The Political Dynamics of Derivative Securities Regulation
Romano, Roberta, Yale Journal on Regulation
The U.S. regulation of derivative securities-financial instruments whose value is derived from an underlying security or index of securities-is distinctive from that of other nations because it has multiple regulators for financial derivatives and securities. Commentators have debated whether shifting to the unitary regulator approach taken by other nations would be more desirable and legislation to effect such a change has been repeatedly introduced in Congress. But it has not gotten very far. This article analyzes the political history of the regulation of derivative securities in the United States, in order to explain the institutional difference between the U.S. regime and other nations' and its staying power. It examines the four principal federal regulatory initiatives regarding derivative securities (the Future Trading Act of 1921, the Commodity Exchange Act of 1936, the Commodity Futures Trading Commission Act of 1974, and the Futures Trading Practices Act of 1992), by a narrative account of the legislative process and a quantitative analysis of roll-call votes, committee-hearing witnesses, and issue salience.
The multiple regulator status quo has persisted, despite dramatic changes in derivative markets, repeated efforts to alter it (by the securities industry in particular) and shifting political majorities, because of its support by the committee organization of Congress and by a tripartite winning coalition of interest groups created by the 1974 legislation (farmers, futures exchanges, and banks). In what can best be ascribed to historical ,fortuity, different financial market regulators are subject to the oversight of different congressional committees, and, consequently, the establishment of a unitary regulator would diminish the jurisdiction, and hence influence, of one of the congressional committees. The committee system is not, however, a sufficient explanation because committees' jurisdiction can shift over time. Jurisdiction over derivatives has not changed because of the stake of the key market players-the 1974 tripartite winning coalition-in its preservation and because the regulation of derivatives is an issue of low salience to the public. In the absence of a sustained large exogenous shock which could focus public attention on the regulatory regime and could alter the incentives of the coalition partners to support it, we can predict with considerable confidence that, regardless of change in administration or congressional majority, the dispersed organization of U.S. regulatory institutions of financial markets will remain.
The regulation of financial markets in the United States is dispersed. Securities are regulated by the Securities and Exchange Commission (SEC) while derivatives on securities-financial instruments whose value is derived from an underlying security or index of securities-are regulated by a variety of agencies. Options on securities are regulated by the SEC; futures and options on futures by the Commodity Futures Trading Commission (CFTC); and off-exchange-traded forward contracts, options, and swaps are typically not subject to any federal regulation (unless undertaken by an institution which is itself federally regulated, such as banks). This multiplicity of regulatory authority has been the principal bone of regulatory contention for decades, as regulators, interest groups and legislators have sought to shift jurisdiction to their preferred agency. Even when a regulator does not object to another's jurisdictional grab, market participants have contested the agencies' authority to do so in court.
This Article analyzes the political history of futures regulation in the United States in order to explain what would otherwise appear to be the anomalous persistence of multiple financial market regulators in the United States. The U.S. regulatory scheme for derivative securities is distinctive from that of other nations, which have one regulator for both financial derivatives and securities. …