Regulating Finance: Mergers and Constitutions

Yesterday, the U.S. House of Representatives’ Financial Services Subcommittee on Oversight and Investigations released a report on the collapse of MF Global. Before its October 2011 collapse, MF Global was betting $6.3 billion on European government debt; when discovered, the exposure to risk spooked markets, forcing MF Global into bankruptcy protection. In yesterday’s report, GOP congressmen blamed the MF Global catastrophe on former CEO (and Democrat heavyweight) Jon Corzine.

The Subcommittee also pointed fingers at the credit rating agencies (S&P and Moody’s) and the regulators (the Securities and Exchange Commission and the Commodity Futures Trading Commission) involved. With the regulators, the Subcommittee alleges their “failure to coordinate regulatory oversight of [MF Global] meant that the agencies missed several opportunities to share critical information.” But, acknowledging that the evolution of financial markets has blurred the SEC’s and CFTC’s jurisdictional boundaries, the Subcommittee made the following recommendation:

As financial products, markets, and market participants have converged, the SEC’s and the CFTC’s regulatory jurisdictions have increasingly overlapped.  In response to this convergence, the regulators have pledged to work together in various areas. […] None of these efforts, however, resulted in meaningful cooperation between the SEC and the CFTC regarding MF Global. 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…merge into a single financial regulatory agency.(Emphasis mine)

Just last month, even SEC Chairman Mary Schapiro made a similar observation:

My view is there is an enormous amount of logic to combining the two agencies, and I think as well as we work together, having to divide the over the counter derivatives market” regulations “is an example of why combining the two agencies would make sense.”

While the circumstances are quite different, the idea of merging financial regulators brings to mind Finance Minister Flaherty’s attempt to establish a national securities regulator with his proposed Canadian Securities Act. However, Canadian securities regulation lies within the constitutional jurisdiction of the thirteen provinces and territories. Reacting to Minister Flaherty’s proposal, Alberta, Quebec, Manitoba, and New Brunswick expressed concern over federal infringement on provincial jurisdiction. Minister Flaherty sought the advice of the Supreme Court of Canada to clarify the proposed Act’s constitutionality, and by December 2011, the court agreed with the four provinces in question. The Supreme Court declared that the economic importance of securities regulation does not justify federal intrusion. The court did concede that a cooperative and coordinated federal-provincial approach might be constitutionally possible. Minister Flaherty’s office noted it would respect and review the decision. 

It will be interesting to track the challenges and opportunities facing US securities regulation. By yesterday afternoon, the proposed regulatory overhaul was already causing political controversy; the SEC is governed by the House Financial Services and Senate Banking committees, while the House and Senate Agriculture committees are reponsible for the CFTC. But, irrespective of the future of Canadian securities regulation, the technical complexity of financial products will continue to accelerate, forcing regulators to react and provide adequate and responsible oversight of financial markets.

Nota bene: For those unfamiliar with the circumstances surrounding MF Global’s collapse, check out Frontline PBS’ documentary from May this year. Here is Chapter 1:

Watch Six Billion Dollar Bet on PBS. See more from FRONTLINE.