SEC, CFTC Sign Agreement To Enhance Coordination Of New Products

by Mike Godfrey, for LawAndTax-News.com, Washington

12 March 2008

US Securities and Exchange Commission Chairman Christopher Cox and Commodity Futures Trading Commission Acting Chairman Walter L. Lukken signed a ground-breaking mutual cooperation agreement on Tuesday 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," announced 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 US government. But today, the blurring of these distinctions requires the US 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," he added.

"As innovation blurs financial sector lines, this agreement will create regulatory synergies between the agencies for the benefit of the public," CFTC Acting Chairman Lukken continued, going on to state:

"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."

This week, as tangible evidence of their closer relationship, the agencies also announced that 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 have committed to sharing information relating to novel derivative products and acting 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.

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