Aronow, who is now a partner with Bingham McCutchen LLP in Washington.

‘Disruptive Trading’

The report recommends legislation to give the CFTC authority to require foreign boards of trade to register with the agency and to act against “disruptive trading practices.” Those include trades known as “banging the close” or “spoofing,” Gensler said.

“We want to enhance the statute by prohibiting disruptive practices, which often would also be considered manipulation,” he said.

Gensler said the agency is also seeking to enhance its ability to police insider trading, by expanding rules to include any misuse of non-public information from other governmental agencies.

The SEC and CFTC should align their record-retention requirements, according to the report. The SEC intends to review its current three-year and six-year requirements for holding records, and consider bringing the rules in line with the CFTC’s five-year requirement, the report says.

Emerging Risks

The report recommends the agencies create a joint advisory committee to identify emerging regulatory risks, as well as an enforcement task force “to harness synergies from shared market surveillance data” and improve market oversight.

The Obama administration, in its June request for changes, said many differences in regulation of securities and futures markets “are no longer justified.”

“In particular, the growth of derivatives markets and the introduction of new derivative instruments have highlighted the need for addressing gaps and inconsistencies in the regulation of these products by the CFTC and SEC,” the administration said.

The SEC and CFTC held two joint hearings last month on harmonizing their rules. They heard from exchanges, including CME Group Inc. and NYSE Euronext, consumer groups and organizations representing traders.

Derivatives Legislation

The House Financial Services Committee approved legislation yesterday to expand oversight of derivatives markets, which will become part of a broader effort to overhaul financial regulation.

Gensler said he wanted to “build upon” the “very strong” derivatives legislation, sponsored by committee Chairman Barney Frank, a Massachusetts Democrat.

“We think this covers the appropriate goals of requiring the clearing and requiring the trading, and it’s just quantitatively we want to bring some more people into it,” said Gensler.

The House Agriculture Committee, led by Chairman Collin Peterson, a Minnesota Democrat, will take up its proposed derivatives legislation on Oct. 21.


The SEC and the CFTC’s examination of each agency’s regulatory regime, and statements and commentary from the September Meeting have identified areas of difference between the two agencies’ regulatory frameworks. Many of these differences are due to specific attributes of the securities and futures markets. Thus, any effort to harmonize the two regulatory regimes must take into account the particular characteristics of the two markets and products that they offer. Regulations must be tailored for the purposes and objectives of the specific market in question.

At the same time, the agencies share the common objectives of protecting investors, ensuring market integrity, and promoting price transparency. Accordingly, the Commissions present recommendations that will allow them to better coordinate and harmonize their regulatory systems. These recommendations, which address areas ranging from exchange rule-making, product review, enforcement and compliance by dual registrants, are designed to fill regulatory gaps, eliminate inconsistent oversight, and promote greater collaboration.

Facilitate Portfolio Margining

The Report recommends legislation to facilitate the holding of (i) futures products in an SRO securities portfolio margin account and (ii) securities options, SFPs, and certain other securities derivatives in a futures portfolio margin account. Panelists identified portfolio margining as a significant area for harmonization and agreed that portfolio margining is important to U.S. competitiveness. The Commissions acknowledge that industry participants are currently developing different approaches to achieving the benefits of portfolio margining, including the two account (or “two pot”) model.

To achieve more fully the benefits of risk-based portfolio margining, the Commissions would support legislation that confers upon customers the choice of portfolio margining in a single futures or securities account at a dually-registered brokerdealer/FCM. Specifically, the Commissions would support legislation that:

  • (i) clarifies that security options, SFPs, and certain other securities derivatives may be held in a futures account and that, in the event of FCM insolvency, customer claims would not be protected under SIPA, but would be resolved under the futures insolvency regime;
  • (ii) clarifies that futures may be held in securities portfolio margin accounts and that the CFTC may waive its segregation requirements with respect to such futures; and
  • (iii) extend SIPA protection to customer claims based on any futures and options on futures (and certain other securities-based derivatives) held in a securities portfolio margin account, together with the collateral held to margin those positions.

The Commissions will work together to foster agreements among futures and options clearing houses that extend the benefits of portfolio margining to clearing house margin and, in that connection, will provide any appropriate exemptive relief.

In addition, the Commissions should undertake to review their existing customer protection, margin and any other relevant regulations to determine whether any rule changes or exemptive relief would be necessary to achieve the full benefits of risk-based portfolio margining. The Commissions should also undertake, with input from experts, the industry, and the public, to explore whether further modifications to portfolio margining, including adoption of a one account model that would accommodate all financial instruments and all broker-dealers and FCMs, would be in the public interest.

