WASHINGTON -- State and local governments may not be given regulatory relief the Commodity Futures Trading Commission could give to sophisticated investors making trades in derivative products on U.S. futures exchanges.

"It's a recognition on our part that municipalities have had some serious problems in the over-the-counter market," said the agency's newly appointed chairwoman, Mary Schapiro.

Yesterday, the trading commission opened for comment proposals that would ease government oversight of the exchange trading of some derivative products by sophisticated investors. The agency questioned whether municipalities should be considered eligible participants. Public comment on the proposals will be accepted for 45 days.

To date, all futures and options contracts traded on the exchange -- even trades among sophisticated investors -- have been subject to the commission's rules.

"I don't know if we can avoid a repeat, but clearly what happened with Charles County and what we've read about county and municipal governments across the country shows that there's, in some cases, not the level of sophistication and understanding about some of these products that one would hope," Schapiro said.

Schapiro was referring to the disclosure earlier this year by Charles County, Md., that it had experienced about $30 million in losses from trades in derivatives.

The proposals come as U.S. futures exchanges are trying to be more competitive in rounding up derivatives business that is usually done in the over-the-counter market.

The agency, in its proposals, questioned whether municipalities should be considered eligible participants in the proposed professional trading markets exemption.

"I have a view that many state legislators are going to introduce bills in the next sessions of their legislatures to restrict the ability of public funds to be used in derivative markets whether they are exchange traded or over the counter," Schapiro said.

While the agency's proposals do ease regulation, they are a scaled down version of the Chicago Board of Trade request last year that sought a broad deregulation of an established professional trading market.

"In contrast to the exemptive feast the CFTC provided for OTC derivatives in 1993, the CFTC now offers U.S. exchanges only a few meager exemptive crumbs," Chicago Board of Trade chairman Patrick Arbor said.

The commission maintained that the exchange's exemption requests that were submitted last year were too broad.

"The fact that a centralized market is composed solely of institutional or 'sophisticated' participants does not obviate the need to ensure market integrity, price dissemination and adequate protections against fraud, manipulation and other trading abuses by continued Commission regulation and oversight," the agency said in its proposal.

Meanwhile, the agency recognized that current laws do put exchanges at a disadvantage with the OTC market, and proposed some relief, including streamlining the registration and disclosure requirments and shortening the contract application period.

The commission proposed, more conservatively, that the exemptions first be issued under a three-year pilot program, that trades be limited to products not otherwise listed on an exchange, and that exchanges still submit to the agency applications for new prodict listings.

The commission agreed yesterday to exchange officials' arguments that the trading of derivatives on U.S. futures exchanges offers advantages not available to investors in the over-the-counter market, including price transparency and reduced credit risk.

"I hope and I expect the flexibility of these instruments, when coupled with the added protections emanating from the exchange-traded framework, will make these instruments an appealing alternative to the over-the-counter markets," Schapiro said.

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