CFTC Chair Touts Benefits of Self-Regulation
Commentary by Steven Lofchie
CFTC Chair Heath P. Tarbert defended the current system of "self-regulation" in the U.S. derivatives markets.
In remarks delivered at Northwestern University, Chair Tarbert highlighted the benefits that self-regulatory organizations ("SROs") bring to the system, including that:
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they are member-funded, which both reduces direct costs to the taxpayer and removes politics from the budgeting process;
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they are closer to the "pulse" of the market that incentivizes compliance;
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they can make rules faster than can government agencies; and
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the threat of ejection from the exchange/organization reduces CFTC enforcement costs.
Mr. Tarbert stated that SROs permit the CFTC to focus on: (i) administrative law functions; (ii) interpretations of Congressional statutes; (iii) no-action authority; (iv) international harmonization; and (v) the supervision of clearinghouses to monitor systemic risk.
Mr. Tarbert described the necessity of both the CFTC and SROs during the initial months of the pandemic. He highlighted the (i) coordination and data sharing between the SROs and the CFTC (i.e., the SROs offering information to the CFTC on market participants, and the CFTC offering information to the SROs on the Federal Reserve and international counterparts), (ii) monitoring of futures commission merchants ("FCMs") conducted by clearinghouses alerting the CFTC to FCMs that might be having problems, and (iii) targeted relief that the CFTC provided (e.g., on voice recordings) which helped to mitigate the consequences of the crisis.
Commentary
In the securities markets, the SEC has the ability to require FINRA and the exchanges to adopt and enforce rules and generally to serve as an agent of the government. As a result, securities firms generally view FINRA as being closer to a policing agency than a representative of broker-dealer views. NFA is not as far down that road, though gradual movement in the perception of the SRO from membership organization to agent of the government would not come as a surprise. It is reasonable to step back from time to time and consider what we want from "self-regulation" (is it the "self" or is it the "regulation"?) and ask whether we are getting it.