Proposed CFTC merger meets mixed reaction

The US Department of the Treasury has released a blueprint recommending the largest overhaul of the US financial regulatory structure since the Great Depression in a bid to boost US competitiveness in global markets.

Treasury Secretary Henry Paulson’s 218-page ``Blueprint for Regulatory Reform,'' was commissioned two months before credit markets suffered a liquidity crisis in August 2007. Paulson’s plan will give greater powers to the Federal Reserve to regulate investment banks and monitor systemic risk.

Among the proposals is a recommendation to merge the Commodity Futures Trading Commission (CFTC) with the Securities and Exchange Commission (SEC) into one main agency.

Paulson's plan sets the merging of the CFTC with the SEC as one of five ``intermediate goals'' and would require Congressional approval, which could take many years to complete, Paulson said in a statement.

CFTC acting chairman Walt Lukken noted in a statement that merging both entities could generate some synergies but warned against any possible detrimental effect on the competitive abilities of US futures markets, given the current economic climate.

“Although the creation of a new unified regulator for securities and futures could bring efficiencies, the trade-offs of such a significant undertaking should be weighed carefully given these turbulent economic times and the competitive global advantage currently enjoyed by the U.S. futures industry," he said.

Lukken warned that the commission’s current strengths risked being undermined by a potential merger. “The CFTC is a world-class regulator because of its focused mission, market expertise, manageable size, problem solving culture and global outlook—all of which may be jeopardized with the creation of a larger regulatory bureaucracy,” he said.

CFTC Commisioner Bart Chilton was less restrained in his condemnation of the plan.

“What I hear from people is their concern about the subprime crisis and the ripple impact on the economy,” he said in a statement. “What I don't hear is a call from the countryside for moving boxes around in Washington, DC or the need for some omnipresent super- regulator… We shouldn't be about trying to cure what isn't sick. “

In a statement, New York Mercantile Exchange chairman James Newsome noted that the US futures markets had already benefited from modernizing regulation in 2000 and that as a result “the futures industry has seen a substantial surge in innovative new products and services that benefit not only the immediate market participants but also the broader U.S. economy as well.”

Newsome added that any exploration into a possible merger between the CFTC and the SEC must take into consideration the fact that a merger “does not represent the only way for rationalizing differences between futures and securities regulation,” and that “any such review must be undertaken with care and necessarily must fully take into account the very real differences in market functions, products and regulatory missions” between both entities.

Paulson’s blueprint would see the Federal Reserve collecting information from commercial banks, investment banks, insurance companies, hedge funds, private-equity firms and commodity-pool operators.

However, many regard the proposals as an effort to create a “light-touch” regulatory climate in the US and the result of hard lobbying from Wall Street.

In particular, it has been criticized for not addressing certain risk-packaging and securitization practices associated with the current housing and mortgage crisis.