Mr. HEIMANN. I would like to broaden it somewhat, because I think there is a fundamental issue involved here which goes somewhat beyond specifics of individual markets, individual types of securities, and the definition of those securities.

That is what we have done over 150 years, give or take. We have designed a financial supervisory and regulatory system which is subdivided, fragmented, creating institutions that service a portion or a supervise a portion of the activities. But no entity, no basic system, that concerns itself with the financial markets of the Nation.

Or, to put it another way, you just heard a description of various problems in the securities and commodity market. The same exists in the banking systems in terms of thrifts vis-a-vis credit unions vis-a-vis commercial banks vis-a-vis large and small.

And for a long time, it had appeared that none of these markets were related. At least the framework is not the framework of relationships in the market.

If the silver affair has shown anything clearly, it's that the commodity market or the silver market is not isolated. That it has an effect on a whole host of other markets, or it may have an effect on them. And that the agencies or entities involved must work very closely together, not at the time of crises, but long before that time in terms of the exchange of information, exchange of ideas and concerns.

My own feeling is that there has been great value in the fractionalization of which we have been speaking. It has created the growth of a lot of industries in this country. I am not sure we are at the stage where we ought to do away with that through one centralized function. But it's perfectly clear to me that the degree of cooperation, information exchange, with whatever statutory restrictions that prevent that, permit it between the independent agencies that are responsible directly together with the financial strength of our system.

The CHAIRMAN. How would you characterize that degree of cooperation in the past with the CFTC, for example?

Mr. HEIMANN. Well, it's a relatively new agency. I must say that it's been-our requests for information have been honored in recent times more, with more facility than at some times in the past.

STATUTORY PROBLEMS

However, there are statutory problems. The banking regulators have the right to exchange information, and they hold it confidential. It is known. Therefore, the free exchange is not a problem. There are concerns, I understand, at the CFTC. I am not sure of all the statutory reasons; I mean I gather they are there, but there are problems with regard to the exchange of information and how that is held confidential. I think those are the types of things that have to be wiped out in the process so we can deal with other agencies outside of the banking regulatory system the same as we deal with agencies within the banking regulatory system.

Then we do have the responsibility to share information if we see problems, work on problems together. That is the kind of bridge that has to be crossed in making a beneficial result from these hearings.

The CHAIRMAN. Chairman Stone.

Mr. STONE. With respect to the issue of how much consolidation of regulations there ought to be, I don't have a firm conclusion. There necessarily must be a very careful tradeoff between benefits of consolidation, which you have talked about, and the benefits of the other sort of structure, which are principally in the form of increased expertise. Where there are widely different sorts of instruments to regulate, it is not possible to expect any single body to understand the breadth and complications of all of the different instruments.

The history of the CFTC is that it had a predecessor agency in the Department of Agriculture exercising a very different sort of expertise than that which is exercised by the SEC. I think that you would want to be very careful about reaching broad conclusions concerning consolidation without taking expertise questions into account.

I think everyone here at the table today has knowledge that regulation of the futures markets is a very complicated subject. The CHAIRMAN. Secretary Carswell.

Mr. CARSWELL. The Business Week article obviously demonstrates that you have a start of the regulatory jurisdiction problem in the futures area. S. 2704 would add a third agency that would cut across the jurisdiction of both of the existing ones. You have just heard the Comptroller say that the banking agencies, and I think he is right, have a concern in this area, too.

Department of Agriculture also has concerns, as I understand. The Treasury Department clearly does, and has so testified to the Congress. It's for that reason that we are trying to conduct this study, trying to rationalize this area so that we and you together don't produce a chart like the one you used to have in the corner here on the bank regulatory agencies.

I think we have a very real chance of doing that if we don't approach this in a more coherent way than 2704 does.

The CHAIRMAN. Mr. Dunn, would you like to comment?

