4 1 its discretion bring an action in the proper district court of 2 the United States, the United States District Court for the 3 District of Columbia, or the United States courts of any terri4 tory or other place subject to the jurisdiction of the United 5 States, to enjoin such act or practice, and upon a proper 6 showing a permanent or temporary injunction or restraining 7 order shall be granted without bond. The Board may transmit 8 such evidence as may be available concerning such act or 9 practice as may constitute a violation of any provision of this 10 title or the rules or regulations thereunder to the Attorney 11 General, who may, in his discretion, institute the necessary 12 criminal proceedings under this title. 13 "(d) The Board may delegate its functions and authori14 ties under this section to any department, agency, or instru15 mentality of the United States Government as it deems ap16 propriate. 17 "(e) Any person who makes or receives an extension of 18 credit, or who arranges for the purchase or sale of a futures 19 contract, in violation of any regulation issued pursuant to 20 subsection (a) shall be fined not to exceed $100,000 or, in the 21 case of a willful violation, shall be fined not to exceed 22 $100,000 or imprisoned for not to exceed five years, or both. "() As used in this section- 23 24 25 "(1) the term 'financial instrument' means any currency, any security or other evidence of indebted 5 1 2 3 4 5 6 7 8 9 10 11 ness not subject to the provisions of section 7 of the Securities Exchange Act of 1934, gold bullion, silver bullion, bulk gold coins, bulk silver coins, or any other article, contract, or right which the Board determines has monetary characteristics or is a store of value, but such term does not include any agricultural commodity; and "(2) the term 'futures contract' means a contract for the future delivery of any financial instrument which is traded on any contract market or similar The CHAIRMAN. Thank you very much, Mr. Chairman. Chairman Volcker, as you know, this is a difficult year for us because it's an election year and because two conventions are coming up and because we are going to have a long hiatus in both July and August and hope to go out early, so I hope that you can come forward with your report, if possible, in early July. If it comes much later than that, it's going to be extremely difficult for us to get any kind of action in the House and Senate and so forth. Will that be possible, do you think? Mr. VOLCKER. I understand the problem very well. I'm not sure about early July. I was thinking in terms of the middle of July for a preliminary reaction. We are working, as you know, with other agencies on this, and we hope to do it in a cooperative way. The Treasury has taken a certain leadership role in this, and we want to consult with people that have some real expertise and familiarity with these markets. The process will be speeded just as much as we can. It hasn't gone quite as rapidly as I had hoped for in the initial organizational stages, but mid-July is the date that I had in mind. The CHAIRMAN. Well, the more promptly you can do this, of course, the better from our standpoint, and I appreciate the fact that you're sensitive to that. My concerns about activities in the futures market go far beyond what's happening to silver, but I have no doubt that the episode in the silver market was a clear warning that excessive speculation built on the basis of credit can easily lead to a collapse of the financial markets just as it did in 1929. While the narrow silver question is interesting, the more serious question is, How do we protect the integrity of our financial markets? I take it from your statement that the Board shares that broader concern. Mr. VOLCKER. Yes. We have, as you indicated in your initial statement, some nagging worries about the financial futures market in general. My impression, I take it, coincides with yours, that some of those markets are heavily dominated by what I think are outright speculative activities rather than activities serving a hedging function. A lot of people have been drawn into those markets. In some ways-for some of those markets, at least-the risks are probably less; the Treasury bill, for instance, has an inherently smaller range of fluctuation in price than, say, silver. But, nonetheless, there have been these questions in our mind for some time as to whether we are not proliferating a series of markets whose principal raison d'être is speculative rather than otherwise. The CHAIRMAN. Recently, fluctuations in the prices of Treasury securities have been just about as great as they have been in silver. Mr. VOLCKER. Not quite. The CHAIRMAN. But they have been pretty great. Mr. VOLCKER. They are bigger than they have been historically, no question about that. The CHAIRMAN. Let me see if I can summarize your position in these five sentences. First, a divergence in price on the futures in spot market can directly or indirectly fuel inflation or inflationary expectations; second, headlines in the financial press about rapid increases in gold, silver, or other financial futures or assets actually did reinforce inflationary expectations in 1979 and early 1980; third, financial markets cannot easily be separated, so some financial institutions with great exposure in many of these markets and brokerage houses could result not only in insolvency but also widespread problems in other, if not all, financial markets; fourth, speculative fever in the futures markets and elsewhere could result in a diversion from credit for productive uses to essentially speculative uses; and fifth, for individual