Unusual Joint SEC-CFTC Panel Convened After ‘Flash Crash’

May 17, 2010

The U.S. government sent a signal today that it aims to address the lack of coordination among exchanges that many say was behind the 'flash crash' of May 6, convening a joint SEC-CFTC panel to look at regulatory issues in a broader way.

The Securities and Exchange Commission and the Commodity Futures Trading Commission convened an unusual joint panel of market practitioners, academics and former regulators who were brought together to address a broad range of regulatory issues in the wake of the May 6 “flash crash.”

“Our markets are increasingly interrelated and interdependent,” said SEC Chairman Mary Schapiro in a press release. According to Schapiro, the goal of the hearing is to “serve an essential role in addressing that challenge.”

The Dow Jones Industrial Average of U.S. stocks fell 1,000 points, an intraday record, in part because of what many industry sources have said was a lack of coordination among exchanges. The New York Stock Exchange slowed trade down, while other exchanges kept up the trade, causing a bottleneck of electronic sell orders that helped push the market down with unprecedented swiftness.

“We need to appreciate how events in one arena can potentially impact investors and markets elsewhere,” said Schapiro.

CFTC Chairman Gary Gensler added, “It is critical that the CFTC and SEC hear from the panel together because our markets are so intertwined.”

Brooksley Born Is In The Building

The joint panel’s members include Brooksley Born, former chair of the CFTC; Jack Brennan, the former CEO and chairman of Vanguard; David Ruder, former SEC chair; along with a number of legal and business academics.

Born’s presence at today’s hearing is a sign that the SEC and CFTC are, at the very least, seriously reconsidering their regulatory posture on derivatives trading. The lack of sufficient derivatives trading oversight is largely credited with the market meltdown of 2008, the bankruptcy of Lehman Brothers and the $1 trillion-plus taxpayer bailout of insurance giant AIG and Wall Street investment banks such as Goldman Sachs, JPMorgan Chase and Morgan Stanley.

Born was a prominent advocate for the regulation of the derivatives market—particularly swaps—during her role as CFTC chair in the Clinton administration from 1994-2001. Then-Federal Reserve Chairman Alan Greenspan, along with Treasury Secretary Robert Rubin and other Clinton administration officials, strenuously opposed such regulation.

The Dow Jones average rebounded from its lows on May 6 with the same swiftness, retracing about three-quarters of the losses and settling 346 points, or 3.2 percent, lower, at 10,520.32. The whole gyrating episode lasted less than 30 minutes.

In addition to overarching regulatory issues, the joint panel will testify on a number of other matters affecting individual investors. University of Cincinnati College of Law Professor Barbara Black spoke this morning about how the compelled arbitration process, a standard feature of most broker-client agreements, is being used to sweep what she called “very big problems” under the rug.


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