SEC vs CFTC: There Can Be Only One: Conclusion
...continued from Part One.
THE GRASS IS ALWAYS GREENER
With so much of the SECís resources devoted to stocks, it is no wonderthat many in the options industry gaze-longingly at the specializedstructure of the futures markets. With the competitive andtechnological situation changing on an almost daily basis, the optionsindustry needs a regulator that understands the nuances of theirproduct.
Unfortunately, many feel that the SEC is not that regulator. ìThe SECis not slow to act so much as they are often not up to speed on theissues facing the options exchanges,î says Thomas Stotts, Director ofthe Options Department at RBC Dain Rauscher. ìAs a result, the optionsexchanges have to spend a great deal of time educating the SEC abouttheir issues before anything can get done.î
TOGETHER AT LAST?
Although many agree that dual regulation is a problem, no consensus canbe reached on how to remedy the situation. One idea is for the SEC tooffload all of its regulatory duties in the options industry to aspecialized body that is similar to the CFTC. The hope is that thisspecialized regulatory body would better understand the vagaries of theoptions industry. While this idea has a great deal of merit, thetremendous overlap between the equity and equity options worldsrequires a regulator with a foot in both markets.
Another idea that is rapidly gaining steam is the notion of merging thetwo regulatory bodies. This concept holds a number of benefits for boththe futures and options industries. On one hand, the merger of the SECand the CFTC would make it much easier for the U.S. futures exchangesto contend with foreign competitors such as Eurex.
At the same time, the options industry hopes that a merger of the twobodies would provide them with a much more efficient and knowledgeableregulator. "It would be nice if some of the CFTCís culture, which ismuch more progressive, could rub off on the SEC,î admits SharonBrown-Hruska, a commissioner with the CFTC
POSITION FROM THE FUTURES PITS
However, not everyone supports ending dual regulation. Quite a fewmembers of the futures industry are worried that a CFTC/SEC mergerwould spell the end of their competitive advantage.
Their opposition to a merger is not difficult to understand. Thefutures markets watched in horror as the SEC forced multiple listing onthe options industry in 1999. As a result of the SECís intervention,the options markets were plunged overnight into a competitivefree-for-all that continues to this day.
While this unchecked competition has reduced customer prices, it hasalso given rise to a host of unintended problems. Chief among theseproblems were the loss of experienced liquidity providers, dramaticincreases in technology costs and an explosion in payment for orderflow. No one in the futures industry wants to see these same mistakesrepeated in their markets.
Not surprisingly, a substantial portion of the futures industry iscontent to leave things just the way they are. ìThe futures and optionsindustries operate on two very different models,î says Neal Wolkoff,Chairman and Chief Executive Officer of the American Stock Exchange.ìUnfortunately, the futures industry has argued quite successfullyagainst opening up or merging those models. I think thatís beenextremely shortsighted on their part.î
THE FUTURE LOOKS THE SAME AS TODAY
At the end of the day, there still is no consensus on how to regulatethe derivatives markets. On one hand, you have options exchangesclamoring for a new regulator and for a chance to capture some of themonopolistic protections of the futures markets. On the other hand, youhave the futures industry fighting to protect a fundamental part oftheir business model.
Where does that leave the debate? Unfortunately, at least for the timebeing, itís dead in the water. Although merging the two regulators intoone governing body has many advantages, the entrenched opposition tothis proposal has rendered it all but moot. There are just too manypeople in the futures markets, and in the halls of Congress, with avested interest in the status quo. Until that changes, dual regulationwill continue to haunt the derivatives world.
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