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Industry Needs One Regulatory Voice

Aite Group analyst calls for merger between CFTC and SEC.

Paul Zubulake, Aite Group Senior Analyst, has a bone to pick with Rep. Barney Frank. In early March, Rep. Frank, Chairman of the House Financial Services Committee, shelved the idea of a merger between the Securities and Exchange Commission and the Commodity Futures Trading Commission.

After extensively researching the current regulatory environment, Zubulake believes that unifying these two entities is critical to improving the industry's current regulatory structure. Zubulake will be publishing a report on the topic on Monday.

"The most important decision will be the make-up of the new regulatory structure," Zubulake said in an e-mail. "All parties agree that a systemic regulator is needed. The issue will be having Congress agree on the decision. What is needed is for the current agencies -- the SEC and CFTC -- to be folded together so that capital market participants understand that they will need to answer to a single entity. The quickest way to establish this would be to expand the current working group. The longer-term plan would be for the agencies to merge. The roadblock will be the in-fighting that will take place in Congress, as the committees responsible for the current structure will not want to lose the campaign contributions that come along with such a responsibility."

In an exclusive interview with Advanced Trading, Zubulake says, "There are a lot of different issues out there -- hedge fund registration, for example. There is no doubt that that is going to happen." But, he adds, the agency makeup itself is still up in the air.

Zubulake notes that Congress has tossed around several ideas, including having the Federal Reserve oversee the capital markets. But he believes that would be extremely inefficient because of the Reserve's already extensive responsibilities.

"Merging the agencies is the ultimate end game -- the industry needs a single entity, a single voice," Zubulake says. "The SEC has some credibility issues right now, and the CFTC has a better track record," he adds, noting, however, that the CFTC is just one-tenth the size of the SEC.

One motive for the merger, Zubulake says, is that all financial products are so intertwined that it doesn’t make sense to keep the regulation separate. He also points out that without a single regulatory entity there is no way to move toward centralized clearing. Zubulake adds that there are ways that the entities can be brought together, while still remaining somewhat siloed.

Zubulake says the underlying political resistance comes from some Congressional members' fears of losing their supervisory roles on the committees that help oversee these entities. But, he notes, "That’s Washington’s problem and that’s got to change.”

He blames Washington’s issues primarily on the two-year election cycle. "Representatives are too concerned about the [next] next election," Zubulake asserts. "They are incredibly partisan, and they don’t understand the financial environment."

Other areas where change is needed to create an improved regulatory atmosphere, according to Zubulake, include compensating regulatory staff appropriately and some standardization of clearing credit default swaps. "I am not in favor of mandatory clearing for all OTC instruments," he says. "But for those products that can be put through a clearing system, it should be done."

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