The Commodity Futures Trading Commission has approved a three-year pilot program of trading in U.S. commodity options and continuation of trading in London options.
After the smoke cleared at an open meeting of the commission Tuesday, that was the net result. A staff proposal to ban options trading completely, drafted at the request of CFTC chairman William T. Bagley, was set aside after it had been raised as a threat before the industry-oriented audience.
But the options industry and the commission itself still face an uncertain course because the CFTC has yet to ask the Office of Management and Budget for funds it needs to supervise the controversial, multi-million-dollar sector.
At a meeting late yesterday the commission reiterated its need for the extra funds, but was unable to agree on the number of additional staff and amount of money necessary to monitor the pilot program in fiscal 1978.
The commissioners did approve tentative figures of 60 staff members and $1,862,000 to operate the options program in fiscal 1979. That request will be sent to OMB today and will modify the commission's total 1979 budget request to about $16 million for a total staff of 530 to 540, an agency spokesman said yesterday.
High-pressure sales methods and questionable trading practices of a number of firms offering London commodity options in the U.S. have triggered a proliferation of law suits, administrative actions and headaches for the CFTC.
The frustration of agency officials in dealing with the options industry sparked Bagley's recent public call for a ban on such trading because, with current budget constraints, the CFTC cannot enforce its options rules adequately.
The difficulties with options trading were touched on in the draft proposal to ban them. It begins, "the commodity option industry continues to be plagued by unsound and fraudulent practices to the detriment of those members of the public induced to purchase options. Existing safeguards and surveillance systems appear to be inadequate to prevent fraud and manipulative practicees."
But as all the commissioners, including chairman Bagley, agreed Tuesday, it would create worse problems for the agency at this point to ban the options than to continue with the options program.
As commissioner Robert Martin noted, if the CFTC voted to ban options, it would be hit with a barrage of law suits from the companies that sell London options, as well as from the National Association of Commodity Options Dealers. "And there'd go 12 more of our staff lawyers fighting the law suits off," he said resignedly.
Commissioner Read P. Dunn Jr. added, "It's too late to consider banning options now, considering the state of the industry," Dunn said, however, he would support consideration of a regulation to ban "cold call" sales to persons whose participation in the fast-moving options arena would be "inapropriate." A staff attorney later said a customer's financial situation and market experience could be factors in determining whether he could handle a commodity options sales solicitation.
The commission estimates that it deployed 60 man years of staff time in fiscal 1977, which ends Sept. 30, to handle all aspects of options regulation and enforcement, or about 20 per cent of the commission's total $13.1 million budget.
Commissioner John V. Rainbolt II, who heads the options staff feels that many of the present enforcement problems will be reduced sharply by two proposals domestic commodity options trading to exchange-floor operations except for tightly controlled dealer options in precious metals.
The second would limit London commodity options sales to offerings by CFTC-registered brokerage house sales persons with firms that members of the International Commodity Clearing House in London or with members of the London Metals Exchange.
Under the revised regulations approved for publication in the Federal Register at Tuesday's meeting, the CFTC would permit trading of:
Dealer options on precious metals under certain clearing guarantees.
Both "put" and "call" options on futures on U.S. exchanges, although exchanges would be barred from trading both on the same commodity.
Options on physical commodities.
London options through dealers who are members of the ICCH or from London Metals Exchange members.
A 45-day period for public comment will follow the publication of the regulations before the agency prepares a final version for formal adoption.