WASHINGTON -- A group representing state and local government finance officers voiced opposition yesterday to proposals released by the Commodity Futures Trading Commission to ease government regulation for an established professional trading market.
"We do not support the establishment of a 'professional trading market' as outlined in the proposed rule or any other action that might decrease regulation of any aspect of the derivatives market at this time," the Government Finance Officers Association said in a comment letter it submitted to the futures trading regulator.
The agency's proposals, which were released for public comment this fall, would enable trades in complicated financial products including derivatives on the Chicago Board of Trade and the New York Mercantile Exchange without the regulatory burdens that are customarily placed on futures exchange transactions.
The agency's easing of its rules would be granted as long as the trades are limited to institutional or professional investors.
One controversial and timely consideration in the agency's proposals is its plan to review previously approved rules that exempt over-the-counter swaps transactions from its oversight.
The agency said in its proposals that it would revisit the swaps exemption to determine if its definition of sophisticated investors is too broad. The agency is considering whether or not all state and local governments should qualify as sophisticated investors.
Mary Schapiro, the agency's chair-woman, has repeatedly expressed concern about derivatives losses that state and local governments have suffered. She has cited concerns that the smaller governments don't have the expertise needed to make wise derivative investment decisions.
The Government Finance Officers Association, in its comments, said it was opposed to restricting municipalities from making derivatives investments. "While GFOA does not support any relaxation of regulatory oversight ... in the event that these or similar rules are approved, GFOA supports maintaining the eligibility of all local governments to engage in such transactions," the association said.
"Just as we support the application of sales practice rules to all investors, we likewise support the ability of such investors to engage in such transactions," the association added.
Before Orange County, Calif. announced $1.5 billion in paper losses and filed for bankruptcy, Schapiro expressed concerns about small state and local governments making derivatives investments.
Schapiro has suggested that safeguards for municipalities be established, which could include an assets-under-management test or a requirement that municipalities have outside managers.
The government officers association said these efforts to restrict smaller municipalities won't curb derivatives losses, adding that Orange County, considered a sophisticated investor, has reported the largest loss yet.
"Orange County would clearly have been considered a sophisticated investor, and yet it is the only government entity to date that has seen such precipitous results," the association said.
The association, in its comment, also maintained that the commission didn't have the authority to set investment restrictions on state and local governments.
"GFOA believes that any exclusion by the commission of any local governments as eligible participants is an inappropriate intrusion into what is properly a state function," the association said.
Meanwhile, the futures trading agency has extended its comment period for certain aspects of its proposals. The agency will now accept comments on the swaps exemption review until the end of January.
The agency said it received a number of requests for an extension of the comment period and is extending the swap exemption portions "in order to ensure that all interested parties have an opportunity to submit meaningful comments."
Municipal Bond Index Update
The list of bonds priced for the Municipal Bond Index will be revised after the December 15 pricing.
Three new issues are eligible for inclusion in the index. They are:
Illinois Development Finance Authority, pollution control revenue refunding bonds, Series 1994D (Commonwealth Edison Co.) (AMBAC insured); 63/4s dated 12/1/94, due 3/1/15; first coupon 3/1/95; term amount: $91,000,000; callable 3/1/05 at 102, 3/1/07 at par; ratings: Aaa/AAA; conversion factor: 0.9047; CUSIP: 451888CU3.
New York State Research & Development Authority, facilities revenue bonds, Series 1994A (Consolidated Edison Co.); 71/8s dated 12/1/94, due 12/1/29; first coupon 6/1/95; term amount: $100,000,000; callable 12/1/04 at 102, 12/1/06 at par; ratings: Aa3/A-plus; conversion factor: 0.9340; CUSIP: 64984EBC8.
Pennsylvania Intergovernmental Cooperation Authority, special tax revenue bonds, Series 1994 (City of Philadelphia Funding Program) (FGIC insured); 63/4s dated 12/1/94, due 6/15/21; first coupon 6/15/95; term amount: $54,000,000; callable 6/15/04 at 102, 6/15/05 at par; ratings: Aaa/AAA; conversion factor: 0.9135; CUSIP: 708840DX8.
