The Post--news: "Single-Stock Futures Advance" +
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>>> Single-Stock Futures Advance
By Kathleen Day
Washington Post Staff Writer
Friday , September 15, 2000 ; E01
Ending a turf battle that has lasted nearly two decades, financial market regulators yesterday reached an agreement that clears the way for investors to buy futures contracts based on single stocks.
The agreement still faces scrutiny from Congress. But lawmakers have told the Securities and Exchange Commission and the Commodities Futures Trading Commission that if they could settle their dispute, Congress would likely adopt their approach. The deal, in which the two have essentially agreed to share regulatory oversight, paves the way to end an 18-year ban on single-stock futures.
A futures contract is a promise to deliver or to buy at a set date in the future and at a set price a certain item--pounds of coffee, barrels of oil, or, in this case, stocks or bonds. By law, a futures contract must be traded on an exchange.
Once the ban on single-stock futures is lifted, investors could, for example, sell a futures contract based on shares of International Business Machines Corp. to hedge against a decline in the price of the company's stock, or buy such a contract instead of buying the actual IBM shares.
Single-stock futures could lower investors' risk by allowing them to hedge against price changes in stocks and bonds. But because they also carry lower margin requirements, similar to those on options contracts, many experts say they could be riskier for many consumers. Initially institutional investors and businesses are expected to be the biggest customers for these new products.
Futures contracts have been around for decades on items such as coffee, pork bellies and corn, as a way for companies to lock in prices of such commodities and control production costs.
In the late 1970s and 1980s, financial services companies began to look to futures contracts as a way to protect against price changes on currencies, interest rates and stocks and bonds. That's when the SEC, which regulates stock and bond markets, and the CFTC, which regulates futures exchanges, began to fight over regulatory authority.
The CFTC argued it should regulate futures on single securities--which include futures on stocks or bonds of public companies or on indexes of a handful of such securities. The SEC disagreed, saying such contracts behaved more like securities and that it should regulate them.
The result was that in 1982, the SEC and CFTC agreed to disagree and simply ban single-securities.
The historic agreement reached yesterday, brokered by Treasury Secretary Lawrence H. Summers, removes the major roadblock that has prevented Congress from passing legislation to reauthorize the CFTC.
And by settling the agency dispute, lawmakers can now pass legislation to clarify the legal status of futures-like contracts called equity swaps, which are forward contracts on stocks and bonds that are traded over-the-counter.
Officials at the Treasury and the Federal Reserve Board have worried that if the stock market drops dramatically, equity swap holders not wanting to face up to their losses might try to argue that the swaps were really futures contracts on single stocks, and therefore illegal and unenforceable contracts.
Federal Reserve Chairman Alan Greenspan and other officials have said that such a dispute could cause a meltdown in the multitrillion-dollar swaps industry and further disrupt the markets.
"This agreement should make it possible for Congress to enact legislation that will maintain the competitiveness of American financial markets, reduce systemic risk and create much needed legal certainty for over-the-counter [swaps]," Summers said in a prepared statement.
Under the agreement, single-stock futures will be defined as securities, a victory for the SEC. But all futures and securities exchanges can sell single-security futures. Those traded on exchanges overseen by the CFTC, such as the Chicago Board of Trade, will be regulated by that agency. Those traded on exchanges, such as the New York Stock Exchange, overseen by the SEC, would be regulated there.
Staff writer Sandra Sugawara contributed to this report.
© 2000 The Washington Post Company <<<
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>>> SEC, CFTC Allow Single-Stock Futures
By Andrew Clark
Reuters
Thursday , September 14, 2000
U.S. stock and futures regulators have finally agreed on ending a nearly two-decades-old ban on the trading of futures based on individual stocks, officials said on Thursday.
The deal between the Securities and Exchange Commission and Commodity Futures Trading Commission removes a major obstacle to a congressional effort to overhaul U.S. futures laws.
Apart from allowing the trading of single-stock futures, the legislation would also keep privately negotiated, or over the counter (OTC), derivatives free of government oversight and restructure the regulation of traditional futures exchanges.
"This agreement should make it possible for Congress to enact legislation that will maintain the competitiveness of American financial markets, reduce systemic risk, and create much needed legal certainty for the over the counter derivatives market," Treasury Secretary Lawrence Summers said in a statement.
The effort enjoys broad support amid fears that outdated regulations are hurting U.S. competitiveness in the lucrative global derivatives business. However, even with the major dispute resolved, its chances of passage in the short time left in the current congressional session remain unclear.
After months of negotiations, and under intense pressure from lawmakers, the SEC and CFTC agreed to jointly regulate single-stock futures, which could be traded by both stock and futures brokers, on both stock and futures exchanges, one year after the legislation was passed.
Futures exchanges have pushed to list the products as a way to bring in new business but were opposed by their securities counterparts, who expressed fears about investor protection and unfair competition with stock options.
To address those concerns, the agreement provides that single-stock futures fall under the strict customer-protection provisions of U.S. securities laws and that margin levels on the products could not undercut comparable options margins.
The tax treatment of stock options and futures would be required to be equalised by the end of 2004, or trading in single-stock futures would have to cease.
While both agencies would have enforcement and examination authority, the CFTC would be the lead regulator for futures exchanges and brokers and the SEC for their securities counterparts. The agencies will consult each other when taking enforcement actions in the area of single-stock futures.
The broader legislation has already cleared the House of Representatives Agriculture, Banking and Commerce committees -- albeit in widely different forms—as well as the Senate Agriculture Committee.
In a letter to House Speaker Dennis Hastert on Thursday, Summers, Federal Reserve Chairman Alan Greenspan and the heads of the SEC and CFTC urged Congress to incorporate the agreement into the legislation and "move expeditiously" to pass it.
Key lawmakers remained guardedly optimistic. "I am confident that this agreement ... will increase the likelihood that Congress passes" the overhaul, Senate Agriculture Committee Chairman Dick Lugar said in a statement.
© 2000 Reuters <<< |
