September 4, 2009
Recommend the following with respect to harmonization:
1. Identify core financial instrument items which would obviously belong to each commission - stocks, bonds and investment contracts for the SEC, and futures contracts (both physically and cash settled) for the CFTC.
2. Identify current instruments which are potentially common to both agencies, such as options and indexes, and assign each to one of the agencies. This is regardless of the underlying asset - although an option based on a stock is technically different than an option based on a commodity, both work fundamentally in the same manner.
3. Create a statutory method of identifying future financial instruments which might be common across the SEC and CFTC, and assigning such instrument to one commission - this could be accomplished through future joint agency hearings once a new instrument is identified to be significantly different from currently defined instruments.
4. Create a new method for establishing SROs, since exchanges such as the CME are now offering indexes which are more tradionally associated with exchanges such as the NYSE. The CME should be allowed to sell indexes, but since the exchanges are selling products which are more identical than ever, it makes sense that all exchanges, whether they offer products based primarily on stocks or commodities, operate in similar fashions and can therefore have their general charters and bylaws as SROs approved by one agency such as the SEC. All exchanges should be SROs whose charters are approved by the SEC (but see #5 below).
5. After being approved as an SRO by the SEC, the exchange must have each product sold approved by the appropriate agency. For example, the CFTC would have to approve each futures contract product offered by an exchange, even though the SEC would approve the SRO charter and bylaws. But if indexes are assigned to the SEC, the CME would have to have each of its index products approved by the SEC. Which agency would approve of the product would depend on the financial instrument the product most closely resembles, and therefore which agency the financial product had been assigned to.
6. All OTC broker/dealers must be registered with an SRO and adhere to the regulations of such SRO and may only offer such products approved by the SRO.