Mr. DUNN. Yes, I would be glad to. I understand the broad thrust of the article that you just referred to was that there should be a common policy among all Government agencies dealing with the money supplies and various financial instruments, including commodity futures, for the protection of the institutions and customers.

I think there can be no argument with this broad policy. I think the questions are on how it is to be implemented. I believe very strongly that there should be a high degree of cooperation among the various agencies that are involved in exercising these responsibilities.

I do not think it necessary to have them all under one administrative roof in order to cooperate. If you did have them all under one roof you would still have to have the specialization that is required for each individual entity, and I do think that it is extremely important in considering such an objective to recognize that there are differences among these various instruments that are quite fundamental.

In the securities area, for instance, you are transferring ownership. In the commodity futures you are transferring risk. Transfer

of ownership occurs rarely in the futures market and only at the end of the transaction.

I think that the basic differences have to be recognized when you are trying to translate objectives into policy and specific regulations.

The CHAIRMAN. Thank you, sir.

Mr. Martin?

Mr. MARTIN. I concur with Commissioner Dunn. I think that the differences in the markets or the instruments are possibly more real than is generally recognized. Sometimes it is thought that because they are traded on an exchange, as are securities, that their similarities are too great. And the differences are not recognized.

I believe from looking at the termination of a delivery period for about 44 years through the CEA before us, I think that does develop a different situation.

Another thing that I think should be brought out, that the CFTC did, we elected one of our commissioners to represent us in interagency task forces. We heard from Mr. Volcker that he didn't get the information from the staffers that we were talking to.

I think that is unfortunate. I think we have been looking for that cooperation. Certainly we are not trying to build any empires or carve something out for ourselves.

The CHAIRMAN. Mr. Gartner.

Mr. GARTNER. Thank you, Mr. Chairman. I also agree with Commissioner Dunn. Trading in securities is vastly different than trading in commodities. One invests in securities, while one either speculates or hedges in commodities. Because of these differences, it is necessary to have separate and distinct, in my judgment, regulatory processes which long have been recognized by the Congress, going back even to the creation of the old Commodity Exchange Authority under the Department of Agriculture, which was our predecessor agency.

So because of these many differences, I believe that to consolidate regulation would cause mass confusion and disarray.

Thank you, Mr. Chairman.

The CHAIRMAN. Thank you. Senator Stevenson.

Senator STEVENSON. Thank you, Mr. Chairman.

Did I understand correctly that the CFTC is not a full participant in the interagency study of the futures market?

Mr. CARSWELL. I think I probably should answer that.

Senator STEVENSON. What?

Mr. CARSWELL. I guess I should answer that.

Senator STEVENSON. Yes, sir.

Mr. CARSWELL. This is an informal interagency task force that was established by the Treasury Department to try to look into these matters. And we simply continued the structure we were using in the two previous task forces.

On the other hand, we said at the time we were going to work with the CFTC. I have absolutely no problem making CFTC a member as well. They have met with us, as a matter of fact, in the last week, twice on topics that are part of the study. So there is no effort to keep them out of it. There has been a mechanical problem

occasionally with the CFTC, because the position of the agency is not always clear.

Senator STEVENSON. That is clear.

Mr. STONE. If I may, Senator, let me add that I have, in order to clear up any confusion on this subject, just in the last day or so, written Deputy Secretary Carswell a note suggesting that Commissioner Dunn could represent the majority of the agency admirably on the task force and suggested that he be added.

Mr. CARSWELL. In the last week, we met with Commissioner Dunn twice.

Senator STEVENSON. Now I am beginning to understand why it's not represented. Only a part of it would be represented.

Mr. CARSWELL. No. I also meet with Mr. Stone from time to time. Senator STEVENSON. Well, I do think that an interagency study of futures markets ought to somehow or other include the active participation of the agency with the principal authority for the futures markets. I gather from what you are all saying now, that there will be such participation. I would hope it would include participation of the Chairman of that agency, too.

Are you suggesting now that everybody except the Chairman of the CFTC would be included in this interagency study?

