is focused primarily on regulating intramarket activities, not on rationalizing the interactions among markets.” SEC Commissioner Edward H. Fleischman agrees. Quoted in the New York Times, Commissioner Fleischman has said, "I wonder whether the SEC would be able to regulate the futures markets as effectively as the CFTC does. You tell me what we would do differently. I would venture to say, nothing. ...We really don't understand those markets, it is a different world." Indeed, there is no evidence that the SEC grasps either the unique risks or the unique benefits of stock index futures, or a complex marketplace in which stocks and futures can interact. Like the mythological Procrustes who chopped off the legs of house-guests too tall to fit into his bed, the SEC has indicated it intends to regulate stock index futures as though they were securities, by such means as the wholesale and entirely unwarranted increase of margin requirements. The overwhelming conclusion of a SEC Chairman Richard Breeden's call for higher futures margins to control volatility exhibits a fundamental misunderstanding of the role of margins in futures markets. large body of academic research into this matter has concluded that changing margin levels is ineffective in controlling volatility. Furthermore, raising margins threatens the economic usefulness of futures markets --and indeed their very viability-- by increasing the costs of using them. Measures such as this may well serve the anti-competitive interests that would relish the destruction of stock index futures, but, let me assure you, they do not serve the global competitiveness of US markets. Competitiveness is the product of innovation. Relatively few of the last decade's important innovations were created under the jurisdiction of the SEC. The stability of US markets would be equally ill-served by this proposal. The SEC has shown no evidence of leadership in the creation of innovative and robust trading and clearing mechanisms capable of handling volatile market conditions. Indeed, during the several episodes of market turbulence of the late 1980s, trading and clearing systems regulated by the SEC performed far worse than those under the jurisdiction of other regulators. Following the market crash of October 19, 1987, the New York Stock Exchange's trading system virtually collapsed. On the Chicago Board Options Exchange, trading in S&P 100 Index option contracts was so problematic that members had to pay a special assessment to fund settlements with disgruntled investors. Both these melt-downs were the result of antiquated practices preserved under the supervision of the SEC. Finally, the fairness of US markets would also be ill-served by this proposal. There is truth behind the public criticism of the CFTC's inadequate surveillance and enforcement capabilities. But we should have no illusions that the SEC will do any better, however, if only we note the recent insider trading scandals. We agree that US markets must be made more competitive, stable, and fair. To accomplish this, the jurisdictional war between the SEC and the CFTC must end. But this war has left both combatants bloodied and dishonoured. At this point, empowering the SEC to regulate stock index futures would be as great a mistake as empowering the CFTC to regulate stocks. We urge that the Administration's proposed legislation be rejected. Let alternate legislation mandate the in-depth research required to formulate truly innovative regulatory structures that will be worthy of the innovation that has transformed our markets. Again, I thank you for the opportunity to testify. THE SEC/CFTC JURISDICTION AND MARGIN THURSDAY, JULY 12, 1990 U.S. SENATE, COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS, Washington, DC. The committee met, pursuant to notice, at 2:20 p.m., in room SD538, of the Dirksen Senate Office Building, Senator Dodd, presiding. Present: Senators Riegle, Garn, Dodd, Heinz, Dixon, D'Amato, Graham, Roth, Bond, and Sarbanes. Also present: Senator Paul Simon. Senator DODD. Let me turn to Chairman Riegle if I can, right off the bat. The CHAIRMAN. Very good. Senator DODD. We apologize, by the way, Mr. Secretary. We have been tied up in the Budget Committee. We had four votes in the Budget Committee and both Senator Riegle and I had to stay there. There are no proxies allowed in the Budget Committee. So you have to be there for the votes, and they were narrow votes decided by a one or two vote margin. So we apologize for being late. The CHAIRMAN. Mr. Secretary, let me welcome you before the committee. This is an important occasion. As you know, we had a very important hearing yesterday morning and afternoon. So we are very much interested in your views. We are convening this hearing at the full committee level because of the importance of the issues that are involved here, but the Securities Subcommittee is going to be leading the effort to try to develop a workable answer here, hopefully on a bipartisan basis between the Congress and the administration, and Senator Dodd, who is chairman of that subcommittee, along with Senator Heinz, the ranking member will be the one that leads that effort. So while we are convening this at the full committe level, Senator Dodd will be running the hearing today in that capacity and for that purpose. [Opening statement of Chairman Riegle follows:] OPENING STATEMENT OF CHAIRMAN RIEGLE The CHAIRMAN. Today we continue our consideration of "The Capital Markets Competition, Stability and Fairness Act of 1990." Yesterday, we heard from Tom Eagleton, our former colleague, who vigorously and enthusiastically advocated enactment of this legislation. Other witnesses, including representatives of the National Association of Securities Dealers, the American Stock Exchange, the Ad Hoc Coalition for Intermarket Coordination, also (381) |