SEC and CFTC sign cooperation agreement

Source: Securities and Exchange Commission, Commodity Futures Trading Commission

Securities and Exchange Commission Chairman Christopher Cox and Commodity Futures Trading Commission Acting Chairman Walter L. Lukken today signed a ground-breaking mutual cooperation agreement to establish a closer working relationship between their agencies.

The agencies also announced their immediate plans to consider two new derivative products under the agreement.

The agreement establishes a permanent regulatory liaison between the agencies, provides for enhanced information sharing, and sets forth several key principles guiding their consideration of novel financial products that may reflect elements of both securities and commodity futures or options.

"This agreement represents a valuable coordination of the roles of the SEC and the CFTC in our capital markets," said SEC Chairman Cox. "Years ago, when the dividing lines between our agencies' regulated products were bright, the high level of coordination we are establishing today was not a priority for the U.S. government. But today, the blurring of these distinctions requires the U.S. government to adopt a more coherent and coordinated approach. To this end, we look forward to enhancing our collaborative relationship with the CFTC within the formal framework covered by the agreement."

"As innovation blurs financial sector lines, this agreement will create regulatory synergies between the agencies for the benefit of the public," said CFTC Acting Chairman Lukken. "While recognizing our distinct missions, the MOU establishes a solid framework for increased cooperation and communication between the CFTC and SEC. The agreement also contains specific principles to guide future consideration of novel products, with the goal of reviewing product filings expeditiously, providing legal certainty for participants, encouraging market neutrality and choice, and enhancing innovation and competitive growth. This is smart government, and we look forward to this new era of enhanced cooperation with the SEC."

Today, as tangible evidence of their closer relationship, the agencies also announced they are issuing notices requesting public comment on two new products. Both products would be based on the streetTracks ® Gold Trust Shares (Gold Shares). One product is an option that would be traded on options exchanges, and the other is a future that would trade on a single stock futures exchange. The requests for comment will be published in the Federal Register shortly.

In addition, the Options Clearing Corporation, which is subject to the joint jurisdiction of the agencies in certain areas, recently filed with both the SEC and the CFTC for approval to clear and settle both of the new products. Both agencies expect to act on these filings expeditiously and issue notices for public comment in the near future.

The two new products have raised questions about how they best should be regulated under federal law. Other recent products, such as credit default options, have raised similar questions. The Memorandum of Understanding addresses how the agencies will approach products that raise these issues in this burgeoning area of financial innovation. It also establishes a framework that will facilitate discussions and coordination regarding issues in other areas of common regulatory interest between the two agencies, such as portfolio margining, foreign security index products, and the oversight of firms registered with both agencies.

Under the principles governing the review of novel derivative products, the agencies agree to recognize their mutual regulatory interests and encourage innovation, competition, and legal certainty. Additionally, the agencies commit to share information relating to novel derivative products and act on any related requests in a timely manner. Finally, the agencies agree to endeavor, for products that implicate overlapping areas of regulatory concern, to permit such novel derivative products to trade in either or both a CFTC- or SEC-regulated environment, in a manner consistent with their respective laws and regulations.

Enhanced coordination and cooperation between the SEC and CFTC are critical to providing effective oversight and legal certainty, while avoiding unnecessary duplication and undue regulatory burdens. The Commissions historically have taken action to further these objectives. For example, the Commissions previously entered into an MOU in March 2004 regarding their joint oversight of security futures products (SFPs), pursuant to the Commodity Futures Modernization Act of 2000, and the sharing of information on SFPs. The Commissions also have regularly cooperated in matters of shared enforcement concern. Implementation of today's agreements will further the effectiveness and efficiency of the SEC and CFTC in other areas of common regulatory interest by improving interagency coordination and communication.

Statement from CFTC Commissioner Jill Sommers on CFTC-SEC Memorandum Of Understanding

The constituents of the CFTC and SEC overlap to a great degree but our missions remain quite different. In the past it has been difficult at times for the two agencies to achieve agreement on issues important to the industry and that has slowed innovation and hampered the success of U.S. business.

This MOU is the beginning of a formal structure for improved coordination and communication. I applaud Acting Chairman Lukken and Chairman Cox for their determination and vision and am proud of our two agencies for all the hard work it took to make this happen. It is vital to the competitiveness of the U.S. financial industry that we remain committed to working together.

One issue of particular importance to me is risk-based portfolio margining. I am very hopeful that this accord will generate progress on this important issue and finally deliver to U.S. markets and market participants the tremendous benefits and capital efficiencies that risk-based portfolio margining provides to markets in other countries. I look forward to the future of enhanced collaboration between the CFTC and SEC.

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