The head of the General Accounting Office recommended to Congress yesterday that all commodity options trading - both domestic and foreign - be banned until Commodity Futures Trading Commission improves its supervision of commodity futures trading.
As expected, GAO Comptroller General Elmer Staats detailed before a Senate Agriculture Subcommittee the administrative and enforcement problems of the three-year-old agency discovered during GAO's year-long audit of the CFTC. GAO recommended, however, that the agency be reauthorized as an independent unit with more staff and a bigger budget.
At a companion hearing held by a House Agriculture Subcommittee yesterday, Securities and Exchange Commission Chairman Harold Williams defended the SEC's proposal that it take over regulation of financial futures markets from the CFTC. Williams also told subcommittee chairman Rep. Ed Jones (D. Tenn) that in similar circumstances the SEC would have done a better job of regulating the futures markets over the past three years than the CFTC has done.
The GAO recommendation would delay further a major CFTC program which is in the final stage before implementation and for which the agency has asked $1.8 million in supplemental funds in fiscal 1979. The experimental domestic commodity option program, which the CFTC had planned to start later this year, would provide for the trading of a limited number of option contracts on U.S. futures exchanges.
The program caused the American Stock Exchange to create a new division, American commodity Exchange to trade commodity options on mortgage certificate futures, silver and gold bullion. Other exchanges have asked permission to trade options on futures contracts of silver and sugar, for example.
CFTC Chairman William T. Bagley defended the agency's supplemental budget request for the options program yesterday afternoon at a House Appropriations Committee hearing.
Although the GAO report criticized the commission, it did not support the SEC's proposal that the regulatory jurisdiction of futures markets be divided. The SEC contends that futures contracts on financial instruments such as Government National Mortgage Association certificates, Treasury bonds and bills and commercial paper should be supervised by the SEC because the underlying issues are securities.
The SEC rejected proposals to permit trading of GNMA futures before the CFTC assumed its regulatory role. The CFTC approved the GNMA futures contract in 1976 and permitted other financial futures contracts last year.
Half of the six congressmen attending the House session indicated that they support splitting the jurisdiction: Reps. Edward Madigan (R-III.), Alvin Baldus (D-Wis.) and Dan Glickman (D-Kan.).
Rep. Fred Richmond (D-N.Y.) asked Williams if the SEC could organize a task force to help the CFTC reorganize itself. Williams, somewhat reluctantly, said that would be possible "several steps down the line."
Williams said, "First I think the question of jurisdiction has to be clarified and then the decisions made on how it's going to be run and what its budget is going to be . . . Atter that, whatever we can do to help we'll do."
Richmond stressed that he does not want the SEC to take over the CFTC's responsibilities because the size of the futures markets - which had a volume in excess of $1 trillion last year - requires an independent regulatory agency.
The GAO review found many of the CFTC's surveillance and enforcement programs "greatly in need of improvement." Until the agency improves its supervision of the markets. "Unscrupulous brokers or futures commission merchants have little to fear concerning the commission's ability to detect abusive trading practices," the GAO reported.
The complete findings of the audit will not be published and released to Congress until April, but initial findings revealed by Staats included:
Lack of planning and weak organizational structure which had led to an "ingrained . . . crisis management."
A high staff turnover rate has robbed the agency of its most experienced and knowledgeable professional personnel.
Lack of training programs and difficulty in recruiting personnel familiar with futures markets and commodities has led to ineffectual monitoring and surveillance of markets.
The problem areas cited encompass nearly the entire CFTC operation.
In answering Senate subcommittee chairman Patrick Leahy's (D-Vt.) questions, GAO officials said commission officials conceded that "only two people at the commission understand the nuts and bolts of futures trading . . . and one of them is a commissioner (Robert L. Martin, a former chairman of the Chicago Board of Trade)."
The overall inexperience and lack of expertise is one of the primary weakness of the commission, the GAO aides said.
They said the turnover rate of 35.8 percent at the CFTC compares with 23.5 percent for all federal agencies. While this high departure rate includes some employes leaving the commission to take commodity-related jobs, the GAO said it would not characterize the situation "as a revolving door problem."
GAO said 163 CFTC employes left the commission in fiscal 1977, including 62 professional staff (Attorneys and economists.) Of the 32 professionals who left the agency since last April, 10 went to work for U.S. exchanges, 11 to law firms which have clients involved in commodities and 10 joined commodity-related firms, GAO said.