U.S. derivatives regulators and securities regulators announced a deal intended to improve cooperation between them, enabling them to deal with financial innovations that blur the lines between different products.

The U.S. Commodity and Futures Trading Commission and U.S. Securities and Exchange Commission announced that their respective chiefs, acting CFTC chairman Walter Lukken and SEC chairman Christopher Cox, signed a mutual cooperation agreement to establish a closer working relationship between their agencies. They also announced their immediate plans to consider two new derivative products under the agreement.

The agreement establishes a permanent regulatory liaison between the agencies, provides for enhanced information sharing, and sets forth several key principles guiding their consideration of novel financial products that may reflect elements of both securities and commodity futures or options.

Today, as evidence of their closer relationship, the agencies also announced they are issuing notices requesting public comment on two new products. In addition, the Options Clearing Corporation, which is subject to the joint jurisdiction of the agencies in certain areas, recently filed with both the SEC and the CFTC for approval to clear and settle both of the new products. Both agencies expect to act on these filings expeditiously and issue notices for public comment in the near future.

The two new products have raised questions about how they should be regulated under federal law. Other recent products, such as credit default options, have raised similar questions. The Memorandum of Understanding addresses how the agencies will approach products that raise these issues in this burgeoning area of financial innovation. It also establishes a framework that will facilitate discussions and coordination regarding issues in other areas of common regulatory interest between the two agencies, such as portfolio margining, foreign security index products, and the oversight of firms registered with both agencies.

Under the principles governing the review of novel derivative products, the agencies agree to recognize their mutual regulatory interests and encourage innovation, competition, and legal certainty.

“This agreement represents a valuable coordination of the roles of the SEC and the CFTC in our capital markets,” said SEC chairman Cox. “Years ago, when the dividing lines between our agencies’ regulated products were bright, the high level of coordination we are establishing today was not a priority for the U.S. government. But today, the blurring of these distinctions requires the U.S. government to adopt a more coherent and coordinated approach. To this end, we look forward to enhancing our collaborative relationship with the CFTC within the formal framework covered by the agreement.”

“As innovation blurs financial sector lines, this agreement will create regulatory synergies between the agencies for the benefit of the public,” added Lukken. “While recognizing our distinct missions, the MOU establishes a solid framework for increased cooperation and communication between the CFTC and SEC. The agreement also contains specific principles to guide future consideration of novel products, with the goal of reviewing product filings expeditiously, providing legal certainty for participants, encouraging market neutrality and choice, and enhancing innovation and competitive growth. This is smart government, and we look forward to this new era of enhanced cooperation with the SEC.”