Showdown on futures trading. Even SEC split on its idea to enter commodities turf
If the folks at the Securities and Exchange Commission thought it would be easy to win control over stock-index futures trading - as called for by the SEC recently - they might want to do some refiguring. ``There's no groundswell for this idea,'' says Merton Miller, a professor of finance at the University of Chicago's Graduate School of Business. ``Nobody seems to think it's a good idea but [SEC] chairman David Ruder and his staff. And Ruder won on a 3-to-2 vote that will be soon a 2-to-2 vote, as one member of the SEC leaves office.''
There's more at stake in the SEC proposal to gain regulatory control over futures trading than just a bid by one agency to expand its powers, although that is certainly not to be discounted, analysts say. The proposal involves a showdown between two federal agencies: the SEC and the Commodity Futures Trading Commission. The CFTC already regulates the futures market.
The debate has already put the Senate Banking Committee, which regulates the SEC, up against the Senate Agriculture Committee, which regulates the CFTC. And then there is the not-so-inconsequential matter of Chicago versus New York, the former representing the innovative futures markets; the latter, Wall Street and the clout of the equities-oriented New York Stock Exchange.
With all these turf battles, lawmakers and congressional sources do not expect any quick approval of the SEC plan - certainly not before the presidential election in November and, barring any pronounced new volatility in the financial markets, not during the rest of 1988.
``We're just not sure the votes are there at all for some type of quick legislative action,'' says Jim Cubie, a staff official with the Senate Agriculture Committee.
The bold SEC plan caught much of Washington by surprise last week when the commission voted to assume regulatory jurisdiction over futures trading. SEC chairman Ruder favors such an approach, maintaining that stock-index futures are directly linked to their respective stocks, and thus, the stock market itself.
Although futures are considered highly speculative, they are used by many investors - especially large institutional investors - as a hedging technique. Investors agree to buy or sell a particular commodity or financial instrument at a certain price on a future date. Stock index futures are traded primarily on the Chicago Mercantile Exchange. That exchange is regulated by the CFTC.
The SEC approach, for all of the acrimony surrounding it after a heated debate among commission members, has some key supporters, including William Proxmire (D) of Wisconsin, chairman of the Senate Banking Committee, and Edward J. Markey (D) of Massachusetts, chairman of the House Telecommunications and Finance Subcommittee.
But Patrick J. Leahy (D) of Vermont, chairman of the Senate Agriculture Committee, favors an approach that would provide for emergency coordination between the SEC and the CFTC in event of another market plunge, as happened last October, with the Federal Reserve Board serving as the mediator or governing agency in case the SEC and the CFTC could not come to an agreement.
``Whatever happens, you are not going to see a demise of the CFTC,'' the Agriculture Committee's Mr. Cubie says. ``A commodities market and a stock exchange are different animals. They involve different types of trading and different types of financial instruments. Putting them under the same regulatory authority will not solve the problems of volatility in the market, and it will certainly not by itself restore investor confidence.''
Mr. Ruder has been prodding for action on index futures for several months now. Yet the Reagan administration's report on the market plunge called for keeping the current jurisdiction of the CFTC over stock-index futures.
Proponents of more-centralized regulation remain undaunted. ``From a mutual funds' point of view, the SEC is probably the right organization to handle futures trading,'' says Peter Thayer, manager of Gateway Option Index Fund. ``What's important is that the SEC approach adds up to a unified policy regarding excess volatility in the financial markets.''
Still, some analysts, including Professor Miller of the University of Chicago, remain unconvinced that the SEC has the muscle - or popular mandate - to forge a new regulatory approach now. Dr. Miller points out that last week's decisive vote came from Aulana Peters, who joined Ruder and committee member Charles C. Cox in seeking the added SEC authority. But Ms. Peters plans to resign from the commission next month.
By law, President Reagan has to fill her seat with a Democrat. But Mr. Reagan could put off doing so, thus keeping the seat vacant the rest of the year.
Then, any votes on the matter this year would be deadlocked on a tie vote. Such a stalemate would not necessarily bother Miller. ``The SEC has too much on its plate as it is,'' he says.