Mr. CARSWELL. We will work it out, so we get all points of view, Senator.

The CHAIRMAN. The first problem is to consolidate the CFTC.

CFTC STEPCHILD AMONG REGULATORY AGENCIES

Senator STEVENSON. Do something with it or to it. It's clearly always been a stepchild among regulatory agencies. And I think points that have been made by some of the Commissioners here are very sound. The markets this agency regulates, or doesn't regulate, are in some ways unique. They are futures markets. They are markets primarily for speculators. And therefore it seems to me that the public interest requires some special attention to those markets which lend themselves very, very readily to just the sort of thing that has happened. I still don't understand what happened. And I sense some difference of opinion among the witnesses. Was this a speculative bubble, or, as I have been told by others, was the price of silver simply reflecting smoothly functioning laws of supply and demand with silver future prices moving in tandem with gold, as they historically have? Is that true? Can somebody answer?

Mr. STONE. I can give you my view on the subject.

Senator STEVENSON. Nobody has suggested that gold was the subject of a big speculative bubble, I don't think. Were they moving in parallel?

Mr. STONE. In my view, the answer to your question is that the movements in the price of silver were substantially more extreme than those in the price of gold. I do believe that there was an element of speculative bubble to what we saw in the silver markets and that it greatly intensified and exacerbated a movement that characterized all of the precious metals. There is a historical relationship between the price of silver and the price of gold. If silver's price tracked what silver would have done had it kept that historical relationship, I would not be able to say that there was a bubble.

But because it went far beyond that, particularly during late December and January of 1980, I believe that you can say that there were problems in addition to those that moved all of the cash markets for precious metals. In the year ending in January of 1980, gold futures rose less than four-fold while silver futures increased more than seven-fold.

Senator STEVENSON. Does everyone agree that the price of silver went far beyond gold?

Mr. GARTNER. Senator Stevenson, I would just like to make a point that the prices in most of the precious metals, we are talking about gold, silver, palladium, copper, platinum, were on the same cycle as silver. The only difference is that there was not a failure of someone to meet a margin call in any of these other commodities. It is my judgment that we would not be here today if the Hunts had been able to meet their margin call.

Senator STEVENSON. It I understood the Chairman correctly, he is saying they were not on the same cycle. You disagree with that. Mr. GARTNER. Yes, I do disagree with that; yes, sir. It was not identical but they were running in the same cycles.

Senator STEVENSON. They were running in the same direction. Mr. DUNN. May I comment?

Senator STEVENSON. Yes.

Mr. DUNN. I think there is no question that in all of the precious metals you had a general run up in price. Whether the run up of each of the metals was precisely in tandem with each and every one, that depends on whether you compare them on the basis of the highest price on each day and compare that to the highest price, or use the average over the week, the month, so forth. It's certainly true that in the case of silver you had some spikes in price that were sharper than you had in some of the other metals. Then you had this very precipitous drop, which was a greater drop than you had in any of the others.

The big difference, in my view, in those various markets was the degree of concentration of the holdings. This is faced in the futures markets. But then it became very pronounced in the physical or cash markets.

Senator STEVENSON. You say concentration. That is the point. You had some spikes, and you had some humps.

Mr. DUNN. Yes. They didn't know what happened; I am sure that is going to be debated for a long time. In my view, it's absolutely necessary to understand what happened to look not only at the futures, but particularly to look at the cash. I think there you find the real story.

When the restrictions imposed by the exchanges in the form of high margins and the quantitative restriction on the size of the big positions began to come down sharply. And by the end of the year those positions had been reduced to considerably less than half of what they had been in September, early October.

By the time the silver price peaked, they were down to less than a fourth of what they had been. The volume in the futures markets was coming down even more sharply. However, the price was continuing to rise in both the futures and the cash markets.

So you have to look further, and when you do you see that while those positions in the futures markets were coming down sharply,