Wednesday December 16, 6:45 pm Eastern Time
Lawmakers urged to cut CFTC's powers over markets
(adds details, quotes, byline)
By Joanne Morrison
WASHINGTON, Dec 16 (Reuters) - Three former heads of the U.S. Commodity Futures Trading Commission (CFTC) on Wednesday recommended Congress strip the agency of a large portion of its regulatory power, asserting the agency has no role in regulating the multi-trillion dollar over-the-counter derivatives market.
At a Senate hearing that launched a Congressional review of the laws authorizing the CFTC's existence, two of the three former regulators suggested that financial futures and similar products be regulated by some other body.
''No special oversight, facility or federal protection is necessary,'' Susan Phillips, also a Former Federal Reserve Governor, said of privately negotiated financial derivatives contracts. ''Exchange-traded futures and options could also be considerably deregulated,'' she added in her testimony.
Financial futures account for the bulk of the CFTC's regulatory work, with energy, agriculture and metals futures trailing far behind.
Since the late 1980s, regulators and lawmakers have mostly looked to the laws under which the CFTC operates as the guidepost for regulating financial derivatives, including products that trade on and off of futures exchanges.
But changes in the marketplace and a blurring of lines between financial services sectors has now drawn questions from lawmakers who are now weighing a major overhaul of those laws.
William Albrecht, another former CFTC chairman, went further by suggesting that all the agency's powers be taken over by the Securities and Exchange Commission.
The suggestions to pare down the agency's powers come at a crucial time as the tiny agency has come under fire from Congressional leaders and other top financial regulators, including Federal Reserve Chairman Alan Greenspan, for trying to establish a regulatory hold in the $37 trillion off-exchange financial derivatives markets.
Former chairwoman Wendy Gramm told the committee that the current law under which the CFTC operates ''has been a source of legal uncertainty'' for financial markets.
Gramm, worried that the near-collapse last September of the hedge fund Long-Term Capital Management would drive regulators to impose tough new financial derivatives regulations, asserted that the agency has no role in these markets.
The Greenwich, Conn.-based fund, unregulated because it is private, had pooled money from rich investors and banks to make huge speculative investments. The bets went bad as troubles in Asia and Russia roiled global markets.
''I would hope that the CFTC and other regulators would not use (Long-Term Capital) as an excuse to over-regulate,'' Gramm warned
Still, Treasury Department and Federal Reserve officials told the Senate panel they were considering ways to regulate hedge funds, or at least better oversee the banks and securities firms that make investments in these risky funds.
Patrick Parkinson, an associate director at the Federal Reserve, said the Fed would probably soon issue guidelines calling on banks to be more careful when they extend credit to highly leveraged entities such as Long-Term Capital.
CFTC Chairwoman Brooksley Born appeared to be alone in her stance before the Senate panel that new rules are needed in the powerful financial derivatives market, especially after Long-Term Capital incident.
''I think we don't have till 2003 to consider these issues,'' she said of proposals in Congress to take up the matter as part of her agency's reauthorization.
Other commission members, including Barbara Holum, told the committee that issues surrounding the financial derivatives markets must first be considered jointly by other regulators and ultimately by Congress.
Holum suggested that lawmakers in their broader review of Depression-era banking laws, may want to consider broader changes to the financial markets, including derivatives oversight.
''With modernization of the banking laws currently under consideration by Congress, this could be an opportune time to review supervision and regulation of the entire financial services industry,'' she said. |