Facilitate Product Approval Process and Provide Legal Certainty

The Report recommends legislation that would provide a process for expedited judicial review of jurisdictional matters regarding new products. Per the 2008 MOU, the Commissions “acknowledge that there may be instances in which novel derivative products may reflect elements of both securities and commodity futures or options.” The experience of past disagreement between the CFTC and SEC regarding jurisdiction over particular products was noted at the September Meeting. Despite the agencies best efforts, the potential for future disagreement exists. Accordingly, the SEC and the CFTC support legislation to establish and clarify:

  • (i) legal certainty with respect to product listings and their use of exemptive authority; and *(ii) a review process to ensure that any jurisdictional dispute is resolved by the Commissions against a firm timeline.
  1. The ability of the SEC and CFTC to resolve the legal uncertainty regarding particular products has been affected by the agencies’ statutory authority. The SEC and CFTC would support legislation that:
    1. allows the CFTC to exercise jurisdiction over an instrument that the SEC exempts, conditionally or unconditionally, pursuant to its authority under the Securities Exchange Act; and
    2. clarifies that the SEC may exercise authority over a securities-related instrument that the CFTC has exempted pursuant to its power under the CEA. Exemptive orders issued by the SEC are not required to expressly state that a product is or is not a security.
  2. There should be a timeline for the two agencies either to use their exemptive authority or otherwise come to agreement on the status of a product. The CFTC and the SEC would support legislation that establishes a process along the following lines:
    1. if either agency receives an application for listing of a novel derivative product that may have elements of both securities and commodity futures or options, agency staff shall immediately notify the other agency’s Secretary and forward a copy of such application; (ii) upon a request by the Chairman or Commission of either agency, the other agency’s Commission shall, within 120 days of such request, by order determine whether the Commission intends to assert jurisdiction;
    2. in the case that one agency does not agree with the other agency’s determination regarding the status of a product, it may petition a United States Court of Appeals for expedited review. Congress may also want to consider other methods for resolving disagreements between the agencies.

Enhance CFTC Authority Over Exchange Compliance with the CEA

The Report recommends legislation to enhance CFTC authority over exchange and clearinghouse compliance with the CEA. The Commodity Futures Modernization Act significantly limited the CFTC’s authority over the rules of exchanges and clearinghouses subject to its oversight. The CFTC does not have clear authority, for example, to set rules for risk management for exchanges and clearinghouses. The CFTC’s authority contrasts with the authority of other regulators, such as the SEC or regulators in foreign jurisdictions. In the near future, however, the CFTC will be expected to regulate not only the futures markets, but also a large section of what currently is the over-the-counter market for derivatives and possibly emissions trading. Absent clear rulemaking authority, the CFTC is limited in its ability to enforce core principles, to adapt to market conditions and international standards, and to protect the public. To provide the CFTC with sufficient ability to ensure that exchanges and clearinghouses regulated under its authority are operating within the principles, rules and regulations established under the CEA, the CEA should be amended to provide the CFTC with clear authority with respect to exchange and clearinghouse rules that the CFTC finds are necessary for them to comply with the CEA. The CEA should be amended to:

  • (i) clarify the CFTC’s rulemaking authority to determine the appropriate manner by which an exchange or clearinghouse may comply with the CEA;
  • (ii) extend from one to ten business days, with a possible extension of another 90 days for novel or complex rules or products or in other appropriate circumstances, the period for the CFTC to review new and amended rules or products proposed by an exchange or clearinghouse; and *(iii) provide the CFTC with clear authority to bring an enforcement action against an exchange or clearinghouse for violation of a core principle in the same manner as it would any other enforcement action alleging a violation of the CEA or CFTC rules. Provisions for these changes are part of Title VII of the Administration’s proposed financial regulatory reform legislation. In addition, the CEA currently provides that exchange rules shall be approved unless the CFTC concludes that the rule “would violate” the CEA. To provide greater oversight authority, the CEA should be amended to provide, as does Section 19(b) of the Securities Exchange Act with respect to the SEC’s authority, that the CFTC shall approve a proposed rule change if it finds that the change is consistent with the statute and regulations, but that the proposed rule change shall be disapproved in the absence of such a finding.

Review Approach to Cross Border Access

The Report recommends that the SEC review its approach to cross-border access to determine whether greater efficiencies could be achieved with respect to cross-border transactions in securities consistent with the protection of investors and the public interest. As described above, under the SEC approach foreign exchanges seeking to do business in the United States must comply with the applicable registration requirements under the Securities Exchange Act.

