Should the SEC and CFTC be consolidated?

That’s part of the latest Treasury plan

The potential gain is that a single agency would be accountable
for all the in-between derivative products which are currently overseen
by no one.  Even if you’re a libertarian who hates regulation, a lot of the subsequent oversight (but not all of it) would be enforcement of laws against fraud and false dealing.  Some of it would be preventing excess leverage to take advantage of the Fed safety net.

At current margins the gains from regulatory competition are less than before.  Arguably the CFTC applies a lower regulatory tax to keep economic activity in one of the sectors it oversees, most notably financial futures, and thus to keep itself in business.  This in turn forces the SEC not to regulate stock trading too heavily, otherwise volume will jump into the futures market.  All true, but that argument made more sense in the mid-1980s (post Shad-Johnson), when stock index futures were still a novelty with an uncertain future.  Furthermore international competition constrains the regulators more today than it did twenty years ago (London would gladly pick up business from the Merc), so that means less need for regulatory competition within the USA.

Ideally a regulatory marriage should focus the resulting agency on its most important roles, namely discovering and penalizing outright fraud and preventing catastrophic meltdowns.  Of course that wish might be dreaming.  After all, if investors are tricked why will underpaid lawyers see through the underlying problems in the market? 

Note also that few regulatory consolidations have gone well, at least not in their first few years.  Imagine actually forging the SEC and CFTC into a single culture with a single set of norms and regular communication patterns and employment practices.  I’d be surprised if it could be done in less than four years’ time and that is usually with some big bumps along the way, all in the service of learning of course.  (Google "Homeland Security.") 

So ideally the time to consolidate the SEC and CFTC is when the crisis is truly passed, not today.  In the meantime we should recognize that the case for separate agencies isn’t as strong as it used to be.  But given that the SEC already has its hands full (did they catch the Bear Stearns problems? No), do you want to divert its talent to managing the merger?  I’m not ready to press the "yes" button on this one, even though the final outcome is probably a better place to be.  A simpler alternative is to give the SEC authority over the derivatives and fold in the CFTC five years from now.


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