The Federal Reserve Board, in a fundamental shift, recommended yesterday that margin requirements for securities purchases no longer be set by the government but by the industry's self-regulatory organizations.
Federal Reserve margin requirements have existed since 1934, when the Securities and Exchange Commission was created to protect investors and markets from the speculative excesses that culminated in the crash of 1929. The current margin -- or money the investor must put up as security -- is set at around 50 percent of the purchase price of securities investments.
But in a letter to Capitol Hill, Fed Chairman Paul Volcker acknowledged, "There no longer remains sufficient justification for maintaining securities margins at levels substantially higher than needed to protect brokers and other lenders against loss from customer default."
He recommended that Congress amend the law to allow the self-regulatory market organizations to set margins, under the oversight of a council consisting of representatives of the three agencies concerned: the SEC, the Commodity Futures Trading Commission, and the Fed. As an alternative, he suggested repealing the law and allowing the exchanges to set margins.
The Volcker letter accompanied a lengthy staff study on margin regulations that was requested by Congress in 1982 as part of the CFTC's reauthorization. A companion study on the effect of futures and options trading on the markets was released Dec. 31. It said that the growing market was beneficial and that no additional legislation was needed to regulate it.
The study released yesterday concluded that "high governmentally set margins are not needed to help achieve balance in the distribution of available credit." It added that capital formation is not likely to be materially affected. The use of credit to finance stock purchases has much less impact on the economy now than in the early 1930s because it represents a smaller portion of overall credit.
The study also concluded that, although high margin requirements do protect unsophisticated investors, there are other ways -- such as disclosure -- to protect them. It found that stocks bought on credit do not have an important effect on stock prices. Summing up, Volcker said, "The analysis raises serious doubts as to the need for continuing federal regulation to foster the objectives originally sought by the Congress in passing this legislation."
Prior to its release yesterday, the study was circulated to the Treasury Department, the SEC and the CFTC for comment.
Treasury Secretary Donald T. Regan, a champion of free markets, said he would prefer abolishing the federal margin regulation altogether.
He added that it would lead to "more efficient allocation of resources by allowing individual firms to tailor margin levels to their own capital position, desired level of risk, and the resources of individual customers."
Susan M. Phillips, who chairs the CFTC, wrote, "The present 'pay-as-you-go' system for setting margins by futures exchanges, their clearinghouses and futures commission merchants has worked well and is efficient and appropriate to the economic function served by futures trading. We find no evidence which would justify federal intervention."
Currently, margins on futures and options transactions, which are set by the market, are much lower than those set on stocks by the government.
In his letter to Congress, Volcker took note of the discrepancy and said that competitive equity and logical regulation should bring the margins on stocks and the so-called "derivative" products into closer alignment.