The Commodity Futures Trading Commission is stirring controversy by hinting that it should regulate the multibillion-dollar market for a popular type of derivative.
Banks and securities firms-which are both dealers and users of the instruments, known as swaps-argue that their derivatives activities are already well supervised by bank examiners and the Securities and Exchange Commission.
"The existing regulatory framework for swaps has produced innovation and tremendous benefits for customers," said Mark C. Brickell, a J.P. Morgan & Co. managing director. "It is a framework that should be studied for its successes, not trampled on."
The commission, which oversees futures contracts, responds that swaps transactions are a virtual Wild West that demand new scrutiny. In May the commission issued a "concept paper" seeking public comment whether it should oversee swaps. The commission estimates that swaps contracts worldwide had a market value of more than $860 billion in 1997-more than double the value in 1994.
Brooksley Born, chairwoman of the Futures Commission, told a House Agriculture subcommittee this month that institutions inexperienced in managing these complex instruments could amass such large losses "that the financial system in some way may be endangered."
Requirements involving capital, internal controls, record keeping, and reporting are under consideration, she said. The commission extended the comment deadline last week to Sept. 11.
At the heart of the controversy is the question: Are swaps a type of futures contract?
Both are financial products whose value is tied to commodities, securities, or other underlying assets. But swaps are privately negotiated and custom-tailored while futures are standardized and traded on public exchanges.
Upset by the commission's overtures, the nation's top three financial regulators quickly objected.
Federal Reserve Board Chairman Alan Greenspan, Securities and Exchange Commission Chairman Arthur Levitt, and Treasury Secretary Robert E. Rubin have asked lawmakers to bar the commission from restricting swaps for at least a year while the issue is studied further.
Without such a delay, they argued, the commission's discussion of possible regulations could jeopardize the legality of swaps contracts, spark lawsuits, destabilize financial markets, and drive the swaps business out of the country to overseas financial centers.
"We have concluded that such legislation is necessary to avoid disruption and dislocation in the market while the underlying issues are being considered by Congress," Treasury Under Secretary John D. Hawke Jr. told the subcommittee.
The commission has also drawn the ire of prominent lawmakers.
Jim Leach, House Banking Committee chairman, introduced legislation last week that would bar the commission from creating rules on swaps until late 1999 at the earliest. His bill also would create a task force of financial regulators led by the Treasury secretary to make policy recommendations.
The Iowa Republican praised the success of the swaps market and criticized the commission for engaging in a regulatory turf war. "I am not impressed by the efforts of one agency unilaterally to gain control of over-the-counter markets," he said on the House floor last week.
In a speech on the Senate floor, Banking Committee member Lauch Faircloth agreed, branding the commission "a rogue regulator" and threatening to amend the agricultural appropriations bill with provisions similar to Rep. Leach's.
Although the commission has stood firm in the face of heavy opposition for weeks, the threat of legislation that could tie its hands has brought it to the negotiating table. Rep. Leach and leaders of the House Agriculture Committee met with Ms. Born, Mr. Hawke, and Fed and SEC officials Friday. More meetings are scheduled for today.
While Capitol Hill is leaning the industry's way, lawmakers may be too busy to act before adjournment in early October and eliminate market uncertainty, said Rick Grove, executive director of the International Swaps and Derivatives Association.
"We have heard from numerous investment banks and (commercial) banks that this is affecting how they are doing business," Mr. Grove said. "If Congress goes home without something being done on this issue, then market confidence will be shaken further."
