After the large derivatives-related losses of the past year, banking and securities regulators are grappling with ways to assure investors that this growing market will not spark crises in others.
But some recent regulatory moves toward such assurance have drawn criticism from other regulators, who feel the actions have stirred fresh market uncertainties.
As the derivatives market continues to evolve, the dividing line between banks and securities firms is becoming blurred. And determining what instruments must trade on public exchanges is confused as well.
The dilemma this creates for regulators is not only how to prevent the ultimate problem, a financial meltdown, but also how to achieve an effective and efficient way of overseeing activity in this market.
Merton Miller, the Nobel Prize-winning finance professor at the University of Chicago, said a recent action by the Commodity Futures Trading Commission against Metallgesellschaft's oil futures trading arm shows that regulatory competition is creating uncertainty in the market.
In that case, forward contracts entered into by MG Futures Inc. were deemed void because they allowed for either delivery of petroleum products or cash settlement. The commission ruled contracts with these characteristics constituted futures contracts and were required by law to be traded on an established futures exchange.
The company's futures arm was also charged with failing to notify the commission of "material inadequacies" in its risk management policies, and with failing to file certified financial reports.
For critics like Mr. Miller, the ruling suggested that the commission was reaching for ways to justify its existence.
"They're trying to find a mission for themselves by becoming the hammer of off-exchange trading by trying to play a big role in risk management," Mr. Miller said.
A commission spokesman denied this was the case, saying the action did not carry the weight of a policymaking decision.
"The case was fact-specific," the spokesman said. "It went to certain activities in terms of instruments that were being sold by Metallgesellschaft."
Still, it has spooked the swaps market.
By stating that any cash settled forward is considered a futures contract, the ruling has caused many dealers and end users to wonder whether the commission is backtracking on its 1993 exemption of these instruments from exchange-trading rules. Not so, said the commission spokesman.
Nonetheless, the action has also gotten the attention of other regulators. Douglas Harris, senior deputy comptroller in the Office of the Comptroller of the Currency, said the ruling had "injected an element of uncertainty" into some derivatives contracts.
"Our concern is that the commercial banks we supervise would want to assure themselves that the transactions they enter into are legal and valid," he said. "That may mean they have to talk to the CFTC about certain transactions."
In other recent instances, actions by regulators of one segment of the market have upset agencies overseeing another sector.
The voluntary code of conduct for derivatives dealers and end users released last Friday is an example. Some see the document as an intrusion into the affairs of securities markets by the Federal Reserve Bank of New York, which assisted the trade associations involved in the project.
Ernie Patrikis, first vice president at the New York Fed, maintained, however, that the bank's participation was as a central banker looking out for the safety and soundness of the financial markets.
"This is not a matter of interagency jurisdiction because we don't have any authority in that area," he said.
But Steven Wallman, a member of the Securities and Exchange Commission, publicly criticized the code for placing too much burden on end users in determining whether a dealer is advising the client or merely selling products.
"I think that the presumption should be that the dealer is required to clarify the relationship," Mr. Wallman told The Bond Buyer newspaper last week. He was on vacation this week and unavailable for comment.
However, it does not appear the SEC's regulatory division wants to get into a shouting match with other agencies. Brandon Becker, director of the SEC's division of market regulation, stressed that his office works well with other federal agencies. While disagreements have developed over specific products, he said, he expects good relations to continue.
"We have worked jointly with the CFTC in the so-called Derivatives Policy Group, and although it is still early in the process, that agreement has been generally recognized as having made a positive contribution," he said.
Even Mr. Miller at the University of Chicago expects any disagreements will be worked out before an all-out turf battle begins, though for a special reason.
"There is a state of equilibrium in the industry now," he said. "Everybody would like their competitors regulated, but they're just about equally balanced, and nobody can really stick it to the others."