Fed Chief Hints FavorFor a Bill that Limits Derivatives Regulation

Federal Reserve Chairman Alan Greenspan Friday suggested his support for a bill to set limits on federal scrutiny of derivatives trading.

Speaking to a Federal Reserve Bank of Atlanta conference here, Mr. Greenspan said the government should let the private market police itself.

"Private market regulation appears to be achieving public policy objectives quite effectively and efficiently," Mr. Greenspan said, adding that it is "wholly unnecessary" to give oversight to the Commodity Futures Trading Commission.

The comments come as the Senate Agriculture Committee is considering an overhaul of the commodities law under which the commission was created in 1974.

With the commission's jurisdiction in this area being debated before various courts, a bill to settle the issue has been introduced by Sen. Richard G. Lugar, R-Ind.

The bill would limit the commission's jurisdiction to regulated exchanges and retail futures contracts. Over-the-counter and certain exchange-traded derivatives used by large banks and other institutional investors would be exempted from the commission's oversight.

The commission has opposed the bill, saying it should be the primary regulator of derivatives.

But Mr. Greenspan-who stopped short of explicitly endorsing the bill- argued that dealers in off-exchange derivative contracts limit their risk by settling derivatives contracts in cash, basing prices on highly liquid markets, and limiting penalties to the actual damages suffered.

Bankers and other purchasers of derivatives protect themselves by working only with dealers who have a strong credit rating and an untarnished reputation, he added.

"Actual losses to institutional counterparties in the United States from dealer defaults have been negligible," Mr. Greenspan said. "Thus, there appears to be no need for government regulation of off-exchange derivative transactions between institutional parties."

Mr. Greenspan said the government may have a role regulating derivative sales to retail customers, who are unable to evaluate their counterparties effectively. But he said this job should not be left to the futures commission.

It is not obvious that the Commodities Exchange Act "provides the best regulatory framework," he said. "The marketing of off-exchange derivatives to retail customers by banks and broker dealers is more appropriately regulated by the banking regulatory agencies and the Securities and Exchange Commission, respectively."

Mr. Greenspan suggested giving clearing houses a choice of being overseen by the futures commission, the SEC, or banking regulators.

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