The Commodity Futures Trading Commission, which oversees the US derivatives industry, is a case in point. The agency, relatively small in Washington terms, was set up in 1974, at a time when most derivatives trading was focused on commodities and when the financial products area was in its infancy. The agency was not given permanent funding status, meaning that it has had to periodically return to the US Congress, to justify its existence and seek re-authorisation. This had repeatedly raised the issue of what regulatory jurisdiction the CFTC either has, or should be given, over this off-exchange trading. Established exchanges have generally complained that, if the OTC market is largely left free from regulatory supervision, this places them at both a cost and operational disadvantage.
Technology compounds the problem further.
The growth in electronic trading means that even on-exchange business is no longer conducted by a discrete number of firms or individuals focused around a specific trading pit. Brooksley Born, the Californian lawyer who stepped down as head of the CFTC following a single term this April, took a forthright stance on both scores. She asserted jurisdiction over the OTC market, launching an inquiry into its regulatory supervision well ahead of the Long-Term Capital Management debacle. Investment banks worried about tighter regulation of OTC trading. Born herself remained a stout defender of its role.