The CHAIRMAN. Mr. Yeutter.

STATEMENT OF CLAYTON YEUTTER, PRESIDENT, CHICAGO MERCANTILE EXCHANGE

Mr. YEUTTER. Mr. Chairman, members of the committee, I, too, would like to submit a written statement for the record, Mr. Chairman, and I will summarize here.

The CHAIRMAN. Fine. We will have that printed in full in the record.

Mr. YEUTTER. First of all, Mr. Chairman, I would just simply point out for the information of the committee that we trade gold, Treasury instruments, and international currencies, all of which are products that are covered by the terms of S. 2704, the bill that's presently before this committee.

Before getting into our arguments in opposition to S. 2704, I would just like to make a very brief statement about the basic economic purposes of futures trading. I trust there is no need to give a lengthy exposition on that subject because I assume that the economic benefits of risk management are evident to everyone on the committee.

The function of futures trading is not well-known throughout our society, but it's becoming better known at all times, and the reason for that is very obvious and that is that we have a whole lot more risk in our economy today, whether it be the rural segments of the economy where we have used futures transactions for 150 years, or the urban and financial sectors of our economy where the concept is relatively new-only a few years old.

Without any doubt, risk management is going to become increasingly important in the future and without any doubt this will lead to increased volumes of trading on our exchange and on our exchanges.

DYNAMISM OF THE INDUSTRY

To give you some feel for the dynamism of this industry, on the Chicago Mercantile Exchange, we traded 4 million contracts in 1969. We doubled that in the next 8 years, by 1977, and then we doubled it again from 8 million to 20 million- more than doubled it in 2 years to 1979. So that's an indication of the growth of the industry and, as you said yesterday, Mr. Chairman, in Treasury bills alone, the value of our transactions last year was something like $2 trillion.

Now there's both risk transferring and risktaking that's involved in this process-hedging and speculation, in the jargon of the industry. Nobody has any difficulty with the concept of hedging because that's really how we justify our existence. That's the transfer of risk off the shoulders of the businessman who wants to move that risk to somebody else.

The risk taker, of course, in most instances, is the speculator. The speculator, regrettably, in my judgment, has traditionally been made a villain, so that when one hears criticism of futures markets it's usually along the lines of that "blankety-blank speculator doing something to somebody." In my judgment, those are unnecessary and unreasonable allegations.

It's clearly demeaning the speculator in a way that is inappropriate because the role of the speculator is a very, very important one

in this whole process. If we had no risk takers in our economy and we had no risk takers in the business of futures trading, we would have no markets.

Those who criticize speculators probably have never been hedgers. I have been a hedger many times in my own business operations in Nebraska and, believe me, I'm grateful for speculators or have been grateful for speculators during the time that I have used those markets, and every hedger is grateful for their presence as well.

Now to turn to S. 2704 in the very short time we have available. First of all, it seems to me that we need to have some understanding as to what problem or problems we are addressing.

Mr. Chairman, I could not tell from the discussion yesterday just what the alleged problem was. I have no heard it stated, in a persuasive fashion by anybody. I am not convinced that there's anything here that needs to be fixed.

Mr. Berendt and Mr. Wilmouth talked about what transpired in silver and presumably it is the silver situation which precipitates some of the concern, but I wish somebody would be specific with respect to what the public policy issues are that are before this committee.

Now there were some alleged issues mentioned yesterday. One, for example, came from Chairman Stone of the Commodity Futures Trading Commission. He said the issue is loss of jobs, that as a result of silver going up in price there were a number of people in some companies that lost jobs as silver became more expensive. My comment to that is that if we are going to be engaged in bringing the Federal Government into the economic system every time someone loses a job somewhere, then we may just as well control the entire economy and forget our market system entirely. I realize we did that for the Chrysler Corp., but at least there were supposedly a half million jobs or so jeopardized there. I believe Chairman Stone referred to 6,000 job jeopardized in the silver industry. Do we now enact S. 2704 because some industry lost 6,000 jobs as a result of silver going up in price? Do we do the same thing every time some commodity or some instrument goes up or down in price? I find that unpersuasive.

Chairman Stone also indicated yesterday that he felt the financial fabric of this country was tested in the silver situation and a couple of the other witnesses gave testimony yesterday that was somewhat similar. I find that difficult to comprehend as well. That seemingly implies some kind of domino theory analogous to one we heard in Southeast Asia a few years ago-that if one brokerage firm has financial difficulties they will spread to other brokerage firms and to other financial institutions and then perhaps to the entire economy, as it did in 1929, and we will have a depression. I find nothing in the silver scenario, Mr. Chairman and members of this committee, that suggests to me that we were approaching a 1929 situation in the silver markets.

