The evolving exchange environment, which has increasingly
started pitting futures exchanges against FCMs for business,
has led some industry observers to advocate a new
super-regulator for the US markets.
While much of the recent industry debate over regulation has
centered on the prospects of a merger between Securities
and Exchange Commission (SEC) and Commodity Futures Trading
Commission (CFTC), some said the entire financial services
regulatory regime needs to be reexamined.
Gary Alan DeWaal, Fimat general counsel, said talk of
combining SEC and CFTC is shortsighted. He contended that
regulation should be addressed through a new regulatory entity,
as futures exchanges have started to compete more with FCMs but
with far fewer regulatory requirements, especially in the wake
of the Commodity Futures Modernisation Act (CFMA) of 2000.
"CFMA? allows the exchanges to compete with FCMs unfairly
with a non-regulated fashion," DeWaal told FO
DeWaal argued that FCMs were saddled with a slew of
brokerage rules and regulations in order to sell exchange
products. The current rules, he said, require broker staff to
obtain licenses to sell futures products to customers, capital
requirements to participate on futures exchanges and clearing
capital along with investments in exchange clearing houses via
stock holdings. Futures exchanges, he argued, could simply
pitch their products directly to end users without any such
"They get principled regulation and I get micro-regulation,"
DeWaal said. "So their complaint about the over-the-counter
industry is my complaint against them in the regulated
business. To the extent they act more like brokers, they should
be regulated like brokers and to that extent we act more like
exchanges, we should be regulated like exchanges. Fair is
As exchanges such as Chicago Mercantile Exchange (CME) and
Chicago Board of Trade (CBoT) push forward with a slate of
service offerings directly to end users, futures brokers are
increasingly finding themselves competing for such customers.
Hedge funds are offered direct connectivity to exchanges and
are given member rates and clearing benefits to trade on
One large FCM executive said brokers took notice when CME
forged a distribution deal with Chinese Foreign Exchange System
(CFETS) last year, a deal which would allow China's banks to
access CME FX and Eurodollar contracts. CFETS would also serve
as a super-clearer for those participants. While these deals
extended the reach and customer base for CME products, they
ultimately cut out the need for brokerage services.
"There was a time when we were part of the distribution
network for exchanges," said one FCM executive.
Seven exchange executives on a panel at Futures Industry
Association's annual conference in Chicago earlier this month
unanimously predicted that in ten years time both SEC and CFTC
would still be operating as they are today.
"I firmly believe there is no regulatory efficiency gained
by combining the regulators," said Jim Newsome, president of
New York Mercantile Exchange. "And because of that I think
there will remain two (agencies)."
DeWaal however was advocating a new regulatory entity that
would look at products in a whole new way. With portfolio
margining coming to securities and more OTC contracts being
offered via brokers, DeWaal argued that the differentiation
between stocks, options and futures was blurred.
"The whole idea of securities and futures being very
different products is no longer valid," DeWaal said. "To me,
securities and futures are financial instruments and we need
regulation to look at them as similar instruments, not
He said the President's Working Group, which had pushed for
portfolio margining in securities and other changes to the CFMA
as part of the reauthorisation of CFTC would be well suited to
propose a new regulatory regime.
Such talk is still new and has barely registered on the
radar screen in Washington. But DeWaal said it could gather
some steam heading forward with key political leaders like US
Treasury secretary Henry Paulson, who has said that regulation
is leaving the US markets at a competitive disadvantage to
those outside the US. Former SEC chairman Arthur Levitt has
also supported changing the current regulatory regime.
"I believe the President's Working Group has the ability to
act as a super coordinator," DeWaal said.