institutions excessive use of credit for speculative uses can be a serious threat to safety and soundness. Am I correct in my characterization of your position? Mr. VOLCKER. All of those are matters of concern. The trick, of course, is, as you suggest, how to exercise some surveillance and restraint to minimize the chances of those dangers without killing the markets in their legitimate function. The CHAIRMAN. Well, then, I want to establish clearly that the Board does consider this, does call for corrective action now rather than later. Mr. VOLCKER. Yes. The CHAIRMAN. Under the Securities and Exchange Act of 1934, the Federal Reserve Board has the responsibility for setting margin requirements on any security except an exempted security, which as you know is a municipal or U.S. Government security. Specific authority is granted to provide special or different margin requirements for delayed delivery, short sales, and arbitrized transactions, and to raise or lower the margin requirements for all or specified transactions. The legislative history indicates the congressional desire to prevent excessive speculation and its destabilizing impact on the country's economic well-being as well as to protect the purchaser by making it difficult for one to buy securities on too thin a margin. In light of recent developments, then, why shouldn't the Fed's powers be broadened as provided in this S. 2704 that's under consideration? CERTAIN RELUCTANCE TO ACCEPT BROADEN POWERS Mr. VOLCKER. I will not argue they should not be. We have a certain reluctance to take on this degree of detailed regulation in a variety of markets. When we look around, we're not sure that we see any other obvious focus for it, however, so we leave that question open. We can't find any other logical focus for it, and I'm not prepared to say that the Federal Reserve Board would not be willing to take it on. But we don't do it with any eagerness. The CHAIRMAN. You're certainly cautious this morning. Mr. VOLCKER. The traditional position of the Federal Reserve has been that we don't want to get into these markets in this kind of detail; it's a question, I think, of diversion of time or effort from our main responsibilities. Now we recognize that the performance of these markets can impinge upon our central responsibilities, and that is the argument for taking on this role. On the other hand, this does involve a degree of detailed surveillance and supervision of the performance of these markets in areas that do not present any important monetary policy problem. In theory anyway, it could be argued that this job could be done by others. The CHAIRMAN. Let me see if I can sharpen a little bit the way in which you may be thinking. Corrective action in the futures markets could take a variety of forms-increased initial margins, position limits, larger maintenance margins, the retention of daily profits by the exchanges until the contract is liquidated. Now if the objective is to limit excessive speculation in financial instruments that may be adding to inflationary expectations or threatening the safety and soundness of financial markets, some combination of these may be needed. If the objective is to stop pyramiding, retention of profits and prevention are clearly warranted. At this point, which of the corrective actions of the futures market appear most necessary, or are they all needed, and are you considering all of them? Mr. VOLCKER. We are considering all of them; perhaps different ones in different markets. When we look at the silver market, that does strike me on the basis of what I know now-as a market that inherently is not all that big in terms of new production of silver and commercial uses of silver. It's been characterized, apparently, by some fairly big operators throwing their weight around in one direction or another, and in that kind of situation position limits kind of leap out as a natural kind of corrective approach. Now one problem you run into immediately and one of the things I don't know about at this stage, is whether we can really be effective in relying upon position limits when those limits might be enforced, let's say, on the organized exchanges, but when the same group of specific interests can deal in London, can deal in the spot market that's not regulated, can deal in other forms. Given that, can we make a position limit really effective? Maybe we can. But that is a typical area in which I think we need to do a little more thinking and study as to what approach might make sense, regardless of which the agency has the responsibility. The CHAIRMAN. Now with respect to bank financing speculation in commodities, what steps can you now take without additional legislative authority to curtail the flow of credit in that area? Mr. VOLCKER. We haven't got any specific regulatory or legislative authority to deal with this area, except through the normal "safety and soundness" considerations which may be brought to bear on some aspects of this situation. But I don't think that, in itself, is a terribly effective tool to deal with all these situations. I think we would think in terms of getting at it perhaps indirectly, through the kind of margin requirements in all their various forms that you contemplate in this bill. Whether anything beyond that would be necessary or desirable is another area we want to look at. But it's pretty hard, as you know, to simply say, "a speculative loan is bad and a productive loan is good"; the difficulty is distinguishing between the two. In this silver situation, again taking that as the case in point, the great bulk of the bank lending-if you put on one set of glasses |