Caveat on Tough Margin Rules

CHICAGO - Higher margin requirements on stock index futures would not reduce volatility in the stock market, a Federal Reserve Bank of Chicago economist has concluded.

In the Chicago Fed's June newsletter, economist Jim Moser wrote that Federal Reserve Board efforts to dampen speculation and volatility by raising margin requirements do not work and, in fact, can be counterproductive.

Mr. Moser contends that speculation helps temper volatility because speculators often take positions opposite to the way the market is moving.

Lesson from History

He argues against increasing the cash margin for Standard & Poor's 500 index futures from the current 11%. A 50% requirement on stock investments has been in effect since 1975.

A measure of percentage changes in S&P 500 futures "does not suggest an important change in volatility has occurred since 1982," when the instrument was introduced, Mr. Moser said.

Before 1975 the Federal Reserve Board made repeated margin-rule changes aimed at smoothing market fluctuations, Mr. Moser said. But repeated reviews show this approach is headed for failure, he said.

By tinkering with margins, regulators take aim at too small a portion of trading activity to have a big impact, he said.

Also, though margin rules restrict using stock as collateral for loans to buy securities, the rule is skirted by basing loans on other assets, Mr. Moser said.

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