The Post's lead editorial Feb. 8 concerning the "Black Monday" stock market collapse touted a dubious quick fix -- that the Securities and Exchange Commission be empowered to regulate not only stocks but also stock-index futures, transferring authority for these products from the Commodity Futures Trading Commission.
This proposal, suggested recently by SEC Chairman David Ruder over dissenting votes from two of the five SEC commissioners, suffers from a key misconception. According to The Post's editorial, the SEC's regulatory concern is securities while the CFTC's is "commodities." This is simply not true, and the logic that flows from it is flawed.
The CFTC regulates not "commodities," but rather futures contracts (and options on futures) on commodities. We oversee trading in gold futures but not gold itself. Similarly, we regulate crude-oil futures but not crude oil, and we do not dabble in oil conservation programs or energy price controls. Stock indexes are not fundamentally different from other "commodities" traded via futures contracts. Since 1974, Congress has provided that intangible financial interests can qualify as "commodities."
To serve their economic functions of shifting risk and discovering prices, futures markets are designed to reflect the cash market of the underlying commodity. As a result, the stock market on the New York Stock Exchange and the futures market in the Standard and Poor 500 index on the Chicago Mercantile Exchange are closely related -- "one market," as the Brady commission report put it. The same is true of oil and oil futures, timber and timber futures, Japanese yen and yen futures. This does not mean, however, that we should give regulatory control of oil futures to the Department of Energy or timber futures to the U.S. Forest Service.
Such Balkanization of futures regulation would strangle the markets in chaos and uncertainty. Congress has looked instead to the similarities of futures markets across the board. All futures perform parallel economic functions; they trade by parallel rules. Thus Congress has centralized federal responsibility for all futures in a single expert agency, the CFTC.
Transferring regulation of stock-index futures to the SEC would abandon this principle. Futures exchanges would suffer a double dose of regulation, with the SEC and the CFTC both telling them how to run different parts of their trading floors. Exchange-wide functions such as clearing, surveillance, rule enforcement and capital requirements would become hopelessly jumbled. The public interest in safely run markets would suffer along with liquidity and economic efficiency.
The CFTC, the SEC and the exchanges all have offered in congressional testimony to cooperate in developing concrete, marketwide solutions in line with the recommendations of the Brady report. Progress has already been made, most visibly in proposals by exchange self-regulators on both sides. So far, however, I've seen no convincing evidence that futures contracts caused the massive selling that overwhelmed the NYSE on Black Monday and Terrible Tuesday. To the contrary, erratic trading halts in individual stocks on the NYSE prompted the brief shutdown of several futures exchanges on Oct. 20.
Authorizing the SEC to imposesecurities-like regulation on futures will not even remotely address the issues of market stabilization raised in the wake of Black Monday. It will certainly destabilize one of the most successful innovations of the futures industry and doubtless give the stock exchanges a leg up in their competitive rivalry with the futures marts. What is needed is inter-industry, interagency, intermarket consultation and coordination. Let's give the system a chance to work.
FOWLER C. WEST
Member, Commodity Futures Trading Commission