The evolving exchange environment, which has increasingly started pitting futures exchanges against FCMs for business, has led some industry observers to advocate a new super-regulator for the US markets.

While much of the recent industry debate over regulation has centered on the prospects of a merger between Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC), some said the entire financial services regulatory regime needs to be reexamined.

Gary Alan DeWaal, Fimat general counsel, said talk of combining SEC and CFTC is shortsighted. He contended that regulation should be addressed through a new regulatory entity, as futures exchanges have started to compete more with FCMs but with far fewer regulatory requirements, especially in the wake of the Commodity Futures Modernisation Act (CFMA) of 2000.

"CFMA? allows the exchanges to compete with FCMs unfairly with a non-regulated fashion," DeWaal told FO Week.

DeWaal argued that FCMs were saddled with a slew of brokerage rules and regulations in order to sell exchange products. The current rules, he said, require broker staff to obtain licenses to sell futures products to customers, capital requirements to participate on futures exchanges and clearing capital along with investments in exchange clearing houses via stock holdings. Futures exchanges, he argued, could simply pitch their products directly to end users without any such requirements.

"They get principled regulation and I get micro-regulation," DeWaal said. "So their complaint about the over-the-counter industry is my complaint against them in the regulated business. To the extent they act more like brokers, they should be regulated like brokers and to that extent we act more like exchanges, we should be regulated like exchanges. Fair is fair."

As exchanges such as Chicago Mercantile Exchange (CME) and Chicago Board of Trade (CBoT) push forward with a slate of service offerings directly to end users, futures brokers are increasingly finding themselves competing for such customers. Hedge funds are offered direct connectivity to exchanges and are given member rates and clearing benefits to trade on Chicago's exchanges.

One large FCM executive said brokers took notice when CME forged a distribution deal with Chinese Foreign Exchange System (CFETS) last year, a deal which would allow China's banks to access CME FX and Eurodollar contracts. CFETS would also serve as a super-clearer for those participants. While these deals extended the reach and customer base for CME products, they ultimately cut out the need for brokerage services.

"There was a time when we were part of the distribution network for exchanges," said one FCM executive.

Seven exchange executives on a panel at Futures Industry Association's annual conference in Chicago earlier this month unanimously predicted that in ten years time both SEC and CFTC would still be operating as they are today.

"I firmly believe there is no regulatory efficiency gained by combining the regulators," said Jim Newsome, president of New York Mercantile Exchange. "And because of that I think there will remain two (agencies)."

DeWaal however was advocating a new regulatory entity that would look at products in a whole new way. With portfolio margining coming to securities and more OTC contracts being offered via brokers, DeWaal argued that the differentiation between stocks, options and futures was blurred.

"The whole idea of securities and futures being very different products is no longer valid," DeWaal said. "To me, securities and futures are financial instruments and we need regulation to look at them as similar instruments, not different instruments."

He said the President's Working Group, which had pushed for portfolio margining in securities and other changes to the CFMA as part of the reauthorisation of CFTC would be well suited to propose a new regulatory regime.

Such talk is still new and has barely registered on the radar screen in Washington. But DeWaal said it could gather some steam heading forward with key political leaders like US Treasury secretary Henry Paulson, who has said that regulation is leaving the US markets at a competitive disadvantage to those outside the US. Former SEC chairman Arthur Levitt has also supported changing the current regulatory regime.

"I believe the President's Working Group has the ability to act as a super coordinator," DeWaal said.