futures system which protects grains and many other commodities as well.

Yesterday we heard Mr. Stone, Mr. Volcker, and other very eminent witnesses talking about the need for a greater "Federal presence" in the regulatory process. In the first place, there's a very comprehensive regulatory system now administered by the Federal Government. Second, if you will listen carefully to the Board of Trade and Comex' testimony, there was a "Federal presence" at their board meetings. Last, I would suggest that the term "Federal presence" is a euphemism, as has been many phrasessuch as bubbles-and we have heard other phrases here. The phrase "Federal presence" is a euphemism for total Federal control of futures markets.

We would also take issue with the suggestion that members of the Boards of Directors are somehow inherently subject to a conflict of interest or perhaps are evil or men engaged in improper activities. I sit on the Board of our Exchange. There are many and varied interests represented. As I indicated earlier, we have farmer-owned cooperatives, exporters, millers, members who usually don't even know the position of their firm. Their firms are buyers one day and sellers the next day. There are firms that have a long position one day and a short position the next day. They may have a long position in Kansas City wheat and a short position in Chicago.

In short, the charges that Boards of Directors are somehow inherently evil or acting in their own self-interest just doesn't stand the test of analysis and inquiry.

In closing, Mr. Chairman, I think it's very instructive to hear what witnesses have said before House Committees in the area of speculation. We heard farmers complaining that speculators run the price of grain into the ground. We heard users of silver complaining that speculators run the price up.

Mr. Chairman, you can't have it both ways. What this tells me and all interested observers is that, in fact, speculators are neutral in price. The supply-demand forces set the price in our great futures markets and we hope, Mr. Chairman, that the present excellent system of regulation by the CFTC and oversight by the exchanges on margins might be permitted to continue and we submit that S. 2704 is not necessary at this time.

Thank you very much.

[Complete statement follow:]

STATEMENT OF THE BOARD OF TRADE OF KANSAS CITY, MO., INC.

(Presented by W. N. Vernon III, Executive Vice President, H. R. Schmid,

President)

Mr. Chairman, we are pleased to be here today to discuss with your Committee some of our impressions and reactions to the proposed legislation arising from the recent chain of events in the silver market.

My name is Walter Vernon, Executive Vice President of the Board of Trade of Kansas City, Missouri, Inc. (herein referred to as the KCBOT). I am accompanied by John Schmid, President. The KCBOT is a cash or spot grain market for all varieties of grain and is a designated futures contract market for several grain futures; the current active contract is hard red winter wheat. Our exchange is clearly one of the "old line" grain exchanges with a history of 125 years in the cash commodities, and more than 100 years of grain futures trading.

The membership of the KCBOT is diverse. Member firms range in size from sole partnerships to some of the largest enterprises in the United States.

We strongly support the continuation of the present regulatory structure of commodity margins. We believe the present system has and will continue to function well within the responsibilities of the various exchanges. We oppose the legislation presently before the Committee. It gives far too much day to day responsibility to an agency staffed for the most part by individuals unfamiliar with the operations of futures contracts.

It is incomprehensible to us that aspects of commodities markets should be regulated by any other agency as suggested in this legislation. We feel that any split of jurisdiction between two or more agencies would create a regulatory and compliance_nightmare. Accordingly, we once again wish to speak in strong support of CFTC exclusive jurisdiction over all aspects of commodity futures trading.

In recent weeks some persons have sought remedial legislation. One area most often discussed is the regulation of commodity margins. It is our view that people who are calling for increased regulation of commodity margins do not grasp the difference between margins and commodity margins. The so-called "commodity margin" is a mislabeled financial device. In fact, the margin on a commodity futures contract is nothing more than an earnest money deposit to guarantee performance. It is not a loan to finance the purchase of a commodity, as is the case of security margins regulated by the Federal Reserve Board. There is no actual commodity being purchased, as with securities, where evidence of title is held as security for repayment by a lender. In general it may be said that the purpose of commodity "margins," other than to guarantee performance, is to protect the financial solvency of FCMs and the clearinghouses, that is to protect the financial integrity of the total market. Their purpose is not to regulate prices, nor to regulate speculative activity per se.

We strongly urge that the setting of margin levels and their timing continue to be left to the self-regulatory bodies-the futures exchanges. A Federal agency would lack the expertise and market sensitivity to adjust markets during the fluid atmosphere present in a true futures market. It is our concern that an unexperienced Federal agency could disrupt the value of a futures market for hedgers. For instance, if a Federal agency set margin rates at too high a level, they would have an adverse impact on hedgers' marketing decisions and, as a result, futures would not be used by hedgers.

