The Commodity Futures Trading Commission decided yesterday to delay expansion of trading in dealer options, a controversial investment vehicle that has been linked to fraudulent sales practices.
Only two American firms now sell dealer options, but CFTC regulations that were to go into effect next week would have allowed others to apply.
Yesterday, however, the commission voted to revoke the proposed regulations and seek additional public comment on the issue.
A dealer option is a right to buy a commodity from a dealer at a future date at a predetermined price. The investor pays the dealer or a broker a premium for the option and makes a profit if the price of commodity rises enough to offset the premium.
Dealer options are backed up only by the strength of the option dealer, and the financial requirements for option dealers-or writers, as they are called-is one of the issues the CFTC intends to study further.
As originally proposed, a net worth of $5 million would have been required for option writers. But CFTC staff members said they found some firms had included "good will" and other intangibles in their net worth, CFTC now proposes a $5 million working capital minimum for option writers.
The order issued yesterday by the CFTC also says would-be option writers "should be required to demonstrate that their proposed options have characteristics that commercial interests might find of value."
Critics have contended there is no economic justification for commodity options since persons who actually intend to buy commodities can use commodity futures to protect themselves against changes in price.
The appeal of options to speculators is that the risk is smaller than with commodity futures. All an options buyer can lose is the premium paid for the option, but a futures buyer can theoretically lose the full value of the commodity if the market collapses.
Dealer options are similar to London commodity options, which were banned by the CFTC in the wake of the Lloyd Carr scandal. In that case, law enforcement officers charged the premiums for the options were so high that it was virtually impossible for investors to make a profit.
Dealer options are now written only by two firms, Dowdex and Macatta Metals, and only for gold and silver. Other dealers resell options written by the two firms and would share financial responsibility for the options under proposed CFTC rules.
While it is delaying action to allow more trading in dealer options, the CFTC is moving ahead with plans for exchange-traded options, which like commodity futures would be bought and sold on exchanges and subject to exchange regulations to protect buyers.