A Bad Call: Comments at the SEC-CFTC Roundtable on Regulatory Harmonization Efforts

Thank you to our moderators and panelists for an excellent afternoon of discussions. You left us with useful recommendations on policy and substantive issues. Thank you to Chairman Atkins and Acting Chairman Pham for hosting this roundtable, and to the staff at the SEC and CFTC who made it happen.

In the wake of the Auburn-Oklahoma game in which the Southeastern Conference, aka SEC, referees failed to call a penalty on an Oklahoma player’s unsportsmanlike conduct,[1] an angry Auburn fan left multiple profanity-laced messages with my office. Had I answered the phone, I would have redirected his call to the proper agency: “For sports-related complaints, please call the CFTC.” Drunk sports fans are not the only ones who have trouble discerning which agency to call to resolve a problem. Even sober and seasoned market participants sometimes find it challenging to discern whether the SEC or the CFTC is the right agency to address their issue. Blurry jurisdictional lines, petulant agency tribalism, and sometimes aggressive agency power grabs have fostered uncertainty, fueled regulatory arbitrage, and impeded the efficient functioning of the markets.

I am pleased, therefore, to be here today to close out a lively roundtable on SEC-CFTC Harmonization. As the panel discussions illustrated, the two agencies always have had many reasons to work together: the markets we regulate are deeply interconnected and complementary and share many common participants. The two agencies also share a common goal of fostering a thriving, competitive financial system upon which a prosperous economy can serve the nation’s needs. The risk-taking and risk-offloading markets that our agencies regulate are essential to economic growth. The American people deserve and expect good cooperation between the SEC and CFTC. We have not always lived up to those expectations, but today’s roundtable evidences a renewed effort to work together and learn from one another.

Good process is key to ensuring close cooperation. Problems arise, for example, when the agencies do not talk about a new product coming to market that lies close the jurisdictional boundary and do not share experiences with similar rules. As I experienced directly when working—at the joint direction of Chairmen Giancarlo and Clayton—with then CFTC Commissioner Brian Quintenz on Dodd-Frank Title VII implementation, sitting down and working through issues together is the most effective way to get the regulation right. The SEC was able to harmonize many of its security-based swap rules with the CFTC’s already operational security-based swap rules. The Title VII cooperation formed the basis for further joint work. In 2020, the two Commissions even held a joint Commission open meeting to adopt a rule on security futures margin and solicit comment on portfolio margining of uncleared swaps and non-cleared security based swaps.[2]

The Administration’s effort to develop a clear regulatory framework for crypto is a wonderful opportunity for the two agencies to commence a new era of working together. Whether under current statutes or under a new crypto market structure statute, both the CFTC and SEC have a role to play in regulating crypto. A new set of assets, intermediaries, and technologies demands our joint attention. We need to work together to ensure that investors are protected and that issuers of crypto assets, issuers of investment products composed of crypto assets, advisers, brokers, and trading venues know what regulatory framework applies to their activities. We should avoid duplicative regulation. For example, if an SEC-regulated exchange, ATS, or broker-dealer wants to offer customers the ability to trade a digital commodity against a security, regulation by the CFTC and NFA seem superfluous. Our two agencies should coordinate to develop appropriately conditioned exemptions.

Crypto issues are not the only ones on which cooperation is essential. We should pick up the thread from five years ago and work on portfolio margining issues so that market participants can net offsetting positions, when appropriate. We also should revisit the swap and security-based swap reporting rules and other elements of the Title VII regime now that we have years of experience with them, and see if further harmonization would be beneficial. Recently, the agencies extended the compliance date for Form PF. We should use that extended time to reconsider the necessity of all the information we collect on the Form. The SEC and CFTC, along with other financial regulators, are working on implementing the Financial Data Transparency Act, and we should draw on each other’s experiences with structured data in this effort. Facilitation of new products is another area that deserves our attention to avoid circumstances that we have seen in the past in which—due to lack of coordination between the SEC and CFTC and the product sponsor—trading in a new product was halted after it had commenced. Routine meetings and coordination between the two agencies’ staff also are key to working through difficult issues, such as 24-hour markets and decentralized finance. We should recommit ourselves to sharing information about the markets and entities that we jointly oversee and conduct joint tabletop exercises to prepare for firm failures and other market events. We should cooperate in writing, implementing, and monitoring the effectiveness of rules. Coordination on enforcement matters also is important. “Me-too” enforcement cases are both a waste of scarce enforcement resources and potentially disproportionate to the underlying misconduct.

SEC referees have little time to make their calls on game day. We, the other SEC, have longer to make our regulatory calls. We also have a colleague—the CFTC—with whom we can consult. I look forward to many such consultations in the years to come. Good regulatory calls require the close coordination of which today’s roundtable is one indication. Good regulatory calls also require public input, so thank you for your participation today.