A Historical Perspective on the Different Origins of U.S. Financial Market Regulators

There are varying objectives and cultural differences among the major regulators of derivative markets in the U.S. This article seeks to shed some light on the sources of differing missions among the Federal Reserve Board (Fed), Securities and Exchange Commission (SEC), and the Commodity Futures Trading Commission (CFTC) by exploring their origins. While the CFTC was not created until 1974, it has its origins in the Cotton Futures Act of 1914/16, and its focus was on the integrity of markets. The SEC was created by the Securities Exchange Act of 1934 in response to the Great Depression with a focus on investor protections. After a series of banking panics in the late 1800s and early 1900s, the Federal Reserve Act of 1913 established the Fed to promote banking system stability. After the Great Depression and WWII, the Fed’s objectives were broadened to include a focus on managing the economy to achieve full employment and price stability. Our perspective is that to understand the regulatory ecosystem in the U.S., one has to appreciate the implications of the different priorities of each regulator and, critically, whether its original focus was on market integrity, investor protections, or systemic risk.