Historically, there have been no major scandals or disasters due to improper margins, thus there is no demonstrated need for government regulation. The CFTC segregation requirements provide customer protection not found in the securities industry. Under these requirements customer funds deposited with FMCs and subsequently paid over to commodity exchange clearing organizations are held in segregated bank accounts. Segregation protection combined with the following create a smooth functioning system: exchanges and CFTC financial audits of FMCs; the CFTC's reporting and financial requirements for FMC now enforced by exchanges; positions being brought to market daily or closed out; and FMC responsibility to clearinghouses for margin funds.

Although the CFTC is at times unresponsive to our view of how a government agency should operate, we recognize the need for such an agency to oversee the operation of this industry. Even prior to the silver market situation, the CFTC has taken a more expansive view of rule approval authority and more stringent new contract standards. With this expansive role being undertaken, it is premature for the Congress to expand the jurisdiction of margin to the CFTC or another Federal agency. If Congress, in its collective wisdom, deems it necessary to expand regulations of commodity markets we believe it is crucial that these responsibilities be placed within the jurisdiction of the agency with the most expertise in dealing with futures markets-the CFTC.

In conclusion we would like to express our agreement with Federal Reserve Chairman Paul Volcker's observation:

"I would caution against striking out with hastily conceived restrictive legislation with respect to organized futures markets. Those markets already have some considerable financial safeguards embedded in their structure. One danger from excessive regulation or the imposition of heavy costs is that activity will shift to unregulated channels, here or abroad, potentially leaving the markets more vulnerable than before to manipulation or credit weakness."

The emotional and political calls for commodity margin control to regulate prices are almost always predictable in timing, and in lack of data and analysis to show a cause/effect relationship.

The CHAIRMAN. Well, gentlemen, you have made a very powerful case for your position, as I expected you would. You obviously are thoroughly familiar and expert in this area.

I reiterate what I did say yesterday. I do think that the speculators play a very useful and vital role, an absolutely essential role, in our markets. And I think the futures, the whole futures process and those who take part in it are necessary and essential. And I certainly don't intend to do anything, and I don't think other members of the committee intend to do anything, to inhibit that kind of necessary risk taking in a free society and in a free enterprise system.

Frankly, my own feelings go back, as perhaps do some of yours, to the experience we did have in the late 1920's and early 1930's and to the action that was taken in 1934 when, under the Securities and Exchange Act, we gave the Federal Reserve the authority to impose margin requirements in stock exchange trading. That didn't destroy the stock exchange. That didn't mean the end of that capital market. It helped make it strong and responsible and I think as fine a capital market as there in the world-the envy of the world, as a matter of fact.

And that is the kind of thing we are considering. And perhaps it is inappropriate for reasons that you may be able to tell us. At any rate, the heart of the issue-and I would like to ask Mr. Wilmouth to respond on this-is whether margin requirements should be used to limit the total volume of speculation in future markets. You oppose the use of margin requirements for that purpose. From your position, is it then fair to conclude that you believe the more speculative activity, the better the market, and the public has no legitimate interest in limiting the total volume of speculative activity?

Mr. WILMOUTH. Let me make several comments, if I may. First of all, I feel that there is a thought here that there was a good deal of excessive speculation going on in the silver market during the period, let's say, from as early as April of 1979 through March of 1980.

In my detailed remarks, I have a chart, which I will merely hold up for the members of the committee here, which indicates that the open interest in silver, which is the total number of contracts that have not been offset by opposite futures transactions, went down from approximately 184,000 contracts in September of 1979 to roughly 24,000 contracts in March. So during this period of silver "crisis" that we are talking about, the speculative "bubble" that Chairman Stone refers to was actually getting smaller, as our chart indicates.

MARGIN SETTING

Speaking again for the board of trade, I think that is another important point to remember. We believe it is extremely important that margin setting be kept in the hands of the experienced, knowledgeable traders who know what's going on in the marketplace minute by minute and hour by hour. We frequently call our Margin Committee together at, say, 11 o'clock in the morning, in an extreme situation, and because of events in or outside the marketplace a rapid increase in prices for example-look at margins. Based upon who the participants are in the marketplace, what their intentions are-are there a lot of commercial people in the marketplace, are they mainly speculators, how many people

are in there with spread positions-we then make a decision to raise and lower margins.

And we do that, use that tool, because we feel it is essential to preserve the integrity of the marketplace-that is our purpose. We don't want anyone to lose money. We want to make sure that all of our contracts are fulfilled in the long run. Maintaining the integrity of the marketplace through margins is, we feel, essential, and we think it belongs properly with the exchanges.

