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WASHINGTON — The heads of two federal agencies with financial oversight responsibilities have told Congress that their jurisdiction can be split over the instruments blamed for hastening the global economic crisis.
The Securities and Exchange Commission, the government's primary markets watchdog, and the smaller Commodity Futures Trading Commission — which oversees the oversees the trading of oil, gas and other commodities — have battled in the past over regulatory turf and found separate supporters in Congress.
But as lawmakers craft an overhaul of the nation's financial rule system and consider the Obama administration's sweeping proposal, the two agencies are in accord on sharing regulation of the so-called over-the-counter derivatives market.
SEC Chairman Mary Schapiro proposed what she called "a straightforward and principled approach" to regulation of derivatives at a Senate hearing Monday.
Credit default swaps and other derivatives related to securities — underlying stocks, bonds, options — would fall under SEC supervision. Primary oversight for the others — derivatives tied to interest rates, commodities, currencies, energy and metals— would go to the CFTC.
CFTC Chairman Gary Gensler said the new regulatory regime will require close coordination between his agency and the SEC.
The two agencies "should have clear, unimpeded oversight and enforcement authority to prevent and punish fraud, manipulation and other market abuses," Gensler told the Senate Banking securities subcommittee.
Sen. Jack Reed, D-R.I., the panel's chairman, said Monday's discussion was the start of a complex process.
The challenge with new regulations is that they must "cover the whole waterfront" and not leave any gaps in supervision, he said.
The Obama plan also calls for placing hedge funds and other private pools of capital, including venture capital funds, under the SEC's oversight.
Credit default swaps, a form of insurance against loan defaults, are traded in a secretive international market valued at about $60 trillion. The collapse of the swaps brought the downfall of Wall Street banking house Lehman Brothers Holdings Inc. and nearly toppled American International Group Inc. last fall, prompting the government to support the insurance giant with about $180 billion.
The value of over-the-counter derivatives hinges on an underlying investment or commodity — such as currency rates, oil futures or interest rates. The derivative reduces the risk of loss from the underlying asset. About $600 trillion of those contracts are held worldwide.
The administration plan involves a network of clearinghouses to provide transparency for trades in credit default swaps and other derivatives. Many derivatives, however, would continue to be traded privately in a multitrillion-dollar market worldwide rather than on commodity exchanges regulated by the government.
At the same time, the big investment banks that trade the over-the-counter derivatives would be subject to requirements for holding capital reserves against risk and other rules. The plan is similar to legislation proposed by a small group of major Wall Street banks.
The White House originally floated the idea of merging the SEC and the CFTC as part of the financial overhaul, but backed off after meeting opposition in Congress. Before she became a securities industry regulator, Schapiro was chairman of the CFTC as well as an SEC commissioner.
