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CFTC and SEC to co-ordinate review of new derivative products


Commodity Futures Trading Commission acting chairman Walter L.

Commodity Futures Trading Commission acting chairman Walter L. Lukken and Securities and Exchange Commission chairman Christopher Cox have signed a mutual co-operation agreement designed to establish a closer working relationship between the two US financial regulatory agencies.

The agreement will be put into action immediately to facilitate a co-ordinated review of two new derivative products based on State Street Global Advisors’ streetTracks Gold Trust Shares exchange-traded fund.

The agreement between the CFTC and the SEC establishes a permanent regulatory liaison between the agencies, provides for enhanced information-sharing, and sets out various key principles guiding their consideration of novel financial products that may reflect elements of both securities and commodity futures or options.

‘As innovation blurs financial sector lines, this agreement will create regulatory synergies between the agencies for the benefit of the public,’ Lukken says. ‘While recognising our distinct missions, the memorandum of understanding establishes a solid framework for increased cooperation and communication between the CFTC and SEC.

‘The agreement also contains specific principles to guide future consideration of novel products, with the goal of reviewing product filings expeditiously, providing legal certainty for participants, encouraging market neutrality and choice, and enhancing innovation and competitive growth. This is smart government, and we look forward to this new era of enhanced cooperation with the SEC.’

Adds Cox: ‘This agreement represents a valuable co-ordination of the roles of the SEC and the CFTC in our capital markets. Years ago, when the dividing lines between our agencies’ regulated products were bright, the high level of co-ordination we are establishing today was not a priority for the US government.

‘But today, the blurring of these distinctions requires the US government to adopt a more coherent and co-ordinated approach. To this end, we look forward to enhancing our collaborative relationship with the CFTC within the formal framework covered by the agreement.’

The agencies have announced they are issuing notices requesting public comment on two new products, both products based on streetTracks Gold Trust Shares. One is an option that would be traded on options exchanges, the other is a future that would trade on a single stock futures exchange. The requests for comment will be published shortly in the Federal Register.

In addition, the Options Clearing Corporation, which is subject to the joint jurisdiction of the agencies in certain areas, has filed with both the SEC and the CFTC for approval to clear and settle both new Gold Shares derivatives. The agencies say they expect to act on these filings expeditiously and issue notices for public comment in the near future.

The regulators say the two Gold Shares products have raised questions about how they should best be regulated under US law, in the same way as other recent products, such as credit default options. The agreement addresses how the CFTC and SEC will approach innovative financial products that raise these issues and establishes a framework for discussion and co-ordination in other areas of common regulatory interest, such as portfolio margining, foreign security index products, and the oversight of firms registered with both agencies.

Under the principles governing the review of novel derivative products, the agencies agree to recognise their mutual regulatory interests, to encourage innovation, competition, and legal certainty, and to share information relating to novel derivative products and act on any related requests in a timely manner.

For novel derivative products that involve overlapping areas of regulatory concern, they have agreed to endeavour to permit these products to trade in either or both a CFTC- or SEC-regulated environment, in a manner consistent with their respective laws and regulations.

The US regulators say enhanced co-ordination and co-operation between them are critical to providing effective oversight and legal certainty, while avoiding unnecessary duplication and unnecessary regulatory burdens, and say that they have already taken steps toward these objectives. For example, the CFTC and SEC signed an agreement in March 2004 regarding their joint oversight of and sharing of information on security futures products under the Commodity Futures Modernization Act of 2000.

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