Proponents of a futures contract based on the Dow Jones 30-stock Industrial Average argued yesterday that last week's 60-point plunge by the Dow might have been mitigated if the futures contract had been in use.
Investors fearful of declining stock prices could have hedged their positions by selling futures contracts, rather than sell stocks in the face of a declining market, it was contented at a hearing held by the Commodity Futures Trading Commission.
The potentially moderating effect of the proposed industrial average future was suggested by Charles Commer, an analyst for Bache Halsey Stuart Schields, Inc. and representatives of the Kansas City Board of Trade, which proposed it.
"Perhaps some of the selling might not have had to take place" if hedging in the futures market had been possible, said Commer, who noted the stocks in the Dow Jones index lost about six percent of their value last week.
Walter N. Vernon III, executive vice president of the Kansas City board said that the record decline in the stock market wiped out $73 billion worth of capital, and critized the Securities and Exchange Commission for opposing the board's hedging plan because it conflicts with some SEC rules.
"Is the SEC more concerned with the possible regulatory differences in philosophy than in protecting the American public?" he asked.
Winding up two days of CFTC hearings on the proposal, it advocates complained that the SEC, and the Federal Reserve Board don't understand the futures markets.
The two federal agencies advocated major changes in the Kansas City Board's plan and urged the CFTC to delay approval of the plan until they have completed studies related to it.
But CFTC Commissioner David Gartner, who chaired the hearing, said his agency's decisions, "neither should be colored nor delayed by the views of other federal agencies." The CFTC is to consider the proposal at its regular meeting Nov. 28.
The Kansas City plan is for a futures contract based on 50 times the value of the widely-quoted Dow Jones Average. Because Dow-Jones and Company has refused to allow its name to be linked to the plan, it is officially called the 3 Industrial Stock Index Futures.
Following margin requirements common in the futures industry, the contract could be bought for $1,500.
The Federal Reseve, which sets margin requirements for stock purchases as part of its credit-regulating power, suggested the margin requirements for the stock index futures ought to be comparable to those for stock options, which are 30 percent.
Vernon contended buying a futures contract is not comparable to buying a stock option because no loan of money is involved. He warned that the purpose of providing an inexpensive hedging mechanism would be negated by setting margin requirements so high that the futures would not be used.
SEC General Counsel Ralph Ferrara advocated, delaying the Dow Jones futures until SEC's study of stock options and their impact on the stock market is completed, some time next year. Comparing futures to options, the SEC spokesman noted that CFTC's regulations on sale of futures are far less restrictive that SEC's rules for sale of stocks or options.
The SEC is styding whether the growing market in stock options is drawing capital away from the market for actual securities and Ferrera suggested the opportunity to speculate on the stock market through low-cost futures might increase the capital drain.
Kansas City officials contended the opposite would occur. Their futures contract, they claimed, would provide a way of lessening the risk of stock purchases by letting buyers hedge in the futures market, thereby encouraging investment in stocks.