Hostilities between U.S. futures exchanges and banks that offer privately negotitated derivatives contracts burst into the open again Wednesday at a Congressional hearing on the Commodity Exchange Act.
Patrick H. Arbor, chairman of the Chicago Board of Trade, used the forum to urge the Senate Agriculture Committee to "eliminate the opportunity" for the derivatives dealers "to escape" the jurisdiction of the act.
At issue is the exemption that privately negotiated transactions have from regulation. Thanks in part to this so-called Treasury amendment to the act, volume in the over-the-counter derivatives has ballooned to an estimated $40 trillion worldwide.
The futures exchanges say the exemption establishes an uneven regulatory landscape that unfairly favors the over-the-counter market.
Mr. Arbor testified that a pending Supreme Court decision on whether the exemption should be extended to government securities and currency futures could be the death knell for the industry, if the decision goes against the exchanges.
"You won't have to worry about the quality of our exchange's audit trail or financial surveillance mechanisms, because there won't be enough trades on the (Board of Trade) to need an audit trail or financial surveillance," he testified. "And you won't have to worry about reauthorizing the (commodity commission), because it will have few viable markets to regulate. This committee's jurisdiction over the (commission) and its markets will evaporate."
Jack Sandner, chairman of the Chicago Mercantile Exchange, said the exemption has led to other problems as well.
"Unregulated bucket shops, Internet dealers, and even the retail trading desks of currency dealers are taking advantage of the public, evading the intense regulation mandated for futures trading and shiphoning liquidity away from the markets," Mr. Sandner told the committee. "Because the Treasury amendment is most abused by currency dealers, the (Mercantile Exchange) has borne the greatest competitive burden in consequence of the regulatory disparity."
The futures officials' comments came just after the major exchanges reported a continued trading slide in financial and interest rate products. Both Chicago exchanges reported double-digit volume declines during May, and both have reported declines in year-to-date volume.
But dealers in the over-the-counter derivatives markets counter that the exchanges shouldn't be complaining, because they are performing well. During the same period that the Mercantile Exchange was reporting a decline in trading volume, it reported consecutive records in open interest, on May 31 and June 3.
"If you look at the statistics, you see the exchanges continue to grow every year," said Gay Evans, chairman of the International Swaps and Derivatives Association, the main trade group for derivatives dealers. "Continued growth in over-the-counter derivatives and continued growth in futures is complementary and should be viewed as such."
The futures industry is proposing that the committee adopt seven changes to the act to overcome these problems. Among the proposed changes, the industry would like to see the exchanges receive "fair and evenhanded treatment on exemptions." It also wants the committee to refine the Treasury amendment to eliminate the opportunity to escape the commission's jurisdiction.