To me, that grossly underestimates the financial strength of this Nation and it denigrates the resiliancy of our economic system in a way that I think is totally unjustifiable.

Maybe the concern is price manipulation or price distortion. There are no allegations, to my knowledge, of those potential diffi

culties being present in the silver situation, but that's always of concern to those of us who are in the futures industry. Obviously, we ought to have all the tools that are necessary to keep prices in the futures markets in line with our underlying cash commodities and to avoid manipulation by anybody at any time in our futures markets.

My comment to that is that if price manipulation or distortion is the concern, then S. 2704 does not provide the tools that would or should be used to resolve these kinds of difficulties. There are other tools already available both to the Commodity Futures Trading Commission and to the exchanges.

It seems to me that the only rational explanation for the concerns that have surfaced in S. 2704 is that prices were allegedly somehow out of line, that in the cash market for silver or the futures market for silver, or both, that somehow something happened to prices that really shouldn't have occurred-that prices were in some way out of line with where supply-demand fundamentals should take them. And, therefore, we should use the credit control provisions of S. 2704 or the margin provisions of S. 2704 to control prices and bring them back into line if and when that occurs in any commodity at any time.

I'd like to know who it is that is to make that kind of determination? Who is going to play God in our economic system and on what basis? How do we determine that cash prices or futures prices or both are out of line with supply and demand fundamentals or with the expectations of where they are going to go? On what basis do we determine that there is excess speculation in the system at any moment, as was alleged by Chairman Stone yesterday? Who is to define excess speculation? Who is to quantify it? On what basis is the Fed to be given that power and why are they sanguine in this area? Why are they more sanguine than the market? On what basis do we put that judgment in the hands of any Federal agency?

It seems to me that the Federal Reserve might be the worst possible agency in which to place that kind of authority because it provides them with an opportunity to cover up errors in monetary policy if that authority were granted to them.

More importantly perhaps, why do we single out cash and futures markets and financial instruments? Why are these powers to apply to the metals and to international currencies and Treasury instruments? If it's wise to have Federal intervention in this area, why shouldn't there be Federal intervention throughout the economy rather than simply for this one segment of the economy? What is so sinful about the cash and futures markets and financial instruments as they are defined here?

PYRAMIDING

Finally, just a comment on pyramiding, Mr. Chairman, as my time runs out. First of all, pyramiding may have been involved in some degree in the silver case. We do not trade silver, so I can't make a personal evaluation of that. It is apparent from Commissioner Dunn's testimony yesterday that it was not involved in the latter stages of the silver situation when positions were going down at the time the prices were going down.

I am particularly distressed about the pyramiding provisions of this legislation because they would result in an impoundment of profits on financial instruments. If we are to impound them on financial instruments under this legislation, what is to preclude us from impounding them throughout society? How does one differentiate these instruments from any other instruments? Are we going to impound all profits at a given point in time by the Federal Reserve, and on what basis?

Summarizing, Mr. Chairman, it seems to me that for the present regulatory objectives that are involved in the futures industry, the existing authority in the Commodity Futures Trading Commission. and the exchanges is fully adequate. It is only if we adopt the objectives of S. 2704, which go far beyond those present regulatory objectives, that it makes any sense at all to bring in a federal

agency.

That calls into question, of course, whether the basic objectives of S. 2704 are sound. In my judgment, they are unsound public policy in the kind of market economy that we have had in this nation for the last 200 years.

You said, Mr. Chairman, in your introductory statement to S. 2704, that you were mindful of the constructive economic benefits flowing from our highly developed financial futures markets and it was not your intent to shut these markets down. I'm sorry to say, Mr. Chairman, that if S. 2704 is enacted into law, that is precisely what will occur. There is no way that financial futures markets can survive if S. 2704 becomes law.

[Complete statement of Mr. Yeutter follows:]

PREPARED STATEMENT OF DR. CLAYTON YEUTTER*

I am Clayton Yeutter, President and Chief Executive Officer of the Chicago Mercantile Exchange. "The Merc" is the world's second largest futures exchange, trading extensively in agricultural commodities, international currencies, and financial instruments. One of our divisions is the International Monetary Market (the IMM), which trades such products as gold, 90-day Treasury Bills, the Swiss franc, German mark, Japanese yen, Canadian dollar, and British pound, all of which would be affected by S. 2704.

We are vigorously opposed to this legislation, and I would like this morning to summarize the reasons for our opposition.

First of all, however, I would like to delineate the economic rationale of futures trading, and draw your attention to the tremendous growth that this industry has experienced in recent years.

THE ECONOMIC PURPOSE OF FUTURES MARKETS

Futures markets are a risk transfer device. They provide businessmen and financial institutions with an opportunity to shift some of their price risk to an individual or firm willing to accept the risk. In this process, the one who wishes to transfer the risk is called a "hedger", and the one who accepts the risk is called a "speculator". Both are essential to the risk transfer process.

