To strengthen its oversight of the financial markets, the US Federal Reserve yesterday signed an information sharing pact over the financial services sector, specifically covering the banking sector, with the Securities Exchange Commission (SEC), in a move that consolidates the Fed's regulatory position in the country.

The agreement between the two regulators covers anti-money laundering, bank brokerage activities under the Gramm-Leach-Bliley Act, clearance and settlement in the banking and securities industries, and the regulation of transfer agents, which have traditionally been under the purview of the SEC.

A joint statement by the two regulators said, "The agreement specifically covers bank holding companies and so-called consolidated supervised entities that own securities firms and builds on and formalises the exisitng cooperative arrangements between the SEC and the Board, as well as the more recent cooperation on matters including banking and investment banking capital and liquidity following the Board's emergency opening of credit facilities to primary dealers."

"I am pleased with this agreement," said Federal Reserve Board chairman Ben Bernanke in the statement. "It formalises and strengthens the ongoing cooperation between our two agencies to enhance the stability of the financial system. I look forward to continuing this productive collaboration with Chairman Cox and his staff."

The US Fed traditionally has not regulated investment banks, which have been under regulation by the SEC, and the agreement will now alllow it information about financial services firms of common interest to the two regulators, including big Wall Street banks.

Ever since the emergency bailout package facilitated by the US Fed to rescue Bear Sterns in March and enabling emergency funds through its discount window to other US investment banks hit by the collapse of sub-prime market, which are under the primary supervision of the Securities and Exchange Commission, the Fed had been working on urgent regulatory changes.

As the primary supervisor of the the four largest investment banks in the US -Goldman Sachs, Lehman Brothers, Merrill Lynch and Morgan Stanley - the SEC will provide the Fed with information and analysis about their financial condition, risk management systems, internal controls and capital, liquidity and funding resources.

The agreement does not create new regulation to oversee the investment banks that have enjoyed less regulation than commercial banks and bank holding companies. The agreement between the Fed and the SEC merely outlines the scope and mechanism for sharing information related to the Fed's discount window and other areas, till Congress passes new regulations, something which get in to the next year following the November presidential elections.

For instance, the US Treasury has issued a roadmap to modernise financial rules and regulations for the US markets, which Democratic lawmakers, who currently have a majority in Congress, will not focus on until after the new White House administration is in place.

Smart government, says SEC chairman
"This agreement represents a valuable coordination of the roles of the SEC and the Fed in our capital markets," said SEC chairman Christopher Cox. "Years ago, when the dividing lines between commercial and investment banking were bright, the high level of coordination we are establishing today was not a priority for the US government. But today, the interconnectedness of mortgage and lending markets, credit derivatives, securitizations, and counterparty relationships requires the US government to adopt a more coherent and coordinated approach. Just as with our similar arrangement with the CFTC, this agreement will permit the expanded sharing of information on a confidential basis, and help ensure that regulated entities receive a coherent message from Uncle Sam. This is smart government. We look forward to enhancing our collaborative relationship with the Fed within the formal framework covered by the agreement."

The agreement will improve the ability of the SEC to perform its role as primary supervisor of consolidated supervised entities and primary dealers, and improve the ability of the Federal Reserve to perform its role in overseeing the stability of the financial system. The importance of this deepened cooperation is highlighted by the recent stress in the financial markets affecting commercial and investment banks, as well as many other market participants.

The SEC recently entered into a similar MOU with the Commodity Futures Trading Commission. An agreement between the SEC and the Department of Labor is anticipated later this summer.