Frank-Peterson Colloquy Clarifies Systemic Risk Status of Exchanges

During the House floor debate on HR 4173, a colloquy between Agriculture Commitee Chair Peterson and Financial Services Commitee Chair Frank clarified that the legislation does not subect derivatives exchanges and securities exchanges to systemic risk regulation. Title I of this legislation creates a systemic risk oversight and regulatory structure that enables regulators to raise capital requirements and impose heightened prudential standards on large, interconnected firms that could pose a threat to financial stability. The legislation also empowers the Federal Reserve Board to impose a host of additional requirements on institutions and activities deemed systemically important.

According to Chairman Peterson, it appears that this new structure is not intended to replace or duplicate regulation of securities or derivative exchanges that are already subject to regulation by the SEC or the CFTC. In looking at the statutory criteria for determining whether a financial company should be subjected to stricter prudential standards, he noted, it is hard to visualize the application of these criteria to derivatives and securities exchanges. Exchanges are not the players who perform the trading, but the administrators of the marketplace where such trading occurs. He asked Chairman Frank is he agreed that, while derivatives and security exchanges would certainly qualify for the definition of a financial company in Title I, the intent of the legislation is targeted more at the players in the marketplace as opposed to the administration of the marketplace. Chairman Frank replied, yes, and agreed completely, as they have operated, as they are almost certainly going to operate, as they are intended to function as marketplaces rather than themselves, it is inconceivable to me that they could be designated in that way.

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