In addition, foreign broker-dealers’ interaction with U.S. investors is facilitated primarily through the exemptions from U.S. broker-dealer registration offered by Securities Exchange Act Rule 15a-6. As noted above, several panelists at the agencies’ September Meeting indicated a preference for aligning the SEC and CFTC regimes by expanding cross-border access with respect to securities transactions.

The SEC intends to undertake a focused review of its approach to cross-border access. In particular, the SEC intends to consider whether its current approach could be modified to achieve greater efficiencies regarding cross-border securities transactions without impairing investor protections. For instance, in connection with its review, the SEC would consider whether limited revisions to the provisions of Rule 15a-6 regarding the interaction of United States investors with foreign broker-dealers may be appropriate.

Statutory Recognition Regime for Foreign Boards of Trade

The Report recommends legislation to empower the CFTC to require foreign boards of trade to register with the CFTC. The CFTC has been concerned that some FBOTs that grant access to their trading facilities to persons located inside the United States may not have certain rules and protections that the CFTC considers necessary for maintaining the integrity of markets and orderly trading. The CFTC currently provides no action relief to FBOTs that have comparable regulatory requirements and is based on reliance of the foreign regulator.

Because there is no statutory registration requirement under the CEA for FBOTs, the CFTC’s authority to oversee trading by United States entities abroad, and phenomena such as the so-called “London loophole,” is limited. Therefore, the CFTC recommends that the CEA be amended to grant the agency authority to require registration of any FBOT that seeks to provide direct access to members or other participants located in the United States and, when appropriate, relying on the foreign regulator to avoid duplicative regulation.

The CFTC also recommends that the amendments to the CEA provide that FBOTs may not be registered unless they meet certain standards that enhance transparency and market integrity, including daily public dissemination of trading information, authority to set position limits to prevent manipulation and excessive speculation, enforcement authority over manipulative conduct, and provision of information to the CFTC. This recommendation is consistent with provisions in Title VII of the Administration’s proposed financial regulatory reform legislation.

Establish a Uniform Fiduciary Standard for Investment Advisory Services

The Report recommends legislation that would impose a uniform fiduciary duty on intermediaries who provide similar investment advisory services regarding futures or securities. Whether regulated by the CFTC or by the SEC, intermediaries are subject to different standards in their interactions with clients. Although some are held to a fiduciary duty standard, others are not, except in certain particular circumstances defined by state common law.

For instance, investment advisers are currently subject to a fiduciary standard. When providing similar investment advisory services, other intermediaries also should be subject to this standard.

Therefore, consistent with Title IX of the Administration’s financial regulatory reform legislation, which seeks to establish a uniform standard of conduct for broker-dealers and investment advisers, the agencies recommend that a consistent standard apply to any CTA, FCM, IB, broker-dealer, or investment adviser who provides similar investment advisory services. The SEC and the CFTC support initiatives to align a high standard of customer care for intermediaries across financial products, recognizing that the behavior of an intermediary acting in the best interest of its client may vary based on facts and circumstances, including the nature of the customer relationship and the services provided. Robust customer protections should apply equally and uniformly across the securities and futures markets.

Align Record Retention Requirements for Intermediaries

The Report recommends that the SEC and the CFTC undertake to align their record retention requirements for intermediaries by harmonizing the length of time records are required to be maintained. The SEC and the CFTC have different record retention requirements for intermediaries. Panelists and commentators suggested that the record retention rules be harmonized to decrease burdens resulting from disparities and suggested that the agencies jointly review the governing rules in this area and consider aligning their requirements.

The SEC intends to review its current three (3) and six (6) year record retention requirements and consider, as appropriate, rule changes that would harmonize these requirements with the five (5) year record retention requirements the CFTC makes applicable to CFTC registrants.

Align Customer Risk Disclosure Documents

The Report recommends that the agencies provide greater consistency in their customer risk disclosure documents. Pursuant to SEC rules, an equity options market must file an ODD that provides certain basic information about the options classes covered by the ODD. In addition, a broker-dealer must provide the ODD before accepting an options order from a customer or approving the customer’s account for the trading of options. CFTC regulations set forth requirements for commodity futures and options risk disclosure statements, and they require disclosure, including similarly specified risk disclosure statements, to pool participants and advisory clients.

