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Monday, February 22, 2010

CRS Issue Statement on Securities and Derivatives Regulation

Rena S. Miller, Coordinator
Analyst in Financial Economics

Mark Jickling
Specialist in Financial Economics

Gary Shorter
Specialist in Financial Economics

Michael V. Seitzinger
Legislative Attorney

Kathleen Ann Ruane
Legislative Attorney

The financial crisis revealed a number of regulatory failures in the securities and derivatives markets and sparked calls for dramatic change. In particular, the unregulated nature of the over-the-counter derivatives market and the rapid rise and collapse of the private securitization market exacerbated the financial crisis. The increasing importance in capital-raising from the "shadow banking sector," or non-bank financial intermediation between investors and borrowers, and its prominence in the financial crisis also highlighted gaps in securities and derivatives oversight. The propensity for price volatility in stocks, oil, and farm products, has further sparked concern about the adequacy of supervision of the commodities and derivatives markets. The international nature of the derivatives market in particular has raised concerns about a "race to the bottom" if tightened regulation is not effectively coordinated with other governments. 

The crisis also highlighted enforcement failures in the securities market, as the Madoff investment scandal, and additional frauds and insider-trading schemes, sparked a more aggressive enforcement approach at the Securities and Exchange Commission (SEC). The Commodity Futures Trading Commission (CFTC) was widely seen as ineffective during severe oil price volatility in 2008. In addition to possible reforms at these two agencies, and possible efforts to harmonize their overlapping regulation of derivatives, Congress is examining ways to change the financial regulatory structure, perhaps by merging some of the existing regulators into one or more "super-agencies."

Date of Report: January 19, 2010
Number of Pages: 3
Order Number: IS40384
Price: $7.95

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