8.

9.

Performance of the Chicago Silver Futures Market.

During the period from April 1979 through March 1980,
Chicago futures prices and U.S. and London cash-market and
futures prices moved together, in response to fundamental
political and economic factors. The futures market retained
its hedging capacity (a naked position in the cash market
was nearly 8 times as risky as a hedged position). Through-
out the period, the Chicago silver futures market was able
to and did perform its economic role as a mechanism for
risk-shifting and price discovery.

Self-Regulatory Activities of the Chicago Board of Trade
in the Chicago Silver Futures Market.

The Board of Trade, in cooperation with and under the
constant oversight of the CFTC, maintained the integrity
of its marketplace at all times. Decisive action was
taken by the Board of Trade on several occasions to protect
the market as a whole during a period of unprecedented
volatility. No defaults occurred, no member firm suffered
financial failure, and no customer lost any money (other
than through market moves).

tive economic value of futures trading is the same for a

11.

farmer, a manufacturer, or a financial institution.

Participants in the futures markets utilize the hedging or
risk-shifting elements of futures trading, whether the

contracts involve grains, forest products, metals, or
financial instruments.

For that reason, assignment of jurisdiction or regulatory authority along product lines is simply unwise and would lead to regulatory chaos. Rather, jurisdiction

whose regulatory role requires an economic expertise which focuses upon the risk-shifting and price-discovery functions that futures trading performs.

A single expert agency is needed in order to enforce a coherent regulatory program encompassing all elements of futures trading and to build on the strong and sound foundation which the Commodity Exchange Act clearly provides. The public interest would not be served by duplicating in one or more additional agencies regulatory authority over futures markets that presently exists in the CFTC, or in resposing in any agency any special authority over particular "product lines."

CFTC Powers To Protect the Market.

The Commodity Exchange Act provides many customer protections not found in the federal securities laws (for example, segregation of customer funds and reparations). Additionally, the CFTC currently has at its disposal a

12.

wide variety of powerful tools to prevent disruptions in
U.S. futures markets, including limit-setting, injunctive,
fining, reporting, and emergency market-intervention
authority. These tools, many of which can be used both in
the futures and cash markets and which are markedly greater
than those at the disposal of the SEC, are more than ade-
quate to protect the markets from any "excessive speculation."
Self-Regulation and the Public Interest.

As recent events in silver demonstrate, self-regulation
also remains a viable and vital force in the futures
industry. It operates efficiently, effectively, and at no
cost to the taxpayer. Cases in point are the Chicago
Board of Trade's comprehensive customer protection pro-
gram, and the Board of Trade's margin-monitoring system.

PART I

FINANCIAL & PRECIOUS METALS

FUTURES AND THE ROLE OF

SPECULATION

Chapter 1

THE ROLE OF FINANCIAL AND PRECIOUS METALS FUTURES

Introduction

The role of financial and precious metal futures markets in the economy must be viewed in terms of the economic benefits which accrue from these futures. From this perspective, it is clear that financial and precious metals futures

are no different than agricultural futures.1/

Futures markets in sectors of the economy other than agriculture are relatively new, of course. Participants in these new markets such as metals and financial instruments

-

are often unaware of the traditional characteristics of futures markets and describe these markets as "exotic." They are not "exotic," however. They are natural and necessary outgrowths of a very traditional, highly developed market system which is unsurpassed in its record of financial integrity.

In essence, this chapter is a brief restatement of the primary benefits of futures markets generally. We will illustrate these benefits using financial instruments as the example, although in describing these benefits, commodities such as gold, silver, copper, corn or orange juice could just as well be used.

Three benefits accrue from futures markets: (1) the hedging of asset value; (2) the determination of prices; and

1/ See Chapter 10 for a discussion of Congress' recognition of this essential fact.

See also Chapter 2.

1-1