A House subcommittee’s report on the debacle that was MF Global includes a recommendation that the SEC and CFTC merge because separately they failed to work together to prevent the firm’s shocking bankruptcy. I’m hoping the legislators’ report will compel the regulators to truly cooperate—one way or another.Despite public pronouncements and a memo of understanding (MOU), the regulators appear to have dropped the ball when it came to effectively monitoring MF Global, according to the House Financial Services Subcommittee on Oversight and Investigations.
“The apparent inability of these agencies to coordinate their regulatory oversight efforts or to share vital information with one another, coupled with the reality that futures products, markets and market participants have converged, compel the Subcommittee to recommend that Congress explore whether customers and investors would be better served if the SEC and the CFTC streamline their operations or merge into a single financial regulatory agency that would have oversight of capital markets as a whole,” according to the report.
The report lays most of the blame for the disaster on Jon Corzine, the former U.S. Senator and governor for New Jersey who became CEO of the firm; the subcommittee does not find that anyone at the firm broke the law.
The report recounts the steps that led to some bad decisions such as a big bet on European sovereign bonds that help bring on bankruptcy and an ongoing mystery on the whereabouts of $1.6 billion that the firm still owes to its clients. (In a Wall Street Journal story, a spokesperson for Corzine was optimistic that MF Global customers would eventually recover their money.)
The subcommittee’s main complaint with the regulators is the severe lack of communication between the SEC and the CFTC. The subcommittee reviewed documents from them that delineated what they did for its oversight of MF Global during the months leading up to its bankruptcy.
“These documents show no record of meaningful communication between the regulators regarding MF Global before the company’s final week of business, even though MFGI was registered with both agencies,” according to the report.
“The SEC’s and the CFTC’s failure to coordinate regulatory oversight of the company meant that the agencies missed several opportunities to share critical information with one another.”
For instance, the SEC failed to include CFTC officials when it met with MF Global in June 2011 to review the brokerage’s global operations and subsidiaries, according to the report. “That meeting, prompted by MFGI’s continued losses and change in business strategy, would have been relevant to the CFTC’s oversight of the company’s FCM business,” the report finds.
“The CFTC, for its part, did not inform the SEC that MFGI was using the Alternative Method to calculate its obligations to its commodities customers trading on foreign exchanges, and that as a result the company could use the ‘excess margin funds’ in secured customer accounts as a source of liquidity for its broker-dealer operations,” according to the report.
The subcommittee found that when the regulators finally worked together during the last days of MF Global they were contradicting each other.
“When MF Global reported that it had set aside $220 million above the amount it was required to hold for its broker-dealer customers, the SEC instructed the company not to transfer any of these funds without prior approval,” the report finds.
“Nonetheless, the CFTC later instructed the company to transfer the funds to the FCM side of its business. When informed of the transfer, SEC Chairman Mary Schapiro stated that the transfer was ‘unacceptable’ and that the CFTC should not have ordered the transfer without telling the SEC.”
The bottom line is clear—the sharing of critical information could have helped the regulators get a better view into MF Global’s troubles and they might have acted “to better protect the company’s customers and investors before it collapsed.”
It’s time for Congress to seriously consider merging the regulators.
“As financial markets evolved and financial products were developed that had attributes of both futures and securities, the jurisdictional dividing line between the CFTC and the SEC began to erode,” according to the report. “As a result, market participants found themselves subject to the regulatory authority of both the SEC and the CFTC.”
The greatest argument in favor of an SEC-CFTC merger would be better protection for investors via a streamlined, modern agency. There could be fewer regulatory headaches for firms. The agencies would combine their human and IT resources to better manage their caseloads. The great hope is that it would lead to a far more proactive agency.
However, Washington being what it is, it would be a long while before the SEC and CFTC would work as one. Another major disadvantage is that a combined SEC-CFTC still might not have enough resources to enforce new regulations and current law. In fact, some positions might be seen as overlapping and would be cut; this would clearly hobble enforcement.
While I think the merger of the SEC and CFTC would ultimately work, I don’t think Congress will seriously consider it before other more pressing matters such as fiscal cliffs, immigration reform and a taxation overhaul.
I’m guessing that the best we can hope for is that the threat of a merger might be enough for the regulators to finally coordinate and set aside turf battles and egos.
Otherwise, if the regulators still refuse to work together, we will see another MF Global-like disaster. But how much more devastation needs to happen before Congress takes action?
Need a Reprint?
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