At the September Meeting, a panelist contrasted the CFTC and SEC disclosure documents, noting that whereas the former is between two (2) to three (3) pages in length, the latter can be over 100 pages. The CFTC’s disclosure documents were thus cited as a model to follow because of their brevity and accessibility. The SEC intends to review the current ODD to determine whether a customer disclosure document more akin to that which is used for futures products would be appropriate and consistent with the protection of investors and the public interest. The SEC anticipates considering what format and requirements may be necessary to promote a firm understanding of the characteristics and risks of various option products by investors. In doing so, the SEC plans to look to, among other things, disclosures provided in registered options offerings, including greater use of plain English, and to futures disclosure documents, to describe the products and their particular risks.

Align Specific Private Fund Reporting Requirements

The Report recommends efforts to align specific private fund reporting requirements. The CFTC and the SEC should review regulatory requirements applicable to investment advisers and commodity trading advisors/commodity pool operators with respect to private funds to eliminate, as appropriate, any inconsistent or conflicting provisions regarding:

  • (i) the use of performance track records;
  • (ii) requirements applicable to investor reports (including the financial statements often used by registered investment advisers to comply with the Advisers Act custody rule and the financial statements delivered to investors by commodity pool operators); and
  • (iii) recordkeeping requirements.

Expand CFTC Conflict of Interest Prevention Authority

The Report recommends legislation to expand the CFTC’s conflict of interest prevention authority. Legislation should be enacted to authorize the CFTC to require FCMs and IBs to implement conflict of interest procedures that would separate the activities of persons in a firm engaged in research or analysis of commodity prices from those involved in trading or clearing activities. Provisions for such change, patterned on those enacted for securities firms in Sarbanes-Oxley, are part of Title VII of the Administration’s proposed financial regulatory reform legislation.

Enhance Whistleblower Protections

The Report recommends legislation on whistleblower protections. Consistent with Title IX of the Administration’s proposed financial regulatory reform legislation, legislation should be enacted to encourage whistleblowers to come forward with relevant information to authorities in both SEC and CFTC registered markets. Specifically, the legislation should provide for:

  • (i) rewards for legitimate whistleblowing; and
  • (ii) protection of whistleblowers.

Clarify the CEA’s Restitution Remedy

The Report recommends legislation that would address customer restitution in CFTC enforcement actions. The CFTC currently has express authority to seek restitution for investor losses in administrative proceedings. However, the legislation should clarify that restitution in civil actions is defined in terms of the losses sustained by persons as a result of the unlawful conduct.

Enhance the CFTC’s Disruptive Trading Practices Authority

The Report recommends legislation to enhance the CFTC’s authority over disruptive trading practices. Experience shows that certain practices are so disruptive to trading in the futures markets that they should be presumptively prohibited. Accordingly, legislation should be enacted to enhance the CFTC’s enforcement authorities with respect to certain disruptive practices that undermine market integrity and the price formation process in the futures markets.

Expand the Scope of Insider Trading Prohibitions Under the CEA

The Report recommends legislation to expand the scope of insider trading prohibitions under the CEA. Legislation should be enacted to expand the scope of insider trading coverage under the CEA. Currently, for example, misuse of non-public information from many government agencies, including the Federal Reserve, the Treasury Department, the Department of Agriculture and other government bodies, to trade in the futures markets is not punishable. The CEA should be amended to make unlawful the misappropriation and trading on the basis of material non-public information from any governmental authority.

Grant the SEC Specific Statutory Authority for Aiding and Abetting

(Grant the SEC Specific Statutory Authority for Aiding and Abetting Under the Securities Act and the Investment Company Act)

The Report recommends legislation that would grant the SEC specific statutory authority for aiding and abetting under the Securities Act and the Investment Company Act. The CFTC has specific statutory enforcement authority for aiding and abetting all violations of the CEA and CFTC rules and regulations, while the SEC has specific statutory authority for aiding and abetting only under the Securities Exchange Act and the Investment Advisers Act and not under the Securities Act or the Investment Company Act. Expanding the SEC’s statutory authority to allow the SEC to bring actions for aiding and abetting violations of the Securities Act and the Investment Company Act would close the gap between the SEC and CFTC’s regulatory regimes.

Create a Joint Advisory Committee

The Report recommends legislation to authorize the SEC and the CFTC to jointly form, fund, and operate a Joint Advisory Committee that would be tasked with considering and developing solutions to emerging and ongoing issues of common interest in the futures and securities markets. Specifically, the Joint Advisory Committee would identify emerging regulatory risks and assess and quantify their implications for investors and other market participants, and provide recommendations for solutions. The committee would serve as a vehicle for discussion and communication on regulatory issues of mutual concerns affecting CFTC and SEC regulated markets, and the industry generally, and their effect on the SEC’s and CFTC’s statutory responsibilities.