The CHAIRMAN. Well, Mr. Wilmouth, the problem is not simply the effect on the people who take part in the trading on the exchange, although that is very important. We're also concerned, as Mr. Stone-you may have heard him yesterday point out the effect and some of you gentlemen referred to what he said—the effect that this may have on the economy as a whole.

In the case he cited, the photographic industry, for instance, had the price shoot right up through the roof. It had a profound effect on silver users of an important commodity. And then, of course, what concerns me also-and I'm sure it must concern others and concerns the Treasury-is the effect that futures trading can have on the debt management policies.

You gentlemen discussed silver I think very well, and I understand how the CFTC is expert in that area. I'm not so sure they're expert on Treasury securities and that the Federal Reserve isn't in a better position, a more competent and expert position, a more disinterested position to act with respect to futures in financial instruments of that kind.

Mr. WILMOUTH. If I may respond to the first part of that question, with respect to Chairman Stone's comments, and perhaps Dr. Yeutter could respond to the last part of it. There seems to be, if I understand correctly, a finger pointed at what happened in silver as being the problem, the reason why people lost jobs-a finger pointed at the speculative silver "bubble" that Mr. Stone keeps talking about. We should examine in detail why gold and silver prices rose and fell. I first of all would point out that gold and silver rose and fell in tandem, as they have historically. The price of silver increased substantially during the 12-month period ending on January 21, 1980; the price of gold did the same thing. It's important to notice that gold and silver peaked on exactly the same day. And after January 21, the price of silver decreased dramatically, as did the price of gold.

I suggest the factors, which we discuss in detail, that caused gold and silver to rise are not to be blamed on the silver futures market. They were basically two: first, inflationary pressures, followed by unprecedented credit restrictions and extremely high interest rates, and then by a recession that we are now in; and second, changing perceptions of worldwide economic and political conditions, including those unfortunate situations that happened in Afghanistan and Iran.

Again, I would like to point out to the committee that in this particular area my detailed statement contains several charts which show the price of gold and silver. Let me just point out one of them to you. This is the one for silver. The one for gold is right behind it, and it shows exactly the same thing.

Every time there is a crisis, every time something unusual happens, people flee the paper assets and they go to the hard currency. The CHAIRMAN. Well, that does help, because as you say that does help and supplement the testimony we heard yesterday on that point.

Dr. YEUTTER. May I, Mr. Chairman, add one supplemental point to what Mr. Wilmouth had to say on speculation?

The CHAIRMAN. Please.

Dr. YEUTTER. It seemed to me that in some of the testimony yesterday, Mr. Chairman, we had our economics backward. I heard a lot of commentary yesterday about speculation in the silver market adding to inflationary expectations. It seems to me it's the other way around. And Mr. Wilmouth just alluded to that, too. People were taking speculative positions in physical gold and physical silver and gold futures and silver futures and diamonds and art and real estate, because of inflation. They weren't causing inflation; they were acting because inflation was frightening them out of their other investments. And this was a reflection, as you know, Mr. Chairman, of a lack of confidence in our fiscal and monetary policy and a number of the things that Mr. Wilmouth mentioned.

Well, back to your concern about Treasury instruments. That too surfaced yesterday, Mr. Chairman. And I would like to respond to that since we trade Treasury bills. And I just want to state for the record and for your benefit and the committee's benefit, what we have said at the Treasury Department and at the CFTC on a number of occasions-and we mean it-that under no circumstances should there be any need for the Treasury to alter its debt management efforts in order to accommodate the needs of future trading in Treasury bills.

We believe, Mr. Chairman, that we have ample authority under our rules to handle any deliverable supply situation that may develop without in any way impeding or affecting Treasury's debt management decisions. To my knowledge, we have never yet, during the several year history of T-bill trading, in any way affected their decisions. And I assure you we will not do so.

The CHAIRMAN. I hope so. Of course, we're getting to a situation that is quite different. As you point out and as I pointed out yesterday, there has been an increase twentyfold in 4 years in the volume of this futures trading, from a little over $100 million to $2 billion. That is a profound difference, and I think we ought to be sensitive to it.

Mr. Vernon, I would like to ask you this in the remaining time I have-

Senator STEWART. Excuse me, Mr. Chairman. Would you yield at that point?

The CHAIRMAN. Certainly.

Senator STEWART. Could I ask that something be inserted in the record there, if the staff could get it for us, just for the purpose of filling the record out? Would you give us some idea, or the staff give us some idea, of the increase in trading on the stock exchange in the same period of time?