Securities and Exchange Commission Chairman David S. Ruder yesterday ran into a buzzsaw of opposition from leaders of the commodities industry when he called for a significant increase in the amount of money that customers have to put up to trade in stock index futures.
Ruder said the amount of margin or "down payment" on stock index futures should be raised to between 20 percent and 25 percent. It now is about 15 percent, having been raised by the commodities exchanges following the Oct. 19 market plunge, exchange officials said.
The SEC chairman delivered his suggestion while speaking to the Conference Board in New York, where he outlined his ideas for reducing market volatility and turbulence.
Ruder said futures contracts let traders control contracts worth large amounts of money with only small "deposits," a process called leverage.
"While the extent to which futures market leverage exacerbated the market decline is uncertain," said Ruder, "its impact was significant."
In a press conference, Ruder said he did not think Congress would grant his request that the SEC be given control of stock index futures, now in the hands of the Commodity Futures Trading Commission.
Ruder's "margin" proposal drew opposition from several key commodities industry officials who were asked for comment.
"I think it is either a misprint or he has some information we don't have," said Kalo A. Hineman, acting chairman of the CFTC.
"It says we want to raise your cost of doing business, so you won't do so much business ... so we won't have so much volatility," Hineman added.
"It just doesn't add up, it just doesn't make sense ... I understand the urge to reduce volatility but we've got to go about it in the most efficient way."
William J. Brodsky, president of the Chicago Mercantile Exchange, home of the popular Standard & Poor's 500 stock index futures contract, was also unhappy with the Ruder suggestion.
"It is obviously his opinion and not consistent with our view," he said. Brodsky added that there were both regulatory and congressional officials who did not support the Ruder view.
He called margins "a delicate issue" and said "raising them too high would seriously impact on liquidity."
John M. Damgard, president of the Futures Industry Association in Washington, said of the 20 percent to 25 percent range, "My suspicion is that's a little high." He said, "Our position is that we should not take the margin-setting authority away from the exchanges and those who are closest to the action."
Ruder had made a reference to boosting the margins on stock index futures in his testimony recently to the Senate Banking Committee. But his reference was indirect.
The S&P 500 stock index is based on the value of 500 stocks contained in the index. The commodities exchanges trade options and futures contracts on the index.
The current value of an S&P 500 contract is about $132,000. A 20 percent initial margin would be $26,400. However, the SEC said, the current margin required is $15,000 for traders and only $10,000 for hedgers.
Futures contracts on the S&P 500 have been widely used by program traders. In the most popular form, called index arbitrage, the trader takes advantage of discrepancies between the cost of the stocks in the index and the cost of the futures in order to lock in a profit.