Sound financial regulation does not require choosing between governmental
and private action. Instead, optimal regulatory solutions often blend the
expertise and adaptability of private-sector influence with the stabilizing effects
of federal oversight. This collaborative framework has a rich history in U.S.
derivatives regulation, which has long relied on self-regulatory organizations
(“SROs”) like exchanges, clearinghouses, and the National Futures Association
to help promote market stability and customer protection. SROs remain subject
to oversight by the Commodity Futures Trading Commission (“CFTC”), which
guards against the proverbial fox-in-the-henhouse scenario while advancing
quintessential government functions like mitigating systemic risk.
The advantages of this self-regulatory framework were underscored in 2020,
when the coronavirus (COVID-19) pandemic spurred unprecedented volatility
across U.S. derivatives markets. Effectively navigating the market effects of the
pandemic required a calibrated approach that drew from the advantages of
SROs and the CFTC. The integrated response that emerged is a model for how
SROs and the CFTC can together promote stability through collaboration.