Attachment B PREPARED STATEMENT OF HON. HAROLD M. WILLIAMS, Mr. Chairman, and members of the Subcommittee: In response to the request of Chairman Stewart, I am pleased to appear today in connection with the Subcommittee's hearing on recent events in the silver futures market. These events have underscored the sensitive nature of this country's organized securities markets and futures markets, and the close inter-relationships between those markets. Since the precipitous decline in silver prices on March 26 and 27, the Commission has closely monitored the financial condition of broker-dealer firms affected by that trading. In addition, the Commission has begun an inquiry into the circumstances surrounding the silver market break insofar as they may have impacted on the securities industry and, in this regard, is coordinating with the CFTC and other interested agencies to ensure that our inquiry proceeds expeditiously and avoids unnecessary duplication of regulatory effort. As you may know, I have provided testimony on two occasions during this past month before the Subcommittee on Commerce, Consumer, and Monetary Affairs of the House Committee on Government Operations, which is conducting its own inquiry into the silver trading of March. I do not propose to repeat that testimony in my prepared remarks today, although I would be happy to respond to any questions which members of the Subcommittee may have in this regard. At this point, I would like to address three questions which the Subcommittee raised in its invitation for me to appear here today. First, the Subcommittee has asked that I comment on various legislative proposals which have been suggested since the events of late March. I would point out that, so far as I am aware, no bills have been introduced in either chamber that deal with this matter. During my testimony before the House Subcommittee on Commerce, Consumer, and Monetary Affairs, Chairman Rosenthal asked for my comments on legislative changes which might be enacted to reduce the likelihood of recurrence, or minimize the impact, of sharp declines in futures prices as that experienced in March. I suggested at that time, and repeat here, that the Congress should provide the Board of Governors of the Federal Reserve System with the authority to adopt margin requirements for all futures trading, which would be comparable to the authority that the Board of Governors exercises over equity securities and options on those securities. Authority to regulate the amount of credit which may be extended in futures trading will provide the Board of Governors with an effective tool to curb excessive speculation in that market, and to channel investment capital into more productive areas. Another important result would be the protection of investors, particularly small investors, from excessive risks incurred by trading upon little or no margin. In addition to the extension of margin authority to the Fed, a number of suggestions have been made to enhance the authority of the Commodity Futures Trading Commission under the Commodity Exchange Act. I do not profess to be expert in these matters. CFTC with whatever additional authority may be needed to enable that agency to obtain full and accurate reports concerning cash market trading activity. Second, the Subcommittee has asked about the legislative and historical basis for the Commission's interest in the trading of commodity futures. Based upon subsequent discussion between the Committee staff and Commission staff, I understand that this question is directed toward futures on tangible However, it would appear useful to provide the odities - such as corn, wheat, and silver - and not futures on securities. The answer is quite straightfoward. The Commission does not seek regulatory responsibility over trading in tangible commodities or futures on those commodities. Indeed, in responding to the recommendation of the General Accounting Office in 1978 that this Commission assume the responsibilities of the CFTC, we specifically advised the GAO that the Commission perceived no need for a transfer of responsibility over trading in futures on tangible ommodities, in view of the differences between that market and the securities market. The Commission does have a serious interest, however, in ensuring that the fairness and orderliness of the securities markets and the efficient allocation of investment capital are not impaired by disruptions in the futures market. Third, the Subcommittee has asked for a discussion of this Commission's activities with respect to commodity futures during the six months prior to March 27. I am advised that this question is directed specifically at trading in silver futures. During the six months prior to the market break of late March, this Commission was not engaged in any regulatory activity focused specifically on silver futures trading, since that market is beyond the Commission's direct jurisdiction. I would advise the Subcommittee, however, that the Commission is continually engaged in the enforcement of its net capital rule applicable to broker-dealers. Indeed, the Commission has had for some time "early warning" rules which require a broker-dealer firm to provide immediate telegraphic notice to the Commission when the firm's net capital position, even though not violative of the net capital rule, approaches certain levels. The existence of this "triggering" device contributed to the Commission's ability to monitor the financial position of brokerage firms during the March silver break. As a result of the March experience, moreover, the Commission is actively considering whether its net capital rules, and other financial responsibility rules, should be revised to shield more effectively the securities activities of broker-dealers from risks they may incur in connection with their commodity futures trading. I thank you again for the opportunity to address this Subcommittee, and I shall be happy to respond to any questions. By letter dated December 4, 1979, the Commodity Futures Trading Commission ("CFTC") requested the Commission to comment on the application of the Kansas City Board of Trade ("KCBT") for contract market designation in a future based upon the Value Line Stock Market Average. The Commission has a strong regulatory concern with respect to the trading of any derivative instrument which may affect the capital formation process, or the integrity and orderliness of the secondary markets for equity and debt securities and other derivative instruments. Accordingly, the Commission appreciates the opportunity to submit these comments on the KCBT application. As you know, the Commission on two prior occasions has apprised the CFTC of its views with respect to an earlier application of the KCBT for contract market designation in the Dow Jones 30 Industrial Stock Average. 2/ In our letter of August 21, 1978, the Commission expressed reservations In recognition of this regulatory concern, Congress in the Letter from Irving M. Pollack, Commissioner, Securities and |