Levitt says SEC, futures commission should be streamlined into one body.

BOCA RATON, Fla. -- Securities and Exchange Commission chairman Arthur Levitt said Saturday that it would be a logical step for Congress to combine securities and futures regulation under one agency.

"It makes an enormous amount of sense," Levitt told the Securities Industry Association's annual convention. "It would be consistent with both the policy of the administration and the new Congress to reduce the cost and redundancy of regulation."

Levitt said that while Congress should pursue efforts to combine the SEC and the Commodity Futures Trading Commission, he wasn't going to get involved in the effort.

"It's logical to have them combined, but it's an issue that I determined I wasn't going to get bogged down in," he said. "The politics of that are very difficult."

However, Levitt emphasized that it should be a top priority for lawmakers in their efforts to cut costs.

"It should be the first thing on their agenda. If I were them, that's exactly what I would be thinking of," he said. "But I want them to think of that."

Last month, Rep. Ron Wyden, an Oregon Democrat, said he would introduce legislation when the new Congress convenes in January to combine into one agency the futures trading commission, the SEC, and the marginsetting authority of the Federal Reserve Board.

Sheila Bair, a CFTC commissioner, said Friday that such efforts to combine the two agencies would be counterproductive. She said the agencies aren't having any troubles cooperating on issues, including derivatives, that fall under both jurisdictions.

Meanwhile, Levitt said that derivatives are a high priority for the SEC and that the agency's joint efforts with the industry are going well.

"We have had ongoing discussions with a group of six firms that are the major derivatives dealers among the securities markets," he said. "Thus far, I'm cautiously optimistic about our ability to work together with them in a very unprecedented cooperative way."

Next week, the SEC is expected to report to Congress on its work with the securities firms in drafting voluntary guidelines for over-the-counter derivatives affiliates.

The report, which was requested earlier this year, is expected to be substantive, an aide to Rep. Edward Markey, D-Mass., said.

"If all we get is 'we're making progress on this,' that will not be well received," the Markey aide said.

Levitt, in addition to other top securities representatives, declined to talk about the details of the over-the-counter derivatives guidelines, noting that some of the details are still unknown.

Nonetheless, Levitt said that developing suitability standards for endusers of derivatives, including state and local governments, is one of the biggest issues the firms and the agency are working on.

"It's a complex problem because at first blush you might say, well, no pension fund or no municipality should be buying derivatives," he said. "Then the question is what kind of derivatives are you talking about.

"Some derivatives I think are so fundamental, so plain vanilla, you can say that a pension fund might be negligent if they didn't buy that, and others are very speculative."

With respect to the recent $1.5 billion in paper losses reported by Orange County, Calif.'s investment pool as a result of investments in interestrate sensitive derivatives, Levitt said the fund manager may have been too aggressive.

"It's clear they were heavily leveraged," Levitt said. "It's dangerous, I guess, for me to say this, but at first glance it looks like the manager of that fund took some risks that with his experience probably suggested he shouldn't have taken."

He emphasized, however, that the SEC is still looking into the matter and hasn't come up with any definite findings.

Levitt said that suitability standards are only part of the problem with respect to derivatives.

"How that relates to bank regulation with respect to derivatives and regulation of counterparties throughout the world is something that we're going to have to think about and deal with very quickly," he said.

He said the president's working group on derivatives issues hasn't held any emergency meetings about the reported Orange County losses.

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