The first comprehensive report on the effect of futures and options trading on the economy concludes that, while these markets serve a useful economic purpose, they have a potential for causing harm if they function improperly.
The report, prepared by the Federal Reserve, the Securities and Exchange Commission and the Commodity Futures Trading Commission, recommends close coordination of federal regulation of these markets, but no new legislation.
The study, prepared at the request of Congress as part of the 1982 reauthorization of the CFTC, is to be released today. A copy was obtained from Rep. Timothy E. Wirth (D-Colo.), chairman of the subcommittee on telecommunications, consumer protection and finance.
Futures are obligations to trade a specified contract on a given date at a price set in the present. Options give a holder the right to buy or sell a contract at a specified price before a stated time in exchange for a premium. Futures and options are written on commodities, currencies, stocks, government obligations and on indices of common stocks. They are used by hedgers to offset risk on fluctuating prices or interest rates and by speculators to make a profit. There are now 11 commodity exchanges and five securities exchanges trading options.
Congress instructed the agencies to study the economic justification for futures and options, the effect on the formation of capital and liquidity of credit markets, the adequacy of existing regulations to prevent manipulation of underlying securities markets and of investor protections. Representatives of more than 100 financial institutions and commercial firms active in the markets were interviewed and a survey of participants is contained in the 700-page report.
A reading of a draft copy caused John Damgard, president of the Futures Industry Association, to declare that the long-awaited report "does not seem to break a lot of new ground. It does not set the stage for a battle between the CFTC and the SEC, which is one of the industry's concerns."
Among the findings:
* Financial futures and options appear to have no measurable positive or negative implications for the formation of capital and appear to have enhanced liquidity in some of the underlying cash markets.
* While institutions use the markets for hedging, most individual participants use the markets for speculation. They are, on the whole, well educated, have net worth over $100,000 and are experienced traders with few complaints about brokers not informing them of risks.
* Options and futures markets do not take funds away from businesses, farmers or governments seeking financing, although the direction of the flow of funds may be slightly altered. Their effect on the flow of capital to risky investments is minor.
* Futures and options do not destabilize cash market prices and, indeed, may work to stabilize them.
On this last point, the report cautions that "these analyses cannot be considered conclusive. . . . The tests cannot rule out the possibility that, over certain isolated periods that occur on a random basis, the activities of speculators can cause speculative bubbles to form in markets."
The report pointed out differences in options regulation by the SEC and futures regulation by the CFTC but recommended no structural changes. Nevertheless, it said that since the products and participants are similar, the two agencies should coordinate their rules.