Securities and Exchange Commission Chairman David S. Ruder yesterday asked Congress to transform the agency into a regulatory superpower by vastly expanding its authority over the nation's stock, options and futures markets.
The SEC proposal, unveiled at the Senate Banking Committee's second day of hearings on the October stock market collapse, would give the agency authority to halt temporarily or shut down trading in stock and options markets during emergencies. Under current regulations, the power to suspend trading in both of those markets is vested only in the president.
Ruder also asked for legislation transferring from the Commodity Futures Trading Commission to the SEC the authority to regulate stock index futures contracts. These contracts, such as the Standard & Poor's 500 index futures, give investors the opportunity to bet on the future price movement of broad stock market averages.
Kalo Hineman, acting chairman of the CFTC, which also regulates all other financial and commodity futures, denounced the SEC proposal to take over stock index futures.
Ruder said the SEC needed legislation granting it broad authority in numerous areas so it could keep up with the unified national market that has emerged from the close relationship linking the stock, options and futures markets. The need for a single, powerful federal regulator because of the strong connection of these markets was dramatized on Oct. 19 when the Dow Jones industrial average plunged a record 508 points, he said.
Given the dispute over what steps, if any, need to be taken to reform the financial markets, rapid legislative action appears unlikely. "I feel legislation at this time is absolutely premature," said Senate Banking Committee member Chic Hecht (R-Nev.).
In its analysis of the trend toward a single national market, the SEC agreed with the presidential commission headed by investment banker Nicholas F. Brady. While Brady and the SEC also agreed that a single regulator ought to be put in charge, they differed on which agency that should be.
Brady, who runs Dillon, Read & Co., on Tuesday urged Congress to give the Federal Reserve Board that role, but Fed Chairman Alan Greenspan and numerous legislators dismissed the idea.
Ruder urged Congress instead to extend his agency's regulatory reach to critical intermarket issues -- such as coordinated trading halts -- that would affect the stock, options and futures markets.
The popularity of stock index futures contracts has surged in recent years as large institutional investors have used the contracts to move in and out of the market at a lower trading cost than is possible by buying and selling large numbers of individual stocks.
Both the SEC and Brady's commission have said that computer-directed "program trading" strategies involving stocks and stock index futures were a major contributor to the October market collapse.
By granting a single regulator increased authority over stocks, options and futures, Brady and others have said critical regulatory gaps that exacerbated that collapse could be closed. In addition, by taking swift and decisive action on key issues affecting trading in all markets, a single federal regulator could discourage the sort of speculation that produced the dramatic rise and fall in stock prices last year, Brady said.
Ruder said that while it is important for the SEC and the Commodity Futures Trading Commission to begin cooperating on various regulatory issues, his agency should be given "tie-breaking" authority whenever conflicts exist. "It is the agency most capable of exercising overall regulatory power," he said.
The CFTC's Hineman said, "Effective cooperation cannot take place where one participant can always dictate the outcome." He was supported in his opposition to the SEC proposal by Sen. Alan Dixon (D.-Ill.), a Senate banking committee member whose constituents include business leaders in Chicago, where the biggest futures markets are based.
Ruder also said that a 1982 SEC-CFTC accord that resolved a dispute over regulation of stock index futures -- placing them under the latter agency -- was flawed from the start and should be abandoned. He said it was inappropriate for the CFTC to have regulatory authority over stock index futures because of the dramatic impact they have on stock prices.
The SEC chairman said he and two other commissioners, Aulana Peters and Charles Cox, favor a more radical proposal than the one submitted yesterday: a merger of the SEC and the CFTC. However, Ruder, describing himself at a press conference later as a "political realist," said such a proposal would face such strenuous opposition that it was fruitless to attempt a move in that direction.
Two of the five SEC commissioners, Joe Grundfest and Ed Fleischman, opposed the proposal to strip authority from the CFTC and expand the SEC's reach. Grundfest said the energy that will be wasted in the months ahead in a regulatory turf battle would be better spent working toward improved cooperation between the agencies. He said giving the SEC authority over stock index futures trading was akin to giving the Department of Energy authority over oil futures trading and the Department of Agriculture authority over trading in pork belly futures.
In confirmation hearings before the Senate Agriculture Committee yesterday, Wendy Lee Gramm, nominated to be the next chairman of the CFTC, said she was opposed to a merger of the SEC and CFTC. "The president did not ask me to become a senior member of the SEC," she said.
Other SEC proposals include possible restrictions on the sale of large blocks of stock to "retard" volatility during crisis periods; higher minimum capital and bank lending requirements for stock market specialists, and possibly a private emergency fund to serve as a safety net for the specialists; and public dissemination of information about computer-directed "program trading" to reduce uncertainty.
Meanwhile, the Chicago Mercantile Exchange, the futures market where the most popular stock index futures are traded, said yesterday that it supports greater market coordination through formation of a committee with representatives from the CFTC, the SEC, the Federal Reserve and all stock, options and commodity exchanges.
The CME also proposed new daily price limits on stock index futures and special price limits during the first 10 minutes of trading.