as well as hedging activity, and this enables the market price to adjust rapidly so that it reflects the equilibrium of expected supply and demand. As long as futures margins are kept low, transactions based on even small expected price changes will be conducted. As margins increase, however, the cost of using the futures markets begins to outweigh their usefulness for smaller commercial participants, leaving the markets to the large commercial firms. In addition, to the extent higher margins force smaller speculators out of the markets, the markets will become much less liquid, and thus less efficient in economic terms. In short, without participation by speculators, which current margin policy encourages, the markets cannot function efficiently. Fourth, futures exchanges are able to maintain financial integrity and keep margins relatively low by imposing daily price limits. The actual size of the margins is related to the daily price limit, in turn, which is based on ordinary price fluctuations. In general, the wider the price limit, the larger the minimum margin requirement. Fifth, a centralized governmental agency could not possibly set margins effectively and efficiently on the diverse number and types of assets on which futures contracts are traded. Only the exchanges' margin committees and their governing boards, with their intimate working knowledge of the industry and the flexibility to take actions with the necessary speed-often a matter of hourscan properly and accurately employ this tool in a constructive and efficient manner, and at no expense to the taxpayer. S. 2704, however, would direct the Board of Governors of the Federal Reserve System to set margin requirements for futures contracts on broadly defined financial instruments. We respectfully submit that this bill has several problems. To summarize: First and foremost, the bill seizes upon futures margin-a delicate mechanism that is vital to the proper functioning of the futures markets and seeks to distort it in to a market regulation and customer protection measure. In this regard, the bill impliedly makes margin the scapegoat for the recent volatility in silver prices, when in fact the two had no connection. Second, S. 2704 assumes that speculation in the futures market is per se harmful, when speculation is necessary to the proper functioning of the futures markets. Third, the bill seeks to control excessive speculation through the regulation of margins, when previous Congresses, after lengthy study of the markets, uniformly concluded that margins are not a proper control device. Fourth, the bill is premised on a number of factual assumptions which we believe are simply incorrect. Fifth, if S. 2704 were enacted, there would then be two differing regulatory schemes for futures trading-the Commodity Exchange Act and the margin control provisions of the Federal Reserve Actadministered by two different regulatory agencies-the Federal Reserve Board and the CFTC-a situation that would produce overregulation in the extreme. This concludes my summary remarks. We request that our detailed statement, along with the supplement, be made a part of the record of these hearings. Thank you. REMARKS BY ROBERT K. WILMOUTH PRESIDENT AND CHIEF EXECUTIVE OFFICER CHICAGO BOARD OF TRADE Mr. Chairman and Members of the Committee: I am Robert K. Wilmouth, President of the Chicago Board of Trade, the world's oldest and largest futures exchange. At the outset, I do want to thank Senator Proxmire for the kind invitation to appear before you today to discuss silver, the adequacy of current market regulation, and S. 2704. I note from the Congressional Record, Senator, that you are "not wedded to the details of this legislation." I note also that you acknowledge "the constructive economic benefits flowing from our highly developed financial futures market," and that it is not your intent "to shut these markets down." - individ We, and the increasing number of people uals, banks, corporations, and pension funds, to name a few who use and benefit from these markets, certainly agree that these markets should not be "shut down." The thrust of my brief testimony today is to, first, support that conclusion, but also to strongly suggest that S. 2704 would be counterproductive to these markets and, if enacted, could destroy the constructive economic benefits that you acknowledge flow from them. Obviously, ten minutes does not begin to do this subject justice. For this reason, and the Committee's assistance, since this is an unfamiliar area, we have prepared a detailed written statement approximately 200 pages - and an informative supplement. We respectfully request that this detailed statement, as well as our supplement, be made a part of the record. 2 Now in keeping with this Committee's area of normal oversight, I want to make full disclosure of the fact that I am a relative newcomer to the futures industry. The bulk of my professional career, until I became President of the Chicago Board of Trade in late 1977, was spent in the banking indusin Chicago, Europe, and in San Francisco, where I was try President of the Crocker Bank. Recent As a former banker, I know all too well that our western economic system is interrelated and always influenced by political as well as strictly economic factors. events in silver, which prompted S. 2704, were no exception. I will not dwell at length on silver, since Mr. Lee Berendt of the Comex in New York is going to focus on that topic. I do want to stress, however, that we believe the much-publicized rise and fall in silver prices were the result Gold was of market fundamentals, both economic and political. subject to the same fundamentals and rose and fell in tandem with silver. Attached to these remarks are 2 charts which demonstrate this most graphically. Dr. Clayton Yeutter, who is President of the Chicago Mercantile Exchange, is going to focus on the important, beneficial role of speculation in our futures markets. My assigned task, in the brief time allotted, is to focus on the selfregulatory tools available in the futures industry, to protect and perfect our markets. These "tools" are discussed at length - 3 in our Detailed Statement. They include, for example, margin controls, position limits, and liquidation and settlement directives. Since exchange emergency powers are a term and condition of every futures contract, we can and do move swiftly, if events require our action. This, in fact, occurred in silver on several occasions - both at the Board of Trade and Comex. - As early as last October, for example, the Board of Trade imposed position limits on silver. Comex has done likewise. Both of our exchanges, in January, ordered that certain contract months be traded for liquidation only; and we the Board of Trade - - required a phased, systematic liquidation of our February 1980 contract. My point simply is that futures exchanges have a number of tools available to protect the integrity of the - the exchanges - I fail to act marketplace. And should we These CFTC "emergency" powers "extraordinary" in 1974 assure against corners, manipula tions, or other events which preclude futures markets from accurately reflecting the forces of supply and demand. That is a key phrase, of course: accurately reflecting the forces of supply and demand. Futures markets do not set prices. Rather, they reflect the supply and demand factors which determine prices in the cash market. This was certainly the case with silver, as the table appended to these remarks demonstrates. |