UPDATE:Acting CFTC Chairman Calls For Reform Before Stepping Down
Tuesday November 11st, 2008 / 19h17
(Updated with a reaction from CFTC Commissioner Bart Chilton, a Democrat.) By Sarah N. Lynch Of DOW JONES NEWSWIRES WASHINGTON -(Dow Jones)- The acting chairman of the U.S. Commodity Futures Trading Commission on Tuesday announced that he intends to resign from the agency shortly after President-elect Barack Obama takes office, even though his term does not expire until 2010. Walter Lukken, a Republican who first was appointed to the agency by President George W. Bush in 2002, will also relinquish his title as acting chairman. Such a move is customary when the president of an opposite party is elected. "As acting chairman of the CFTC, I serve under the nomination of the current president and do not intend to stay in the role of acting chairman past the inauguration," Lukken said. "I also intend to leave the commission shortly after stepping aside as acting chairman to provide others with an opportunity to serve the public. I am looking forward to helping the new administration with this transition over the coming months." Lukken announced his intention to leave the commission at an annual expo hosted by the Futures Industry Association in Chicago. But before he officially leaves, he also laid out a proposal that would drastically overhaul the regulatory system in a way that would radically alter the agency he leads. "It is this moment in time when courageous regulatory reform is most needed," Lukken said. "It is in this spirit that today I advocate a bold, new direction for our regulatory system. I believe the United States should scrap the current outdated regulatory framework in favor of an objectives-based regulatory system consisting of three primary authorities: a new Systemic Risk Regulator, a new Market Integrity Regulator and a new Investor Protection Regulator." Lukken said each of the three authorities he is proposing would regulate based on an objective. A systemic risk regulator would police the markets. A market integrity regulator would be responsible for the safety and soundness of banks, exchanges, and other institutions. The investor protection regulator, meanwhile, would protect investors and keep a close watch on business conduct. If his vision came to pass, Lukken said, all the various regulators including the CFTC and the Securities and Exchange Commission would have their functions dispersed among the three different new regulatory authorities. In the interim, Lukken also said the CFTC is committed to working expeditiously with other regulators to advance efforts to provide clearing for credit-default swaps. CFTC Commissioner Bart Chilton, a Democrat who has publicly disagreed with Lukken on some key issues, praised some of Lukken's ideas Tuesday. "I am pleased to see the CFTC's acting chairman's comments, as he announces the end of his term of office, that he believes we should aggressively advance efforts to clear credit default swaps. This is indeed a laudable goal," Chilton said in a statement. "I am also gratified to note the acting chairman's emphasis on review of the system of federal financial regulatory oversight in the U.S. Smart people disagree on if and how this should be done, but it is clear that now is the time for thoughtful review of our regulatory bodies and systems." In addition to creating three distinct regulators, Lukken said his plan to reform the current system would require the reporting of exchange and over-the-counter market data to regulators. Such reporting would be particularly important, he noted, when certain products "play a public pricing role" or grow large enough to pose the risk of a systemic event." "This objectives-based framework focuses on risks from the macro to micro levels and would be a radical departure from the current structure," Lukken said, noting it would "significantly improve financial market transparency across-the-board." "Regulation by objective rather than function will ensure that all products and institutions are properly overseen based on identified public risks rather than futile and difficult determinations of whether an instrument is a security, a future or a swap contract," he said. At the same time, however, Lukken made it clear that he is against a merger of the CFTC and the SEC - a move SEC Chairman Christopher Cox has advocated in recent weeks. "In Washington, this is code for the larger SEC - along with its rules-based model and culture - taking over the principles-based CFTC. In my view, this would be ineffective and would only reinforce our outdated regulatory structure. Simple merger is a recycled idea when bold solutions are needed," he said. He defended the CFTC's "principles-based" approach to regulation and called on Congress to keep that approach intact as it rewrites the laws governing financial regulation. Lukken acknowledged a rewrite of the regulatory system could take years to accomplish and urged Congress to create a bipartisan congressional committee to study the issue. He also urged policymakers to create an interim unified regulatory board that would consist of leaders from the Federal Reserve, the CFTC and the SEC. That board, he said, would "facilitate the sharing of market information and be armed with joint rulemaking and exemptive authority to eliminate regulatory gaps and duplications that currently exist in the system." This is the first time since the financial crisis hit Wall Street that Lukken has laid out a full-scale blueprint for reform. A former aide to Sen. Richard Lugar, R-Ind., Lukken once played a role in helping to draft the Commodity Futures Modernization Act, which prevented the CFTC from regulating swaps and also created the agency's principles-based regulatory approach. He was appointed to the CFTC in 2002 and is currently serving his second term. In October, Lukken testified that he believes the act should be amended to give the CFTC expanded police power over credit-default swaps, but he offered no thoughts at the time on how to restructure the current regulatory system. -By Sarah N. Lynch, Dow Jones Newswires; 202-862-6634; sarah.lynch@dowjones.com Click here to go to Dow Jones NewsPlus, a web front page of today's most important business and market news, analysis and commentary: http://www.djnewsplus.com/al?rnd=6NlmY0aFxCN%2F%2BlgX8%2BRclQ%3D%3D. You can use this link on the day this article is published and the following day.
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