Federal commodity regulators started doing something yesterday about problems produced by the collapse of the silver market last spring.
The Commodity Futures Trading Commission put out a series of proposed rules changes that staff members said are meant to protect both brokerage houses and their customers from financial loss in any future commodity market disasters.
The new rules would make commodity brokers take quicker action when customers can't pay their commodity debts on time and would discourage brokers from letting customers use speculative commodities such as silvr as collateral on loans.
"What we are doing is to raise still higher the safety nets" that protect customers and to tighten the reins on brokers, CFTC Commissioner Read P. Dunn said.
Though aimed directly at problems caused by the speculative binge of the Hunt brothers of Texas, the new CFTC rules would not eliminate all the troubles the Hunts got into, officials of the agency admitted.
The new rules apply only to commodity firms that are regulated by the CFTC, explained John Manley, the agency's director of trading and markets. c
Many of the Hunts' difficulties came in dealings with companies that are either the parent or the subsidiary of a regulated firm and thus outside the jurisdiction of the commodity agency.
Other federal regulators such as the Federal Reserve Board, the Securities and Exchange Commission and the comptroller of the currency will have to act on those problems, suggested Commissioner David Gartner.
The highly technical rules changes redefine the "net capital requirements" of commodity brokerage firms. A broker's net capital is the cash the company has left after all its debts are paid. A firm that does not meet the CFTC's minimum capital requirements must shut down.
A CFTC staff survey of 222 commodity firms showed about one-third of them will have to come up with additional capital to satisfy the new standards, when and if they finally are approved.
The new rules also will require brokers to deduct from their net capital any commodity speculating debt that is not paid within three days. Customers now have six days -- and sometimes more -- to pay their debts to brokers before the broker must write off the loss.
When silver prices collapsed in March, the Hunts owed their brokers hundreds of millions of dollars and took several days to pay up. CFTC officials said at the time that all the Hunts' brokers remained solvent. That apparently would not have been the case if the new rules had been in effect.
The other major change proposed yesterday would make brokers deduct from their net capital any debt to them secured by the commodity the customers is speculating in.
The Hunts used silver as collateral to borrow from three companies -- Merrill Lynch, Pierce Fenner & Smith, Bache Metals Inc. and ACLI Iinternational. Manley said the Merrill Lynch loans would have been covered by the new rule, but not the other two.