FIA calls on US Treasury to endorse principles-based regulation

Source: Futures Industry Association

The Futures Industry Association submitted a comment letter to the Treasury Department on Nov. 20, 2007 outlining its views on the structure of financial services regulation in the U.S.

The letter was drafted in response to Treasury's request for comment on the impact that regulatory structure has on the ability of U.S. financial institutions to adapt to market evolution and global competition. Treasury is expected to issue a set of recommendations early next year following its review of comments received from various interested parties.

The FIA letter said that principles-based regulation, as observed in the U.K. and as applied by the CFTC, can achieve "significant economic and operational efficiencies" compared to the rules-based regulatory structure that currently applies to financial institutions in the U.S. The FIA therefore urged Treasury to "take a leadership role in developing and implementing a program to shift the regulation of U.S. financial markets and institutions to a comprehensive principles-based regulatory structure."

The letter noted that the FIA is in a "singular position" to comment on this issue because of the CFTC's leadership in applying principles-based regulation. The letter cited in particular the CFTC's willingness to open international derivatives markets to U.S. participants if those markets are subject to a comparable regulatory scheme, and the steps that the CFTC has taken to adapt its rules to the increasing use of over-the-counter derivatives. The letter noted, however, that FIA member firms have not been able to share in the benefits of principles-based regulation, partly because the CFTC's principles-based approach extends mainly to the regulation of markets rather than intermediaries, and partly because the overwhelming majority of the FIA's member firms are registered with both the SEC and the CFTC. "As such, they must also comply with the even more specific, and frequently conflicting, regime promulgated by the Securities and Exchange Commission," the letter said.

The letter also emphasized the importance of maintaining exclusive jurisdiction of derivatives transactions at the federal level. The last two decades of growth would not have been possible, the letter said, if Congress had not provided the CFTC with exclusive jurisdiction over derivatives transactions. "It is where the CFTC has not had exclusive jurisdiction that the growth has stagnated," the letter added, pointing to the dual regulation of security futures as the "perfect example."

Regarding the idea of consolidating the SEC and the CFTC, the FIA said that if Treasury decides to take such a step, consolidation should be the last step in the process. "Consolidating agencies prior to implementing the necessary statutory and regulatory changes to assure a unified, principles-based approach to regulation will accomplish little," the letter said. "To the contrary, by attempting to blend competing programs and cultures without first creating a new platform which clearly recognizes the significant differences among the varied products traded, from which staff can approach their responsibilities with a fresh perspective, would likely be counterproductive."

Read the FIA's comment letter here:Download the document now 327.2 kb (PDF File)

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