Tuesday, August 18, 2009

Proposed Legislation Will Allow CFTC and SEC to Regulate Derivatives Market

A few years ago, I wrote an article entitled Controlling a Financial Jurassic Park which analyzed the unregulated Forex market, derivative trades, and fraud. The article discussed the cause of Forex derivatives fraud, its rampant increase in the last 10 years, and recommended proposed legislation to regulate and prevent fraud in the Forex derivatives market. One recommendation was for Congress to provide the Commodity Futures Trading Commission(CFTC) and the Securities & Exchange Commission (SEC) expanded authority under the Commodities Exchange Act and the Securities Exchange Act to aggressively regulate and prosecute derivative traders that defraud the public.

Imagine my elation when the Obama administration formally proposed legislation to regulate derivatives. The administration proposed that most derivatives should be traded on regulated exchanges similar to the way stocks and bonds are currently traded. The legislation also proposed tightening the banking regulations that inter-connect with the proposed derivative trading regulations. Additionally, the SEC, the CFTC and the banking regulatory agencies would share responsibility for oversight of the derivatives market. Shared regulation is a crucial element for preventing fraud in the market. As various federal agencies work through complex and sophisticated derivative transactions their shared analysis will allow for a better understanding of the transactions, and will create a better synergy to prevent fraud in the future.


  1. It is interesting to me that Chairman Gensler of the CFTC submitted 31 pages of explanation and additional legislative proposals to House and Senate leaders. Apparently these provisions ended up on the cutting room floor over at Treasury. My concern is cognitive and financial capture of Treasury and administration leaders such as Lawrence Summers and Timothy Geithner.


    We are in for one heck of battle on these proposals. Unfortunately policy is dominated by the banks and as it gets closer to the finish line, it gets harder and harder to have a voice. I tried to get an audience with regard to TARP, but in the end I was largely ignored by senior legislative aides.

    We should organize to submit a unified set of proposed amendments to the Treasury proposals.

  2. It is wonderful to see this proposed regulatory approach. This is definitely an area that needs regulation.