Financial Regulatory Coordination

Following the highly publicized losses experienced by a large leveraged hedge fund in 1988 and the potential implications for worldwide financial markets, questions began to be raised about the role and functioning of the President's Working Group on Financial Markets. The Working Group was created by an executive order in response to the 1987 stock market crash, although since 1994 the Working Group has served as a mechanism to coordinate regulatory responses to various market events that have arisen. This group is composed of the Secretary of the Treasury and the chairs of the Board of Governors of the Federal Reserve System, the Securities and Exchange Commission, and the Commodity Futures Trading Commission. This report discusses (1) whether the issues listed for consideration by the Working Group by the executive order have been considered, (2) what additional issues have been considered by the Working Group and how they were identified, and (3) the nature of coordination and cooperation within the Working Group and the views of Members of Congress and Working Group participants about whether it needs to be formalized in statute.

GAO noted that: (1) the Working Group and the relevant agencies have considered the issues articulated in the executive order concerning the 1987 market crash; (2) the 29 issues were divided among four categories: (a) investor confidence; (b) the credit system; (c) market mechanisms; and (d) the financial regulatory structure; (3) all of the issues were discussed in the Working Group's 1988 report on the market crash, or subsequently were addressed by the Securities and Exchange Commission, the Commodity Futures Trading Commission, or the exchanges they regulate; (4) the Working Group and the agencies have revised a few of its May 1988 recommendations, such as the 1998 revision of coordinated trading halts and expansion of their work on bankruptcy reform; (5) since 1994, the Working Group also has considered a variety of other financial issues; (6) most of its activities have resulted from self-initiated or congressionally requested work following some market event or issue; (7) the Working Group has drafted legislation aimed at reforming provisions of the Bankruptcy Code that apply to certain types of financial instruments; (8) the Working Group serves as an informal mechanism for coordination and cooperation among its members and their staffs; (9) according to the officials familiar with the Working Group, the frequency of its meetings usually is driven by market events; (10) the senior staffs of the agencies, who are responsible for carrying out the work of the Working Group (the Steering Committee), generally meet biweekly; (11) agency officials said that meetings of the Steering Committee are informal and generally have focused on agency perspectives, market events, agency actions, and financial legislation; (12) various members of Congress have raised questions about the Working Group's ability to coordinate and function effectively; (13) since 1994, various proposals have been made to provide a statutory basis for the Working Group; (14) although such proposals could enhance continuity, they also raise resource and structural issues; and (15) agency officials involved with the Working Group were generally averse to any formalization of the group and said that it functions as an informal coordinating body.