Some CFTC Officials Wary Of Any Shift In Flexible Oversight Regime

Senior U.S. futures regulators have voiced concerns that the flexible oversight regime used over the past decade is being eroded by a broad financial overhaul.

They say provisions in the Dodd-Frank law are causing the Commodity Futures Trading Commission to shift away from being a more business-friendly, principles-based regulator.

Such a shift could make the CFTC become more like the Securities and Exchange Commission, where prescriptive rules govern exchanges and other market participants, a less flexible regulatory approach.

"Not everything will conform to a one-sized-fits-all solution, and I'm wary we might be headed down that way," CFTC Commissioner Scott O'Malia said in a recent interview.

The SEC's regulatory philosophy prescribes strict rules for exchanges. The CFTC, by contrast, gives exchanges flexibility in how they comply with various core principles. The CFTC boasts its approach helps foster innovation and reduces industry costs. It has enabled futures exchanges to get rule changes or new product approvals faster than their securities exchange counterparts.

The Dodd-Frank law's impact on the CFTC comes as the principles-based approach to financial regulation is being peeled back around the world.

The new U.K. government is scrapping the Financial Services Authority, a super-regulator set up in 1997 whose principles-based approach was widely copied around the world. The FSA, however, was criticized for its handling of the financial crisis.

The overhaul of U.S. futures regulation in 2000 took part of its lead from the U.K. approach, and advocates of principles-based oversight maintain it fostered industry growth and helped the sector have a "good" crisis, handling the fallout from the Lehman Brothers' collapse and subsequent market volatility.

The contrast between the CFTC's approach and the rules-based oversight of the SEC has often been cited as the key barrier to any merger of the agencies.

Any move away from principles is being eyed warily as the CFTC negotiates closer cooperation with the SEC as they prepare to share oversight of the massive over-the-counter derivatives market.

"I will ask that staff continue to follow our principles-based regime and forego prescriptive rules," CFTC Commissioner Michael Dunn said at a public meeting last month.

In a series of recent public statements, CFTC Commissioners O'Malia, Dunn and Jill Sommers have all expressed fears that the CFTC may become less lenient in how it allows market players to comply with federal derivatives regulations. They have raised these concerns as the CFTC continues to propose new, and at times prescriptive, derivatives rules such as limits on clearinghouse voting stakes and restrictions on how futures brokers can invest their customers' collateral. The investment restrictions proposal isn't required under Dodd-Frank, but comes in response to the financial crisis after the Reserve Primary Fund "broke the buck."

The Dodd-Frank law still preserves the core principles, leaving exchanges and clearinghouses with some discretion over compliance matters. A caveat was added, however. The law says exchanges have discretion unless the CFTC hasn't otherwise prescribed a rule.

"In essence, if the CFTC chooses to be completely rules-based, it can do so," Sommers said in a speech on Oct. 21.

Dunn has said he is concerned a lack of funding and resources could force the agency to write more prescriptive rules because the CFTC won't be able to enforce them without help from industry self-regulatory groups. The CFTC has asked for a large budget increase to implement Dodd-Frank, but so far hasn't received it.

"Without sufficient staff to conduct proper oversight, the CFTC may need to write more prescriptive rules that rely more heavily on burdensome reporting requirements," Dunn said on Oct. 26. "This will undoubtedly be very costly for the industry and market users."

Despite some concerns voiced by regulators, however, some top futures executives appear less concerned. Craig Donohue, chief executive of CME Group Inc. (CME), said he thinks Congress left the principles-based regulatory structure more or less intact when it passed Dodd-Frank.

"People might have differences of opinion as to what constitutes a principle versus what constitutes a rule," Donohue said. "In some cases it may it lean more further toward the latter, but fundamentally it hasn't altered what Congress intended."

-By Sarah N. Lynch, Dow Jones Newswires; 202-862-6634; sarah.lynch@dowjones.com

(Doug Cameron and Jacob Bunge contributed to this article).

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