Members of the Joint Advisory Committee would be appointed by the Chairmen of the SEC and CFTC. Members would include both SEC and CFTC members, as well as experts and industry participants. A SEC and a CFTC member would serve as cochairmen of the committee. Such a Joint Advisory Committee would be a valuable resource for continuing to further the Administration’s recommendation on harmonization.

Create a Joint Agency Enforcement Task Force

The Report recommends that the agencies create a Joint Agency Enforcement Task Force to harness synergies from shared market surveillance data, improve market oversight, enhance enforcement, and relieve duplicative regulatory burdens.

A number of panelists at the September Meeting endorsed creation of a task force that would consist of staff from each agency to coordinate and develop processes for conducting joint investigations in response to events that affect both the securities and futures markets. The task force would prepare and offer training programs for the staffs of both agencies, develop enforcement and examination standards and protocols, and coordinate information sharing.

The task force also would oversee temporary details of personnel between the agencies to assist in furthering the aforementioned objectives. The Commissions believe that the creation of a Joint Agency Enforcement Task Force will help eliminate inefficiencies, and ensure comprehensive and consistent fraud and manipulation detection across the two marketplaces.

Establish a Cross-Agency Training Program

The Report recommends that the SEC and the CFTC should establish a joint cross-agency training program for staff. The SEC recently enhanced its training for SEC staff and has been requiring its examiners to obtain certification through the Association of Certified Fraud Examiners training program. With rapidly evolving global financial markets and technology, and the convergence of marketplaces and market participants, the number and complexity of matters where both agencies have enforcement jurisdiction and interest will continue to grow. Accordingly, the Commissions believe that joint training programs for enforcement personnel would be highly beneficial. The training program would be for staff at both agencies, and would focus on enforcement matters.

Develop a Program for Sharing Staff Through Detail Assignments

The Report recommends to develop a program for the regular sharing of staff through detail assignments. The agencies anticipate that, through this program, each year several staff from each agency will have the opportunity to work at the other agency through temporary detail positions for a specified period of time.

As financial products grow more complex, and as financial institutions and markets continue to consolidate and expand their global reach, it is becoming ever more imperative for the staffs of each agency to have a thorough understanding of both the securities and futures markets in order to perform effectively. Implementing a program where staff engages in a rotation between the two agencies will allow for greater collaboration and coordination between the two agencies. Further, it will help foster understanding and appreciation for the unique aspects of the markets and products for which both agencies are responsible.

Create a Joint Information Technology Task Force

The Report recommends that the agencies develop a Joint Information Technology Task Force to pursue linking information on CFTC and SEC regulated persons made available to the public and such other information as the Commissions jointly find useful and appropriate in the public interest.

Linking publicly-filed information and such other information as the Commissions jointly find useful and appropriate in the public interest residing with the two agencies would promote transparency and facilitate the use and understanding of such information by providing a comprehensive, consolidated database on persons and entities regulated by the SEC and the CFTC.

An integrated database would assist the staff of both agencies in conducting investigations, examinations, enforcement matters, and market surveillance activities. The task force should also explore linking or coordinating the NFA BASICdatabase and IARD, which would make it easier for investors and customers to find registration and disciplinary information for an adviser.

Such linkage of information on the professional background of current and former securities and futures firms and brokers would further the same objectives. Accordingly, the CFTC and SEC recommend formation of a joint agency task force on information technology.

SEC and FSA to share hedge funds data

"UK and US regulators took a step towards co-ordinated global financial regulation on Wednesday as they agreed they would ask hedge fund managers to report a common set of data to both countries.

The deal is part of a larger effort to share information and co-ordinate ­regulation and enforcement between the two countries, and came out of a meeting between the respective heads of the US Securities and Exchange Commission and the UK’s Financial Services Authority...

...The announcement comes a day after the FSA announced it had reached a separate agreement with another US regulator, the Commodity Futures Trading Commission, to work together to supervise cross-border clearing houses.

By co-ordinating their data requests and super visory work, the regulators hope to reduce the compliance burden on companies and prevent regulatory arbitrage.

“As the regulators of two of the world’s major market centres, the SEC and the FSA have a strong interest in collaborating with respect to OTC markets and hedge funds, credit rating agencies and other market participants with cross-border operations. Only through strong co-operation can we achieve coherent oversight of global actors and limit opportunities for playing the regulatory seams,” said Mary Schapiro, SEC chairman.

