portant operational similarities between commodities and securities margins. Margin levels in both cases serve as a threshold determinant for many potential customers. The initial decision on market entry and the quantitative decision on how large a position to take are easily influenced by the relationship between available speculative cash and the amount of margin required. A second common element in securities and commodities margins is the potential role for margin in the acceleration of sudden market fluctuations. When margin deposits are low, price movements may generate sufficient calls for additional deposits that customer decisions about account maintenance are controlled by the ability to meet calls. A market characterized by very low margins is a market vulnerable to chain reaction price movements. While I unequivocally favor the placing of permanent marginsetting authority with the Federal Government, there are two aspects of the bill before you now that may deserve your further attention. Senate bill 2704 would place this authority with the Federal Reserve Board of Governors. That is appropriate to the extent that concern for the general economic implications of futures speculation motivates the bill. Concern for the health and commercial viability of the markets themselves might argue, though, for placing this authority with the Commodity Futures Trading Commission. Study might also be profitably directed at which of the two agencies could more easily develop the necessary expertise. My second reservation concerning this legislation arises from its attempt to draw a distinction between financial instruments and other commodities. The problems we witnessed in the silver market were born at least as much from silver's usefulness as a raw material in commerce as from its erstwhile similarity to a medium of exchange. A bubble in copper, sugar, or soybeans could be every bit as harmful as a bubble in a more abstract or intangible commodity. The lack of close substitutes, moreover-a characteristic more prevalent in other commodities than in financial instruments-is probably one of the most essential ingredients to bubble formation. My proposal is for federally established minimum margins to control speculation in all commodities, not just those with some degree of proximity to money. RESTRICT SPECULATIVE LENDING Except with respect to the exclusion of agricultural commodities, I fully concur with the portions of Senate bill 2704 which would seek to restrict lending for purely speculative purposes. Just as the Congress acted in 1934 to curb the extension of credit "into the stock market and out of more desirable uses in commerce and industry," so it should consider acting now with respect to commodity speculation. Economists today are in rare agreement on the proposition that our Nation devotes too small a fraction of its savings to the formation of new productive resources. The public as a whole is painfully aware that personal credit is tight. In these times, it is a cause for distress when hundreds of millions of dollars in bank credit are seen devoted to something as manifestly unconstructive as speculative hoarding in silver. Banks and brokers have long been prohibited from lending money to meet margins on securities. They regularly make loans to finance speculative margins and physical deliveries for speculative purposes in commodities. There is no reason for this disparity to continue. In the era of tight money, inflation and Government guarantees of institutional solvency, the case for such restriction seems to me to be self-evident. Low margins and the availability of ready credit for unlimited amounts of commodity speculation may be extremely attractive to the exchanges, brokers, and traders who depend upon trading volume. They may be attractive to the largest of speculators and to the smaller speculators who would ride their coattails. From the broader perspective of the public interest, however, moderation and commercial usefulness should be our watchwords. [The two statements from the Commodity Futures Trading Commission follow:] 64-891 0 - 80 - 10 STATEMENT OF THE COMMODITY FUTURES TRADING COMMISSION PRESENTED BY COMMISSIONER ROBERT L. MARTIN The Commodity Futures Trading Commission is pleased to appear before this Committee. The Commission has provided to the Committee copies of the report on recent developments in the silver market which was printed by the Senate Committee on Agriculture, Nutrition, and Forestry and made public by Senator Donald W. Stewart on May 1, 1980. In this report, the Commission has recounted the chronology of events involving the silver markets. The report also contains a synopsis of the Commodity Exchange Act's regulatory scheme as well as a description of the operation and function of margin in futures trading. We do not intend to reiterate the details of those subjects in this statement. The Commission believes that the facts set forth in this report do not demonstrate a gap or inadequacy in the scheme embodied in the Commodity Exchange Act for regulating futures trading in all commodities, including precious metals and financial instruments. The principal purposes and provisions of the Act are sound. The Commission has been entrusted with responsibility for ensuring that the forces of supply and demand will be fairly and accurately reflected in the futures markets. The Commission also has a broad mandate to protect commodity customers from fraud and other abusive practices. In addition to the Commission's powers, the Act requires active and vigilant self-regulation by the commodity exchanges of day-to-day trading activity, subject to Commission oversight. Congress has already provided the Commission with sufficient authority to fulfill its statutory mandate. We do not believe that the conditions leading to the precipitous price decline of silver in late March 1980 evidence a weakness in this statutory scheme. Rather, a review of these events will probably reveal that the financial concerns generated by this decline were largely caused by business misjudgments concerning the extension of credit. To this end, the Commission generally supports the concept embodied in Chairman Proxmire's bill, S.2704, that federal authorities should oversee the terms, conditions and amounts of credit (including the type of collateral furnished) extended by banks and other lending institutions to speculators trading in financial instruments and futures in those instruments. While the Commission does not purport to have significant expertise in such matters, we would be pleased to cooperate fully with, and to provide any information to, this Committee in connection with this proposal in order to avoid any adverse impact upon commercial use of the futures markets. However, the Commission does not believe that the Federal Reserve Board should replace the commodity exchanges as the ultimate entity controlling the setting of levels of margin for futures contracts traded on those exchanges as is also contemplated by S.2704. The setting of margins in order to ensure the integrity of futures contracts requires a level of expertise which the federal government neither presently possesses nor could readily acquire. In addition, the Board's experience in establishing a level of margin for the purchase or sale of securities will be of little value if it should attempt to set margins in futures trading. The Commission has explained in its report the various types and purposes of margin required by clearing houses, commodity exchanges and futures commission merchants. All will agree that this description is vastly dissimilar to a description of securities margin. Despite these clear dissimilarities, two principal purposes are offered to support providing the federal government with authority to set futures margins. First, it is said that the present level of margins set by the commodity exchanges is too low. Government authority over margins will result in higher margins thereby alleviating the potential for excessive speculation. But what is excessive speculation? Is excessive speculation a more concise way of saying that there is a "major market disturbance" which prevents a market from accurately reflecting the forces of supply and demand or that a threat exists of a market manipulation, corner or squeeze? If this is so, then Congress has already provided the Commission with sufficient emergency authority to take any action to restore orderly trading in such a market. In fact, the U.S. Court of Appeals for the Seventh Circuit has ruled that a determination by the Commission to invoke this emergency authority is not even subject to judicial review. Certainly no other federal agency has such broad power. Perhaps excessive speculation is intended to be a level of speculative activity which does not permit a futures market to serve either its risk-shifting or price discovery functions. The Commission presently has authority to deal with this situation as well. In 1974, Congress added to the Commodity Exchange Act the requirement that a contract market demonstrate that trading in a particular commodity is not contrary to the public interest. This public interest test was intended by Congress to include a demonstration that futures trading in a commodity would serve the traditional economic purposes for such trading. Thus, if the Commission finds that a contract is not serving a hedging or price discovery function, the Commission may initiate any one of a number of regulatory tools at |