With any talk of its possible forthcoming IPO strictly verboten, regulation was one of the topics discussed at the Chicago Board Options Exchange (CBOE) annual media luncheon yesterday. CBOE Chairman Bill Brodsky noted that the markets were still working well and that any new regulations should be done in a “careful way.” He said CBOE is working closely with Congress and the SEC, but it was hard to say when many regulatory issues would be addressed, although he said that whatever gets done in Congress had to be done by the end of June. He also noted that Washington should stop demonizing high frequency trading. Although Washington is giving it a “dirty name,” Brodsky said high frequency trading actually has resulted in better, faster and tighter markets and leveled the playing field.

Gensler said he believes that as many OTC transactions should be “put under the regulatory umbrella” as possible. He added that hedge funds, financial firms and other investment firms should not be exempt from clearing requirements, and said that all standardized products should be moved onto regulated exchanges or trade execution facilities, a requirement that was included in the two regulatory bills now being floated by the House Financial Services Committee and the House Agriculture Committee. He also highlighted some of the recommendations in the CFTC-SEC harmonization report, including expediting the product approval process and proposals to allow for portfolio margining (allowing for certain securities and futures to be brought into the same account).

Exchange leaders offered their opinions about upcoming regulation as well. Chicago Board Options ExchangeChairman Bill Brodsky said that while the harmonization study was well written, it doesn’t answer many of the questions that the Treasury originally asked for about where regulation should go next. He also said the document didn’t address the issue of harmonization between the U.S. and the European Union.

CME Group Executive Chairman Terry Duffy said he would like Congress to move quickly on its reforms. “People need regulation that makes sense on a global scale. We do not feel it’s fair for us to compete with our hands tied behind our back in the global marketplace,” he said. He added that the crackdown on excessive speculation and push for position limits has already caused market participants to move out of the U.S. markets. “We are all for regulated markets, but it’s so perverse what’s going on right now. They’re actually taking business off the regulated market and putting it into dark pools and foreign competitors.”

Johnathan Short, senior vice president and general counsel at the Intercontinental Exchange, said the issue of position limits and excessive speculation “has almost spun out of control. There really hasn’t been any study that has shown that excessive speculation led to higher prices in the last year.” FIA President John Damgard said telling Congress that speculation and manipulation are not the same thing is “falling on deaf ears.” Now that reform is looking like more of a reality, it seems more important than ever for Congress to listen.

In his testimony, Donohue pointed out that “harmonization” of the two agencies hadn’t really been defined. “We believe that the ‘harmonization’ discussion between the CFTC and SEC must take account of the basic fact that these markets are highly dissimilar in many critical aspects and that the regulatory framework, by necessity, should be different,” he said, going on to express concern that “harmonization may be interpreted to mean abandoning the principles-based regulation of the Commodity Futures Modernization Act.”

A push towards adopting a more principles-based regulatory approach was echoed by other exchange leaders. CBOE Chairman Bill Brodsky in his testimony said “we support the Administration’s proposal that the SEC give serious consideration to shifting closer to a principles-based approach for exchanges and clearing organizations under its jurisdiction.” He mentioned that inconsistencies in regulation “have led to conflicts between the agencies over new products, clearing and portfolio margining.” Options Clearing Corporation Chairman Wayne Luthringshausen called for “combining the functions of the SEC and CFTC under a new principles-based statute to ensure holistic oversight of all derivatives products.” Another CFTC-SEC meeting tomorrow will include representatives from National Futures Association and Managed Funds Association.

The proposal received mostly a chorus of praise from the industry. CME Group called it “a significant step towards restoring confidence in the integrity of financial markets.” International Swaps and Derivatives Association CEO Robert Pickel said in a statement that it “provide[s] an important framework for financial regulatory reform.” In his statement, Futures Industry AssociationPresident John Damgard “commend[ed] the administration for the thoughtfulness and comprehensiveness of its plan.” In a statement, Chicago Board Options Exchange ChairmanBill Brodsky said, “We are particularly pleased that the plan recognizes the need for greater coordination and harmonization of the SEC and CFTC,  including streamlining the approval of new products and rule filings.” But not everyone is singing the proposal’s praises.

The “harmonization” of regulatory agencies is one of the elements that could impact the futures industry the most. Specifically, the plan calls for the CFTC and SECto make recommendations to Congress on how to eliminate differences “with respect to similar types of financial instruments that are not essential to achieving investor protection.” The two agencies must complete a report with recommendations by Sept. 30. If they don’t the matter will be forwarded to the soon-to-be created Financial Services Oversight Council. Some are concerned that the creation of additional agencies will not solve the regulatory problems that exist in the financial system. “In the proposal, there are not one, not two, but three proposed coordinating committees [including] the Financial Services Oversight Council. The better solution would have been to get rid of all of those agencies that require coordiation and consolidate them somehow,” says Gary DeWaal, general counsel of Newedge. “It’s more of the same. The Obama Administration has other priorities and they don’t want to use political capital to make real effective change in the financial services industry,” he adds.

House Agriculture Committee Chairman Collin Peterson isn’t a huge fan of the proposal either. In a statement, Peterson said he was “concerned about proposals to expand the authority and responsibility of the Federal Reserve, a secretive and unaccountable institution.”

Peterson did, however, applaud the proposal’s reforms for over the counter (OTC) derivatives regulation, including credit default swaps, the proposal’s other big takeaway impacting the futures industry. The proposal requires standardized OTC derivatives to be centrally cleared and executed on exchanges and requires transparency for all OTC trades and positions through recordkeeping and reporting requirements, as called for by Treasury Secretary Timothy Geithner in an earlier OTC reform proposal.

Brodsky also discussed another regulatory hot button issue, the SEC’s newest proposals to restrict short selling. Brodsky stressed the need for the SEC to allow an exemption for market makers. Not having an exemption would create a “draconian situation,” he said. He seemed optimistic that the SEC commissioners are open to industry comments and suggestions about the exemption. He called the short sale rule “the most important issue facing the options industry in the United States.”

In an address at the conference this morning, Elizabeth King, associate director of trading and markets at the SEC, was asked about the direction of the market maker exemption. “I don’t know what the likelihood is. I think it’s important that those of you here who are knowledgeable about the options business…comment on this proposal,” she said. There will be an SEC roundtable to discuss the rules on May 5, and the comment period will last through June.