We do have questions, however, which relate to the proposed regulation of the market. It appears that S.2704 which seeks to address some of these problems we have discussed this morning is very broad in scope. The language of the bill would seem to embrace not only financial futures on an organized exchange, but also the underlying cash markets themselves and forward commitments including foreign exchange contracts among banks and corporate customers. We do not believe that it was the intent to restrict foreign exchange contracts which are necessary to facilitate trade, commerce, and normal interbank flows.

We are also concerned about the process used to establish margin requirements on the exchanges.

Increased margin

requirements, which raise the amount of capital required to take a position, will tend to decrease the number of participants in the commodities market and, as a consequence, will reduce the liquidity in the market. Too high a margin requirement by one exchange may also drive participants to other futures exchanges both domestic and overseas. Margin requirements should be set sufficiently high to cover any initial losses resulting from an adverse price change. Because of the complexity of these markets, any changes in the process of setting margin requirements should be implemented only after careful study by those thoroughly familiar with the intricacies of these markets.

not

Another common control device is position limits. During the turmoil in the silver market, such limits were imposed by the two principal exchanges. However, as indicated in the CFTC's report to the Senate Agricultural Committee, these limits were rigorously enforced. Uniform position limits should be explored as a means for preventing unreasonably large and speculative concentrations.

In summary, we believe that both Congressional and regulatory action is warranted in light of the events leading up to late March and thereafter. At the same time we must move with care, since the futures markets play an important role in the U.S. economy by providing producers and consumers with means of hedging against severe price fluctuations. Accordingly, we recommend that

a comprehensive evaluation of the issues precede legislative or

regulatory action.

ESTIMATES OF WORLD CERTIFIED STOCKS, EXCLUDING COMMUNIST COUNTRIES (millions of ounces)

*Does not include London Bullion market, a private market which has more than 100 member dealers.

64-891 0-80-7

(37.6)

The CHAIRMAN. Mr. Williams.

Mr. WILLIAMS. Mr. Chairman, members of the committee, I am pleased to be here this morning to represent the Securities and Exchange Commission in connection with recent events in the silver future market and possible legislative or regulatory responses to prevent the recurrence of similar crises which pose dangers to the Nation's financial markets beyond what free markets should be expected to absorb.

As you are aware, the Commission does not regulate trading in the futures market. The events of March, however, have underscored the interdependence of this country's securities markets and futures markets.

This interdependence is heightened as the futures markets move beyond their traditional role as a hedging and risk-shifting mechanism for producers and users of agricultural products. The introduction of futures on exempt securities-that is, futures on certain securities, such as Federal obligations, which are statutorily exempted from the registration and reporting requirements of the Federal securities laws-and on precious metals has attracted to the futures market much larger numbers of securities brokerdealers and traditional investors in securities.

MONITORING FINANCIAL CONDITIONS OF SECURITIES FIRMS

Since the March silver break, the Commission has closely monitored the financial condition of securities firms who have held, for their own or their customers' accounts, large positions in silver futures. On the basis of information provided, we do not believe that any such firm is in current financial difficulty as a result of dealings in silver or silver futures.

Apart from its monitoring efforts, the Commission is conducting an inquiry into the circumstances surrounding the March silver collapse to determine whether any violations of the Federal securities laws occurred during that period. At the same time, the Commission is currently studying possible changes to its financial responsibility rules, particularly in the net capital area, to protect the solvency of broker-dealers from undue risks incurred through futures trading and other activity that could endanger public confidence in the ability of broker-dealers to discharge their role in the securities markets.

But it is important to bear in mind that broker-dealers who engage in futures trading are also registered as futures commission merchants with the Commodity Futures Trading Commission. As such, they are subject to the requirements of the CFTC, which has the primary obligation to devise financial responsibility rules for futures trading. If these rules are not effective in assuring the financial responsibility of broker-dealers with respect to their futures trading, the Commission will need to take compensating regulatory actions in order to protect the overall financial status of broker-dealers trading in both stocks and futures.

The Commission has recently joined in a study with the Treasury Department and the Federal Reserve to analyze the present regulatory approach to financial futures to determine what legislative changes are necessary. We are devoting substantial resources to the completion of this study and hope to present proposals for