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The arguments for commodity margin control are similar in some respects to those offered with respect to the stock market during the

great depression when President Roosevelt condemned excessive speculation in securities and commodities "as one of the most important causes of the terrible conditions" of that period. This is the case despite the fact that margins in the two areas are legally quite distinct. Stock market margining

is, in itself, a loan. In commodities, the placing of a margin deposit does not imply the taking of a loan. The distinction, however, should not be cited to obscure some important 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 low margins is a market vulnerable to chain reaction price movements which may become self-sustaining and tend to distort fundamental price formation.

Congress has stated that excessive speculation can be a burden on valuable interstate commerce. It is thus appropriate to limit speculative

activities to a level conducive to useful commerce.

Margins, established

at carefully selected levels in all markets at all times, can help to maintain a proper balance between speculation and hedging activity. The need to protect markets from chain reaction price movements, moreover, is similarly met by an effective and ongoing program of minimum margin requirements.

The exchanges and

If margins are to be used as a tool to prevent excessive speculation, the authority to set them must reside with government. commission houses will set margins high enough to protect themselves, but it is unlikely that they will regularly set them high enough to curtail their own speculative business

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and this is exactly what is required.

Government margin setting would not be a substitute for private authority; it would be undertaken to set a floor beneath which the privately established margins could not fall.

While I unequivocally favor the placing of permanent margin-setting 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.

commodities.

My second reservation concerning this legislation arises from its attempt to draw a distinction between financial instruments and other 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 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.

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. 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 The public as a whole is painfully aware that personal

resources.

Economists

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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.

The Federal Reserve Board expressed its concern last October when it called for restraint in the provision of speculative commodities loans. Its urging went so unheeded that the Hunts soon managed to amass well over a billion dollars in speculative borrowings. In effect, the banks involved, and the brokerage firms that in some cases served as their intermediaries, made themselves partners in the Hunt's silver speculation. If banks and brokers are to have claim on the funds of taxpayers or private entities in the event of financial crisis, they must exercise a high standard of judgment in their lending policies. These institutions have long been prohibited from lending money to meet legally set margins on securities. They regularly, however, make such loans to finance speculative margins and physical deliveries for speculative purposes in commodities. There is no reason for this disparity to continue. In an era of tight money, inflation and government guarantees of institutional solvency, the case for such restrictions seems almost 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 CHAIRMAN. Thank you, Chairman Stone.

I would like to ask each of you starting with Chairman Williams and going right across the panel, your reaction to the statement in a Business Week

Oh, yes. Certainly. Mr. Heimann did his testimony and did it very well. He not only summarized it, but he did it in about 2 minutes.

Mr. HEIMANN. Thank you, Mr. Chairman.

The CHAIRMAN. He was the star.

This editorial describes how a particular exchange was prevented from entering the options business by the SEC only to regroup and organize a futures market to the CFTC's approval.

My concern is not with the exchange, it's not with the SEC position or the CFTC's position, but it's to the general problem, which I think was very well stated in two brief paragraphs in that Business Week editorial.

HOLE IN THE REGULATORY NET

It says the following:

The stock exchange has found a hole in the regulatory net created by the unwillingness of Congress to consolidate supervision of all financial markets in one agency. Stocks, bonds, options, and futures are all part of the U.S. financial marketplace. There is nothing to be gained by having one agency to handle trading and commodities and another to watch trading and securities.

But that is what Congress has done. In doing so, it's invited the same sort of competition and laxity it created in banking when it set up rival supervisory agencies. The SEC has devoted the front door to options trading, but it lets the-the exhanges know if they can't get what they want out of one agency, they can always try the other.

That wasn't a statement by Ralph Nader. It was a statement by Business Week, which is as we know a pillar of conservative business opinion.

I would like to ask Chairman Williams to react.

Mr. WILLIAMS. As far back as 1978, I testified in connection to an inquiry by the GAO, that we believe in vertical integration of regulation. That is, that the regulation of both options and futures should, for a number of reasons, be located in the same agency as that of their underlying securities.

I believe that this type of integration of regulatory responsibility is essential to adequate surveillance of the integrity of the markets. One cannot effectively surveil for either an underlying equity or derivative instrument without surveilling for the other.

As I indicated in my testimony, we now have applications for financial instrument options, and may soon have applications for stock index options, with the SEC. Meanwhile, the CFTC has applications for futures on similar derivative instruments. It might be totally inappropriate if determinations of where trading will take place were based on regulatory disparity rather than on a more substantive public purpose.

The CHAIRMAN. Thank you. Mr. Heimann.

Mr. HEIMANN. May I agree with part of Business Week's editorial?

The CHAIRMAN. The main part, I hope.

Mr. HEIMANN. Mr. Chairman.

The CHAIRMAN. The conclusion.

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