Home > Stock Analysis

What Paulson's Plan Means To Exchanges

Posted: Apr 01, 2008 08:48 AM by Wayne Pinsent

Tickers in this Article: NYX, NDAQ, CME, NMX, ICE

Treasury Secretary Henry Paulson's plan for sweeping regulation reform was unveiled over the weekend, and contains many provisions to alter the regulatory landscape that we know today. Some of the big proposals include giving the Fed more power to watch over the markets, and the possible merger of the Securities and Exchange Commission (SEC) with the Commodity Futures Trading Commission (CFTC). The latter could have a significant impact on the exchanges.

Get Free Stock Analysis By Email

Positive For Stock Exchanges
The possible merger of the SEC and CFTC would affect all of the exchanges materially since it will change the way they are regulated. As reported in The Wall Street Journal on Monday, it will not affect both exchanges in the same way, however. Stock exchanges, which are now overseen by the SEC, would likely benefit. NYSE Euronext (NYSE:NYX), which runs the New York Stock Exchange, and the Nasdaq OMX Group (Nasdaq:NDAQ) have had troubles dealing with the SEC.

The SEC has been known to be slow to move, which has caused problems for the exchanges when they try to launch new products or change prices, both actions that need approval. The Nasdaq even had to wait years before the SEC gave approval to allow it to become an official exchange. A streamlined regulatory structure will likely help the stock exchange landscape greatly. (For a crash course on the SEC, check out Policing The Securities Market: An Overview Of The SEC.)

Bad For The Futures
The same benefits cannot be said for futures exchanges like CME Group (NYSE:CME), Nymex Holdings (NYSE:NMX) and IntercontinentalExchange (NYSE:ICE). The futures exchanges have a cozy relationship with CFTC, which makes things good now and any changes will shift to a less optimal situation. Complaints have arisen over the years that the relationship between the futures exchanges and the CFTC has caused the CFTC to be slow to react when there actually are problems. If a regulatory shift does occur, I think focus will be put on breaking these relationships. (If you're new to futures, read Futures Fundamentals.)

Nothing Set In Stone
The overhaul plan has many facets and will almost certainly not be enacted in the exact form that Paulson has proposed. This is an election year, and Democrats and Republicans will likely have a fierce battle. You can expect many alterations, additions and subtractions to the proposal.

Also, the proposal to combine the SEC and CFTC will be fought by the futures exchanges. However, Paulson is widely respected and I think the overall policies will be strongly considered. And, despite this being a regulatory plan, it is actually seeing praise from Wall Street. Many see the regulatory system is irreparably broken, so a plan that brings more clarity and structure to regulation will benefit all market participants.

The Bottom Line
Paulson's plan to overhaul the regulatory structures in the markets is far from a done deal. What it is doing is sparking discussion over the future regulatory landscape. Paulson's proposal to combine the SEC and CFTC will likely benefit the stock exchanges, and hurt the futures exchanges a little. I think the overall result would be a big positive for the market, as it would give a clearer and more defined regulatory scheme.

To learn about the history of exchanges, check out The Birth Of Stock Exchanges and Getting To Know Stock Exchanges.

By Wayne Pinsent

Rate this Article: Your Rating: Overall Rating: Vote Now!

MORE STOCK ANALYSIS