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The top official at the Commodity Futures Trading Commission is calling for the creation of three new regulators, including one monitoring system-wide risk, to replace his agency and the Securities and Exchange Commission.

Acting CFTC Chairman Walter Lukken is the latest government official to offer advice to Congress and the incoming Obama administration before they take up the issue in earnest next year. Mr. Lukken said he will be stepping down after the new president takes office.

In a speech at a conference in Chicago, Mr. Lukken recommended the creation of three regulators to focus on systemic risk, market integrity and investor protection. The roles of the CFTC and SEC would be folded into the new regulators.

Under the plan, the systemic risk regulator would police the financial system for risks that could ricochet across companies to have broad economic consequences. The market integrity regulator would oversee safety and soundness of exchanges and key financial institutions, effectively acting as a replacement for existing bank regulators and the SEC's function of regulating brokerages. The investor protection regulator would protect investors and business conduct across all firms.

In the immediate term, Mr. Lukken called for the creation of a bipartisan panel to study oversight. He suggested that the heads of the Federal Reserve, CFTC and SEC set up a board to share information and pass joint rules.

Democrats, with a solid majority in Congress, have begun to outline some ideas on regulation. House Financial Services Chairman Barney Frank has said he also favors a systemic risk regulator that would have oversight of the financial system and financial institutions, possibly including hedge funds. During the campaign, President-elect Barack Obama said he supports updating the current regulatory structure and increasing capital and liquidity levels at financial institutions.

Mr. Lukken's recommendations contrast with those of SEC Chairman Christopher Cox, who has urged Congress to merge the SEC and CFTC and asked for the SEC to have oversight of credit default swaps, a financial instrument that many believe worsened the credit crunch. Mr. Lukken rejected calls to merge the two agencies, saying such a move would be "ineffective and would only reinforce our outdated regulatory structure."

Instead, he advocated a "complete rewrite" of securities and futures laws and recommended the new regulators follow broad principles that could adapt to changing markets and innovation. The current "rules-based regulatory approach" wasn't able to " keep up with the speed and innovation of the financial markets," he said.

"Regulation by objective rather than function will ensure that all products and institutions are properly overseen based on identified public risks rather than futile difficult determinations of whether an instrument is a security, a future, or a swap contract," Mr. Lukken said.

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Tuesday, November 11, 2008

CFTC Head Seeks New Regulators

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