SEC vs CFTC: There Can Be Only One - Conclusion

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...continued from Part One.

THE GRASS IS ALWAYS GREENER
With so much of the SECís resources devoted to stocks, it is no wonder that many in the options industry gaze-longingly at the specialized structure of the futures markets. With the competitive and technological situation changing on an almost daily basis, the options industry needs a regulator that understands the nuances of their product.

Unfortunately, many feel that the SEC is not that regulator. ìThe SEC is not slow to act so much as they are often not up to speed on the issues facing the options exchanges,î says Thomas Stotts, Director of the Options Department at RBC Dain Rauscher. ìAs a result, the options exchanges have to spend a great deal of time educating the SEC about their issues before anything can get done.î
 
TOGETHER AT LAST?
Although many agree that dual regulation is a problem, no consensus can be reached on how to remedy the situation. One idea is for the SEC to offload all of its regulatory duties in the options industry to a specialized body that is similar to the CFTC. The hope is that this specialized regulatory body would better understand the vagaries of the options industry. While this idea has a great deal of merit, the tremendous overlap between the equity and equity options worlds requires a regulator with a foot in both markets.

Another idea that is rapidly gaining steam is the notion of merging the two regulatory bodies. This concept holds a number of benefits for both the futures and options industries. On one hand, the merger of the SEC and the CFTC would make it much easier for the U.S. futures exchanges to contend with foreign competitors such as Eurex.

At the same time, the options industry hopes that a merger of the two bodies would provide them with a much more efficient and knowledgeable regulator. "It would be nice if some of the CFTCís culture, which is much more progressive, could rub off on the SEC,î admits Sharon Brown-Hruska, a commissioner with the CFTC


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POSITION FROM THE FUTURES PITS
However, not everyone supports ending dual regulation. Quite a few members of the futures industry are worried that a CFTC/SEC merger would spell the end of their competitive advantage.

Their opposition to a merger is not difficult to understand. The futures markets watched in horror as the SEC forced multiple listing on the options industry in 1999. As a result of the SECís intervention, the options markets were plunged overnight into a competitive free-for-all that continues to this day.

While this unchecked competition has reduced customer prices, it has also given rise to a host of unintended problems. Chief among these problems were the loss of experienced liquidity providers, dramatic increases in technology costs and an explosion in payment for order flow. No one in the futures industry wants to see these same mistakes repeated in their markets.

Not surprisingly, a substantial portion of the futures industry is content to leave things just the way they are. ìThe futures and options industries 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 successfully against opening up or merging those models. I think thatís been extremely 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 regulate the derivatives markets. On one hand, you have options exchanges clamoring for a new regulator and for a chance to capture some of the monopolistic protections of the futures markets. On the other hand, you have the futures industry fighting to protect a fundamental part of their business model.

Where does that leave the debate? Unfortunately, at least for the time being, itís dead in the water. Although merging the two regulators into one governing body has many advantages, the entrenched opposition to this proposal has rendered it all but moot. There are just too many people in the futures markets, and in the halls of Congress, with a vested interest in the status quo. Until that changes, dual regulation will continue to haunt the derivatives world.

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