The Securities and Exchange Commission has urged Congress to hold off on legislation to regulate the volatile government securities market because several government agencies are already working on problems in the area, according to an SEC report released yesterday.

The report was sent to the House subcommittee on telecommunications, consumer protection and finance in response to a query posed by the subcommittee in January. But it was transmitted after the SEC had forced a Florida-based firm, ESM Government Securities Inc., into bankruptcy after fraudulent actions left it short some $300 million worth of securities it was supposed to have had.

The ESM failure led to the closing of a major Cincinnati savings and loan association, Home State Savings Bank, which had major dealings with ESM The Home State failure, in turn, led to a run on other privately insured Ohio S&Ls, which the state's governor then ordered closed last Friday.

Subcommittee staff sources said several members, upset about the events in Ohio, plan to challenge the study's assertion that no legislative action is needed when SEC Chairman John S. R. Shad testifies before it on Thursday.

"There are a number of problem areas in the government securities market which the SEC , bank regulators and industry representatives are currently addressing," the SEC report said. "In addition, we understand that the General Accounting Office is undertaking a survey of the Federal Reserve System's supervision of the Treasury securities market.

"We suggest that these efforts may produce substantial progress in addressing current problem areas and that they should be completed and evaluated before additional legislative efforts are considered," it continued.

The government securities market, which is largely unregulated, has been hit in the last three years by several highly publicized failures of smaller securities dealers. Customers of those firms, as well as other larger dealers with which they traded, have suffered millions of dollars in losses as a result.

The largest, so-called primary dealers, which the Federal Reserve itself utilizes in buying and selling Treasury securities, are very closed watched by the Fed. These dealers, which handle the lion's share of the $45 billion or more in daily government securities transactions, must file daily reports on their market positions -- how many securities they own or have promised to buy or sell in the future -- and monthly financial statements.

As a condition of doing business with the Fed, the central bank requires that primary dealers meet stringent tests of capital adequacy and trading volume. However, the only penalty for not doing so is removal from the list of primary dealers and a loss of Fed business.

Many of the primary dealers are also major banks and, as such, are subject to federal banking regulations and supervision. Other dealers, including about one-third of the 36 primary dealers, are subject to SEC regulation, which imposes broad financial responsibility rules, including those for capital adequacy.

But as the New York Federal Reserve Bank noted in a recent proposal for new capital-adequacy guidelines, "There remains a significant number of government securities dealers that are not subject to any of these federal oversight mechanisms."

ESM was in the group covered by the SEC, but as the New York Fed declared in its proposal, "No capital-adequacy ratio can ensure against fradulent acts. Moreover, adherence to such a standard would not remove the need for market participants to consider other aspects of creditworthiness." Some of the tests it suggested include the ratio of total assets to capital, which it said should not exceed 100 to 1, and a dealer's earnings performance, management capabilities, scope of business, organizational structure and nature of trading activity.

Applying just those sorts of tests to ESM, most primary dealers had declined to do business with the bankrupt firm. A trader at one primary dealer said that ESM had sought to trade securities with it, but upon examination there "were holes in its balance sheet, and when we asked questions we did not get answers."

But some of ESM's customers were far less sophisticated, particularly those who executed repurchase agreements with the firm and did not require that ESM transfer title of the securities to them. Under a repurchase agreement, securities are sold and at the same time a contract executed calling for their repurchase at a higher price later. The higher price provides a return on the money involved.

The New York Fed proposal calls for a careful estimation of how much money a securities dealer might lose if interest rates rise or fall and the value of its market position changes accordingly. "The proposed standard requires that a dealer . . . keep the size of its risk consistent with the amount of liquid capital available to absorb losses," the Fed said.

In particular, the suggested standard is that a dealer's capital should at all times be equal to at least 1.2 times the amount of money it could reasonably lose if the market moves the wrong way.

The Fed suggested that dealers of all sizes be prepared on a voluntary basis to certify to their customers and counterparties in trades that they meet this standard. Further, dealers should ask their independent auditors to test their compliance with the capital-adequacy standard and to certify that a firm's internal management controls are sufficient to monitor compliance on a continuous basis.