Washington - An interagency council should be created to determine if federal oversight of the derivatives markets is adequate, the Commodity Futures Trading Commission concludes in a report scheduled for release today.
The report, which was mandated by Congress, also recommends against merging the CFRC and the Securities and Exchange Commmission so that derivatives, futures, and securities would fall under a single regulatory agency. The benefits of the merger would not outweigh the costs, the report says.
The report says the futures commission the SEC have a "well-established cooperative relationship" regarding issues of overlapping jurisdiction, but that over-the-counter derivatives raise broader issues that extend beyond both agencies.
The report notes that there is currently no comprehensive, standardized information for over-the-counter derivatives products and that derivatives market participants are subject to varying degrees of regulatory oversight from different agencies.
Commission officials, meeting with reporters on Tuesday, said that a group of federal agencies including the CFIC, the Securities and Exchange Commission, the Treasury, and the Federal Reserve Board - much like the group that studied the 1987 stock market crash - should be created to coordinate information-gathering and regulation of derivatives.
The group would supplement, rather than supplant, the derivatives activities of each of the memberagencies, the officials said.
In particular, the agencies would identify information gaps, assess the availability of pricing data, determine the extent to which firms are managing risks, and consider proposals for establishing clearing facilities for over-the-counter derivative products, according to the futures commission's report.
The CFTC's call for an interagency group follows a similar recommendation for creation of an interagency task force on derivatives made last month by Eugene A. Ludwig, comptroller of the currency.
In the interview with reporters on Tuesday, Sheila C. Bair, acting chairwoman of the futures commission, said the two proposals would be congruent. "I think they would complement each other, if not end up being the same thing," she said of the two proposed groups.
Bair said that at this point there is no way to tell whether federal legislation or regulation is needed for derivatives. "The data is just not there," she said.
Bair stressed that the futures commission is "not trying to sound any alarm bells" and is only recommending coordinated study of derivatives issues by the many federal agencies with jurisdiction over them.
"We have a strong affinity for derivatives at this agency. We like derivatives," Bair said. "We think that the over-the-counter derivatives markets have grown and prospered because they form very legitimate and important economic functions."
Bair added, "We have no basis to think at this time that there are particular issues or crises down the road at all."
Congress asked for the CFRC study of over-the-counter derivatives markets as part of the Futures Trading Practices Act of 1992. It asked the commission to determine the size and scope of the market as well as the need for additional regulatory controls.
In its report, the commission expressed frustration with the widespread use of "notional principal" amounts to quantify the swaps markets. The commission said, for example, that while the total notional principal in the interest rate and currency swap markets approached $5 trillion at the end of 1992, the risk exposure in these markets is far smaller.
The notional principal figure is the principal amount of the issue upon which swap contract and payments are based, but it is never exchanged.
The commission said that at the end of 1991, only about 20 U.S. financial institutions had swaps contracts outstanding with notional principal amounts exceeding $10 billion. Of these institutions, commercial bank positions were three to five times larger than those of nonbanks or U.S. units of foreign dealers, the report says.
In an effort to put derivatives figures in perspective, the report says the notional principal amounts of interest rate swap, currency swap, and foreign exchange forward contracts held by U.S. broker-dealer affiliates equals the notional value of their futures positions.
The report says the primary endusers of interest rate and foreign exchange derivative products are: commercial banks and corporate financial subsidiaries (25%), corporations (20%), regional banks (18%), and non-dealer foreign banks (16%).
CFTC officials said the commission's own agenda for derivatives includes commenting on rules published by the Treasury last week that govern the tax treatment of hedging transactions. Bair said the futures commission "welcomed" the rules but wants to study them further to see how comprehensive they are.
Bair said also that the commission will continue to consider proposals by two commodities exchanges for creating futures-style clearing facilities for over-the-counter derivatives.
"I think that, if properly structured, a clearing facility would help reduce credit risk concerns in the derivatives markets. But there are no blueprints at this point. It's just something being studied," Bair said.
The futures commission report recommends against merging the commission and the SEC, arguing that their regulatory missions are too different and the merger would not save much money. The report says that while, historically, the commodity futures and option contracts regulated by the futures commission have been risk-shifting instruments, the securities regulated by the SEC have been "capital formation vehicles."
