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WASHINGTON (Reuters Breakingviews) - What will be the top financial merger of 2017? Will it be UniCredit buying Deutsche Bank, or Bank of China swooping on JPMorgan? Think again. It will be America's two markets watchdogs – the Securities and Exchange Commission and the Commodity Futures Trading Commission – crunching into one über-regulator.
President-elect Donald Trump has vowed to cut regulation. The country's labyrinth of finance overseers offers a rich target, starting with the SEC-CFTC. But thanks to their heavy entrenchment in Congress, Trump and his Treasury secretary-nominee, Steven Mnuchin, will need to marshal all their negotiating skills to hammer out a deal.
The existence of two market watchdogs is the most glaring example of America's patchwork of financial regulation. The SEC was created in 1934, after the stock market crash, to bring securities oversight to the federal level. The CFTC wasn't established until 1974 and took on regulating futures trading from the Agriculture Department.
Both missed warning signs of the financial crisis, partly because there was no legal authority to oversee the opaque over-the-counter derivatives market. Yet both saw their powers expanded under the Dodd-Frank Act of 2010, which Trump has pledged to roll back.
Competing jurisdictions in Congress over the SEC and CFTC, and the donor money that comes with them, have prevented a merger. The SEC reports to House and Senate banking committees. The CFTC is under the agriculture committees. Lawmakers raise campaign donations based on this power. That's why the agencies survived the Dodd-Frank reforms. Under Trump, several regulators could be gutted or folded into other agencies. The Financial Stability Oversight Council, which designates non-banks that pose systemic risks, is a target. So is the Consumer Financial Protection Bureau. Overhauling these smaller bureaus would provide an excuse to combine the SEC and CFTC.
Many firms are regulated by both agencies, which conduct regulatory exams and bring enforcement actions. That offers opportunities for reducing costs. One area is rent and utilities, where the CFTC proposes spending $28 million in 2017. The SEC estimates a $33 million bill. They could also cut redundant offices like the inspector general, which would reduce their $20 million total budget, or the general-counsel operations, costing $67 million.
The overarching goal should be to create a single agency less susceptible to arbitrage by market participants and less likely to get caught flat-footed in a crisis. If a tie-up between the SEC and the CFTC can accomplish this, it would be a good use of Trump's dealmaking skills.
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