The CHAIRMAN. I'd be happy to get that, that increased volume. It is my impression that it has been very substantial, but nothing like twentyfold in the 4 years.

[The following tables were received for the record:]

The CHAIRMAN. Mr. Vernon, at the present time each exchange enjoys complete autonomy in setting the levels of margins for futures contracts, and I'm concerned about the conflict of interest that may be involved here. The law specifically precludes the CFTC from setting margins. Don't the directors have an apparent and real conflict of interest in setting margins, since it appears the majority of them, or their business organizations, have a direct pecuniary stake in the level of margins?

Mr. VERNON. I don't believe so, Mr. Chairman. In the first place, margins are kept as low as possible so that the hedging process may be conducted at an efficient level or, if you want to use another word, at as cheap a level as possible, because the lower the margin cost, the lower the cost the whole system has to absorb, the more the producer could be paid, and the less the consumer has to pay for the goods.

The margin cost is one cost in the marketing chain.

The CHAIRMAN. So the lower the margin, the more useful it is, the more profitable it is for those who trade?

Mr. VERNON. Not necessarily. For a speculator, that may be true. But the marketing cost, including the hedging cost, is part of the cost of getting the goods from the farmer to the consumer. So we all should want to keep that cost as low as possible.

As a matter of fact, if you raise the margin, at the high price of interest, you are really adding to inflationary pressures rather than the other way around.

And on the second point, Mr. Chairman, if I may comment just briefly, on our board of directors we have men who represent different interests, buyers and sellers, farm cooperatives and exporters, millers and traders. These different interests provide a mix, so that if there were any inclination to favor their own particular industry position, it is well offset by people on the other side of the market.

The CHAIRMAN. But there is no offset to the fact that the directors want to keep the margin low so they can get as much volume as possible. The lower it is, the more volume it gets, the more commissions you generate, the more money you make.

Mr. VERNON. Well, I can't speak for every exchange. At our exchange, where 90 percent of the business is commercial, the grain man is interested in having a small cost for the marketing process. Therefore he wants the margin low, so his costs will be low and so the cost to the consumer for a loaf of bread will be low. I think that is a laudable aim, Mr. Chairman.

The CHAIRMAN. My time is up. I will be back.

Senator Garn?

Senator GARN. Thank you, Mr. Chairman.

I believe that it would be unwise and probably very counterproductive to attempt to devise an easy solution without knowing a great deal more about the nature of the problems, if any, which may have occurred in the silver markets recently. In addition, I am hesitant to try to apply on a broad scale any lessons which might be derived from this episode until such time as there is convincing evidence that we would be doing more than attempting to solve yesterday's problems.

I have an open mind about the issues, however, being raised in these hearings. And I believe there are several interrelated questions which must be answered before it is clear that any legislative answer is appropriate.

Mr. Vernon, first of all, let me ask you, if the Federal Reserve Board or some other Federal agency had standing authority to set margins on futures transactions, what if anything do you think they would have done differently than what happened?

Mr. VERNON. Senator, there is a presumption that they would have set higher margins throughout this process in order to squelch the speculative bubble. I assume that is the approach. You would have to ask the gentlemen, who are much more familiar with the silver situation than I. But I think that is the inference. Mr. WILMOUTH. May I respond to that, if I may, Senator? Senator GARN. Yes.

Mr. WILMOUTH. I don't think they could have done much different. There are two levels of margins. We set margin levels, for example, at the Board of Trade that at times approximated 35 to 40 percent of the value of the contract. Comex at one time was setting them significantly higher than that.

But in addition to our margins, there were also additional margins imposed by the brokerage houses that frequently equaled almost 100 percent of the contract.

Mr. Berendt I think can also verify that.

Mr. BERENDT. Yes; with regard to margins and the levels at which they were set by the Board of Governors of Comex, they were as high as $60 to $75,000 per contract, which was at least 40 percent of the value of the underlying commodity. And I don't know whether the Fed would have set margins any higher. I don't know if they would have treated the situation any differently. But clearly, the margins were set at a level that we felt necessary to protect the integrity of the marketplace.

Senator GARN. Well, the point I'm really trying to make herecertainly I am a total layman in this field. But in looking back and watching it develop, I would be surprised that a Federal agency would have acted much differently, the way I saw it develop. Yet we talk about legislative solutions, putting the Feds into the picture.

As a former member of the Fed, Mr. Brimmer, what do you think?

Dr. BRIMMER. Senator Garn, my own judgment is that I think the Federal Reserve would have come very late to this situation. They would not have been in a position to keep abreast of develop

ments on a day-to-day basis-and certainly not on an hour-to-hour basis, as Mr. Wilmouth suggested happens on his board.

FEDERAL RESERVE'S INEXPERIENCE

The kinds of margins at issue here are the kinds of margins with which the Federal Reserve has absolutely no experience. I want to emphasize that.

