Is a Ginnie Mae option a commodity or a security?

This question may be decided on Nov. 4 when the U.S. Court of Appeals is scheduled to hold a hearing to determine which of two rival Chicago exchanges will sell the new instrument. Last Friday the court issued a temporary stay delaying the start of trading, set for Oct. 30, on the Chicago Board Options Exchange.

The appeal was filed by the Chicago Board of Trade, which has traded Ginnie Mae futures since the mid-1970s and would like to offer Ginnie Mae options as well. During the first nine months of this year CBOT traded 1.6 million contracts in Ginnie Mae futures. According to a spokesman, the potential market for Ginnie Mae options is even larger.

Ginnie Mae stands for Government National Mortgage Association, the federal agency that buys mortgages in the secondary market and issues mortgage-backed participation certificates. A Ginnie Mae future is an obligation on the part of the buyer to take delivery of $100,000 contracts based on the certificates at a certain price at a specified time. A Ginnie Mae option is the right of a buyer to buy or sell the $100,000 principal balance of the certificates at a specific yield at any time during the life of the option.

Ginnie Mae futures are the third-largest interest rate contracts traded, after Treasury bonds and Treasury bills. They are purchased primarily by mortgage bankers and some savings and loan associations as a way of hedging against changes in interest rates. These businesses are expected to be significant traders in Ginnie Mae options, which afford the buyer more flexibility than futures.

CBOT contends a Ginnie Mae option is a commodity and therefore should be regulated by the Commodity Futures Trading Commission. CBOE, on the other hand, believes a Ginnie Mae option is a security and therefore should be regulated by the Securities and Exchange Commission. Should the court decide a Ginnie Mae option is a security, it could have a far-reaching effect because other stock exchanges have already applied to trade these options.

A spokesman for the Mortgage Bankers Association, which is meeting in New Orleans, expressed disappointment at the delay. The MBA had worked toward trading on the CBOE.

CBOT president Robert K. Wilmouth hailed the stay, saying, "We are pleased and delighted with this first step by the court. We believe it is consistent with our position that the CFTC has sole jurisdiction in granting permission to a designated futures exchange to trade options on commodities."

CBOE Chairman Walter E. Auch declared, "We are hopeful that, after the oral arguments are heard on Nov. 4, the court will lift this temporary stay so that we can go forward with this market, which has been approved by the SEC and which is so badly needed in this period of volatile interest rates." Auch said 238 people have registered as traders and 8,000 account executives have been trained to assist buyers.