There are other risk transfer devices available to American businessmen. Forward contracting, for example, is one of them. But none has quite the flexibility of futures markets. And never before has risk management played such an important role in our economy. U.S. firms and financial institutions are today operating in a worldwide market, and that market is far more volatile than it was a few years ago. Within the past twelve months, we have experienced double digit inflation, double digit interest rates, a grain embargo, dramatic and unpredictable increases in the price of imported petroleum products, and political upheavals in some of our major trading partners. All of this aggregates to a level of business uncertainty exceeding anything we have ever experienced in our free enterprise economy.

*President, Chicago Mercantile Exchange; former Deputy Special Trade Representative and former Assistant Secretary of Agriculture.

During the past few years American firms have vigorously sought to minimize their risks by "locking in" attractive input costs or profits whenever it is possible to do so. This has led many of them to futures markets, where participation by both hedgers and speculators has grown dramatically. Using our Exchange as an example, we traded four million contracts in 1969, double that number in 1977, and nearly double that again-twenty million contracts-in 1979. A great deal of that increase was in hedging, and justifiably so. "Risk management" has entered the lexicon of our market economy in a major way over the past decade, and it will be with us for a long time to come. Hedging is an excellent risk transfer technique, and one which will continue to grow in importance among American businesses-both rural and urban-and among our financial and credit institutions. Nevertheless, without a concomitant increase in speculation, i.e., risk trading, the growth in hedging could never have occurred. The two go hand in hand.

THE ROLE OF THE SPECULATOR

Just how much speculation is enough? That question has been asked on numerous occasions in recent weeks, in particular because of allegations arising from the silver scenario. The debate has been further sharpened by comments emerging from several Federal agencies. The Federal regulators who are most knowledgeable and experienced, i.e., the majority at the Commodity Futures Trading Commission, have not been terribly exercised by the level of speculation which typically prevails, either in cash or futures markets, for commodities and financial instruments. The Federal commentators who have been using pejorative language such as "excessive speculation", "gambling", etc., are those who are the least knowledgeable and have only limited experience in this complicated industry.

Fortunately, some of them have begun to realize the danger of their comments and the fragility of their positions, and their recent statements have become more cautious and circumspect. Chairman Volcker, for example, and Deputy Secretary of the Treasury Carswell have both warned against precipitous action, and both suggest that the issue of additional Federal regulatory powers be carefully studied before any legislative action is taken. We agree with those expressions of caution, and we are confident that any objective study will indicate no need for additional Federal regulatory powers.

"Speculators" in the futures industry are analogous to "middlemen" in the cash market. Both become "designated villains" when no other villain is readily apparent. When food prices rose dramatically a few years ago, everyone looked for a culprit, but one was hard to find. Consumers were startled by what occurred, but they did not wish to blame the farmer, who was just coming off several years of economic hard times. So it was the "middleman" who got the blame, even though the entire food chain has always been characterized by relatively low profit levels. Critics were simply never very specific about which middlemen were to blame, or just what public policy sins they were allegedly committing.

With futures markets, the same villainous role has been assigned the speculator. Obviously, no one is going to blame the hedger for any of the alleged ills of the marketplace. He is the one who is seeking risk protection; he is the beneficiary of the price insurance that futures markets make available to him. Hence, if there be shortcomings in the risk transfer process, the sins of commission and omission must be those of the speculator.

But neither life nor business is ever that simple. The speculator is an essential cog in the risk management wheel. Therefore, any legislative or regulatory action that will reduce the role of the speculator runs the risk of also inhibiting and hindering the risk transfer process. In other words, there are public policy tradeoffs involved, and those tradeoffs should be carefully assessed lest we damage our economic system, rather than improve it.

Some, including the Chairman of the CFTC, have argued that recent speculation in silver was excessive. The Chairman also says that we have inordinate speculation in a number of other futures markets. My colleagues at the Chicago Board of Trade and COMEX will respond with respect to silver, a product we do not trade at CME. With respect to the commodities and instruments we do trade, however, I am not persuaded that excessive speculation exists in any of them. Speculation provides liquidity, giving hedgers the opportunity and prerogative of getting in and out ot the market quickly. That is of immense importance to one who seeks to minimize risk. Those who downgrade the relevance of liquidity have very likely never been hedgers. It is mighty comforting to have a speculator readily available when one wishes to place a hedge, and perhaps even more comforting to have him available when one is ready to lift the hedge. To suggest that speculation is simply gambling, as one Federal regulatory official has done in recent testimony, is a gross misrepresentation of the speculator's role in assisting businesses to manage risk. Without ample speculators, there would be few hedgers. As futures markets grow, they will require

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