The Federal Reserve Board yesterday proposed for the first time to control credit for commodity futures contracts, issuing what it called "a regulatory framework" for the new stock index futures that went on sale Wednesday.
The Federal Reserve said it is considering not only regulating the size of the down payment or margin that must be put up to purchase stock index futures, but also may impose limits on loans by banks to support futures speculation.
The restrictions on bank credit for commodity speculation apparently were aimed at one of the major problems contributing to the collapse of the silver market in 1980.
When the price of silver was going up, banks loaned millions of dollars to the Hunt family of Texas and their associates to finance purchases of silver futures contracts.
When the price of silver began to fall, the Hunts were forced to borrow more and more money to cover their commodity speculation losses and eventually sought a $1 billion loan from a group of banks, a loan so big the banks sought the blessing of Fed Chairman Paul A. Volcker before making it.
Congressional investigations of the silver market collapse concluded that speculative credit played a major part in the incident, which threatened several Wall Street brokerage houses with bankruptcy.
The regulations under consideration by the Federal Reserve would apply only to the new stock index futures, but would establish a precident of Fed regulation of all commodity credit, which has never before been subject to government controls. The politically potent and intensely independent futures industry will certainly oppose any government intrusion into its business.
Stock index futures are the latest variation on the century-old practice of buying and selling contracts for future delivery of grain and other commodities. Futures contracts permit users of commodities to protect themselves against unexpected changes in price by contracting to buy or sell goods at a fixed price months in advance.
Rather than wheat or corn, the "commodity" involved in stock index futures is a hypothetical portfolio represented by an index of stock prices.
Trading in the first stock index futures started Wednesday on the Kansas City Board of Trade with a contract based on the Value Line Index of 1,700 common stocks. More than a dozen other stock index futures proposals are now awaiting approval.
Ever since stock index futures trading was first proposed, the Federal Reserve has said it intended to regulate credit for stock futures, just as it now regulates credit for stock purchases.
A confrontation between the Federal Reserve and the Commodity Futures Trading Commission over margins on the Kansas City Value Line contract was averted after a series of negotiations between Volcker and CFTC Chairman Philip McBride Johnson. As a result of those talks, the Kansas City Board of Trade "voluntarily" increased the margin requirement on its contract from $4,000 to $6,500 or about 10 percent of the contract's value.
The increase "would appear to alleviate the need for any immediate action by the board," Volcker said last week, but it took the Fed only a few days to produce a proposal for regulating stock futures margins.
The board asked for public comment on "the appropriate level of margin" on stock futures, the best way to apply present credit regulations to commodity brokers and "the treatment of bank loans and loans from other lenders for the purpose of meeting margin calls and related costs."
Present Federal Reserve rules make it possible to borrow no more than 50 percent of the money needed to purchase stocks, but there are no controls of any kind on commodity credit.