The top futures market regulator proposed what she termed a "substantial compromise" yesterday in the turf battle over regulating financial products that have aspects of both stocks and futures contracts.
Commodity Futures Trading Commission Chairman Wendy Gramm proposed giving her agency even more authority to set requirements for investors buying stock-index futures on credit.
But the proposal would establish a formula to determine whether the CFTC or the rival Securities and Exchange Commission would regulate newly created types of so-called "hybrid" financial products.
"I would view this as being a substantial compromise," said Gramm, who sent her plan to the Senate Agriculture Committee.
A new product would be regulated by the SEC if the product is most like a stock and by the CFTC if the product is most like a futures contract, according to the compromise.
In another development, legislation that would merge the CFTC and SEC into one super-regulator was reintroduced in the House yesterday.
Legislation to reform commodity futures trading was waylaid last year in a jurisdictional battle over which agency should oversee stock-index futures -- the SEC, which regulates the stock and bond markets, or the CFTC.
Stock-index futures are a financial product -- part stock, part futures contract -- that allow investors to bet on the movement of a group of stocks without having to buy the securities themselves.
The Bush administration unsuccessfully sought to tack a measure shifting control over stock-index futures from the CFTC to the SEC onto futures trading reform legislation pending before the Senate last year. The turf battle derailed both the amendment and the legislation.
To avoid another dispute, Senate leaders recently sponsored legislation to leave stock-index futures under the control of the CFTC but shift authority for setting margin requirements to the Federal Reserve Board, which already oversees margins in the securities markets.
Margins are down payments paid by investors buying securities on credit. In the futures markets, margins are performance bonds or earnest money to guarantee compliance.
Securities margins are generally 50 percent of the securities' price while futures margins, which are set by the individual exchanges, are usually much lower. Critics claim the disparity can worsen volatility in market emergencies.
The proposed Senate legislation also would modify the CFTC's exclusive jurisdiction over new hybrid products.
In response, Gramm offered a plan that would expand the CFTC's authority to tell futures exchanges when to raise margin levels on stock-index futures. It also would create a mathematical test to determine which agency should regulate new hybrid products. "If it is mostly not a future or mostly not an option, then it is not ours" to regulate, she said.
Gramm's proposal also calls for exempting certain types of products from current rules that require them to be regulated by the CFTC even if they were developed by an SEC-regulated exchange like the American Stock Exchange.
A federal appeals court ruling in 1989, stating that the CFTC had authority over any financial product with even the slightest aspect of a futures contract, touched off the current turf battle.