The UK already regulates and collects data from hedge funds, while the US Congress is considering proposals to give the SEC the ability to do the same thing. Now the two regulators have agreed to assemble common data demands, something the ind ustry has been lobbying for."

Washington, D.C., Sept. 16, 2009 — Securities and Exchange Commission Chairman Mary Schapiro and Hector Sants, Chief Executive of the UK Financial Services Authority (FSA), today announced plans to explore common approaches to reporting and other regulatory requirements for key market participants such as hedge funds and their advisers. In particular, they agreed to identify a common, coherent set of data to collect from hedge fund advisers/managers to help the SEC and FSA identify risks to their regulatory objectives and mandates.

This announcement came out of a meeting of the SEC-FSA Strategic Dialogue, through which SEC and FSA leaders meet periodically to discuss areas of mutual interest. Other issues discussed at the meeting included over-the-counter derivatives markets and central clearing; accounting issues; regulatory reform; credit rating agency oversight; short selling; and corporate governance and compensation practices.

Chairman Schapiro said, "As the regulators of two of the world's major market centers, the SEC and the FSA have a strong interest in collaborating with respect to OTC markets and hedge funds, credit rating agencies and other market participants with cross-border operations. Only through strong cooperation can we achieve coherent oversight of global actors and limit opportunities for playing the regulatory seams. I look forward to continuing this successful dialogue between the SEC and FSA."

Chief Executive Sants said, "The global crisis has underlined how intertwined financial markets and institutions are and regulators around the world have to work together to ensure appropriate oversight. We are all working alongside the Financial Stability Board and other international regulatory committees to drive forward global financial reforms. The strategic dialogue with the SEC is a valuable component of the discussions around these reforms, particularly in areas of joint interest and in identifying potential regulatory gaps."

The SEC and FSA have worked together closely to address the recent financial crisis, both on a bilateral basis as well as in international organizations, such as the International Organization of Securities Commissions. Recently, the SEC and FSA have worked to promote the use of central counterparties (CCPs) for the clearance of credit default swaps and are actively cooperating in the oversight of CCPs.

This was the fourth meeting of the SEC-FSA Strategic Dialogue, which began in June 2006. The purpose of the Dialogue is to engage at senior levels on current matters impacting the U.S. and UK capital markets and areas of future collaboration.

Australian efforts to harmonize regulation

ASIC plans call for 'super-regulator'

THE chairman of the Australian Securities and Investments Commission, Tony D'Aloisio, is canvassing the idea of a super securities regulator with greatly increased consumer protection powers after the fallout from the global financial crisis.

Mr D'Aloisio is recommending a profound rethink of ASIC's powers, effectively calling for a review of Wallis inquiry settings that established the current form of financial services regulation in 1996. The call for the review appears in ASIC's submission to a federal parliamentary committee tasked with considering the financial services regulations. Mr D'Aloisio is due to appear before the committee in Canberra today.

Part of the reason for Mr D'Aloisio's stance is understood to be frustration at the corporate watchdog's role of arriving at the scene after high-profile collapses that have cost investors $73 billion since August 2007.

In a speech back in May Mr D'Aloisio said: Our powers to act ahead of time are limited. For example, we do not have power to regulate capital adequacy or to prohibit certain business models.

A review of financial services regulation would canvass whether ASIC should be given such powers to address business models that are seen as too risky - a shift from ASIC's existing approach that relies heavily on disclosure to protect consumers.

The Wallis inquiry enshrined the twin peaks of financial services regulation shared between ASIC and the banking regulator, the Australian Prudential Regulation Authority.

The inquiry gave ASIC an enforcement role but not a prudential role over the securities and investments it regulates.

The original inquiry found the form of securities and investments offered to investors should not be the subject of regulatory interference because it would increase costs and hinder the operation of efficient markets.

In the address in May, Mr D'Aloisio outlined the resulting limits in ASIC's role, arguing ASIC should not be held responsible for the collapse of business models.

Should ASIC have prevented these business models or put an end to them earlier? he said. The answer to this specific question, in the context of the Corporations Act and ASIC's powers, is clearly 'no'.

The director for the Centre of Corporate Law at Melbourne University, Professor Ian Ramsay, broadly supported the calls for a review of existing financial services regulation: The extraordinary transformation of the financial markets, combined with the global financial crisis, means that it is time for some fundamental review that would extend beyond ASIC.


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