The Commodities Future Trading Commission and the Securities Exchange Commission should closely consult the Federal Reserve on conflicts of interests affecting the nation’s over-the-counter derivatives clearinghouses, wrote HLS Professor Hal Scott, director of the Committee on Capital Markets Regulation, in a letter to the chairman of the CFTC. According to Scott, the CFTC’s rules could have a direct bearing on the riskiness of the clearinghouses, and ultimately on that of their participants.

“The Fed’s broad powers and roles under Dodd-Frank affect virtually every important CFTC and SEC regulatory and rulemaking activity affecting clearinghouses, including conflict of interest rules,” he wrote.

The letter, released yesterday by Scott, was sent to CFTC Chairman Gary Gensler on August 25.

Scott, the Nomura Professor of International Financial Systems at HLS, noted the Fed’s mandates under the Dodd-Frank Act empower the central bank to:

  • Supervise the major dealers who are the principal owners and users of clearinghouses
  • Open the discount window privileges to clearinghouses under unusual circumstances—subject to conditions which could include those relating to their risk management systems
  • Object to any rules promulgated by the SEC and the CFTC regarding systemically important clearinghouses, forcing the Financial Stability Oversight Council to resolve the dispute

Given these broad, immense powers, Scott added, “It is inconceivable to me that an agency whose rulemaking and systemic risk moderating activities are certain to come under close Fed scrutiny would not want to take the Fed into its confidence on conflict of interest rules.  A failed important clearinghouse would be the financial equivalent of Chernobyl.  This is no time in our history for regulatory turf battles.  I ardently hope that Chairman Gensler and his staff at CFTC, as well as their counterparts at the SEC, are coming to precisely that conclusion.”

The Committee on Capital Markets Regulation is a nonpartisan research organization dedicated to improving the regulation and transparency of U.S. capital markets. A copy of Scott’s letter is posted on the CCMR web site at