Senator GARN. That's never prevented Government from getting involved before. [Laughter.]

Dr. BRIMMER. Senator, I agree with you. But it may have some bearing on the judgment we can form about the degree of competence they might bring to it.

The Federal Reserve's experience is with margins on securitiesand that experience is based on the use of credit. The Federal Reserve is an institution that regulates financial institutions and credit. And I would strongly urge this committee and the Congress not to give the Federal Reserve this authority. Do not ask them to take on this additional responsibility. I believe they would demonstrate that they cannot perform in this area anywhere nearly as well as they perform in the area of their traditional responsibility. Senator GARN. Dr. Yeutter, did you wish to make a comment? Dr. YEUTTER. I was just going to add two things: One, just to supplement what Dr. Brimmer has just said, it is inconceivable to me, Senator Garn, that the Federal Reserve or any other Federal agency could properly handle the existing margin-setting functions of the exchanges, let alone the additional functions that are encompassed in S. 2704.

This large packet I'm holding is the list of margin changes that we made on our exchange in just the last few months. If one were to multiply that by all commodities on all exchanges, it becomes clear that setting margins is an enormous task for which the Fed just simply is not qualified.

The second point I want to make is a philosophical one. There has been a lot of discussion about margin authority here, Senator Garn. I just wanted to add the point that margin setting is not generally a sound regulatory tool, that if we're really trying to get at speculative bubbles, as seems to be the suggestion here- and I'm not prepared to accept that there is a need to deal with any speculative bubbles. But if that were the case, if one were to assume that were a problem, there are a lot of other regulatory tools that are more efficient and more effective than margins. Senator GARN. I would address my next question to any of you that would like to respond. Would the U.S. futures market continue to be competitive with those in other countries if required margins on contracts were increased significantly? In other words, what I'm trying to get at: Would traders, particularly large traders, find overseas markets much more attractive and act accordingly, certainly then diminishing our own role here?

Mr. WILMOUTH. I don't think there's any doubt, Senator, that that would occur. And I think Mr. Volcker of the Federal Reserve said the same thing the other day. There's no doubt. The absolute answer to that question is, we would lose the futures markets. They would flee elsewhere.

Mr. BERENDT. If I could comment for just a moment on what Mr. Wilmouth said. At Comex, we constantly have had to deal with the existence of an international market. As an international marketplace with competing markets in London-the LME-and elsewhere, we are always concerned that if our regulatory scheme or structure is too large or too onerous, it may become less desirable for people to use our marketplace, particularly when there are one or more other markets available for them where the regulatory structure is not eonerous. So this is something we are concerned about and something that we believe is a real threat to our markets.

Senator GARN. Mr. Wilmouth, if margins generally are increased, this would presumably have the effect of increasing costs for both hedgers and speculators. Assuming that these participants do not plan to absorb such price increases, what effect would this have, first, on costs to consumers of the underlying commodities; and second, on the liquidity of the futures markets?

Mr. WILMOUTH. It would have an effect on both of them. First of all, the resource allocation would be different. If the smaller hedgers are forced out of the market because of high margins, they have no place to go. And they have to build into the prices of their products the fact that they no longer can reflect what prices are going to be for the futures markets.

So there will be a steady increase in prices, and those people who were formerly using the market to hedge no longer could do so. And the second part of your question?

Senator GARN. Well, the second part was on the liquidity.

Mr. WILMOUTH. There is no doubt that as you raise margins, people who can't meet those margins get out of the market. That is one of the complaints that the Hunts have-that the margin increases dry up the liquidity in the marketplace, and that's true. Senator GARN. Mr. Chairman, we have so many witnesses and panels today and questions to be asked, I will submit the rest of my questions to this panel to be answered at a subsequent date. The CHAIRMAN. Senator Stevenson?

Senator STEVENSON. Thank you, Mr. Chairman.

We got into this because of the speculation in silver bullion and futures contracts. And I for one am still having some trouble understanding what happened. I am having difficulty now reconciling information furnished to the committee about the closing spot prices on Comex for silver bullion with the information submitted to the committee this morning by its witnesses.

Mr. Wilmouth, to try to help us all understand a little better what did happen, let me ask you, from whatever documents you have with you, to tell us what the spot price at the close of business was for silver on September 4?

Mr. WILMOUTH. I think Mr. Berendt has those prices.

Mr. BERENDT. In the chronology that we submitted to the committee, on September 4 the spot price-actually the closing settlement price-on Comex was $11.02.

Senator STEVENSON. Now, Mr. Wilmouth, let me refer you to figure 13, which accompanied your statement, and ask you what it suggests to the committee was the price of silver on September 4? Mr. WILMOUTH. What chart are you referring to?