BOCA RATON, Fla. -- Commodity Futures Trading Commission member Sheila Bair said yesterday that a proposed merger between her agency and the Securties and Exchange Commission would be counterproductive.

"I just think the SEC and the CFTC have so much on their platters right now and a fight over merging the agencies would be so diverting," Bair said in an interview here, where she was a speaker at the Securities Industry Association's annual conference.

Bair said the CFTC is actively working with the SEC as well as with other regulators on issues concerning over-the-counter derivatives.

"We're working very well together. As long as we're working well together and cooperating I don't see any urgent need for a merger," Bair said.

"I'm hoping that we won't get diverted into any kind of merger fights, because we really have an awful lot to do," she said.

Last week, Rep. Ron Wyden, D-Ore., said he would introduce legislation at the start of the next Congress to merge the two agencies in an effort to tone down duplicative government regulation.

A Wyden aide said the time was ripe for a merger, and that passage of the legislation could be more likely now that Republicans control the House and Senate.

However, Bair said she hasn't heard any enthusiastic responses from either the House or Senate Agriculture Committees about combining the agencies.

Meanwhile, Bair said over-the-counter derivatives will be a top priority for the futures trading agency next year.

"In the next year we're going to be dealing with OTC derivatives issues," she said. "That's going to definitely be a front burner issue."

Bair said improved disclosure would be a major step in protecting state and local governments that invest in derivatives.

"I think it would be better to talk in terms of disclosure, that is, knowing your customer and making sure that the products that you sell the customer are in line with the customer's objectives," she said.

With respect to suitability standards, Bair said efforts to improve disclosure may be more appropriate.

"My personal view is that I would hope we could get away from the word suitability," she said. "For a lot of people, they identify suitability with the securities retail markets and of course you're dealing with a completely different set of circumstances with OTC derivatives," Bair said.

Bair also suggested setting limits on the use of derivatives in speculative activity. "Perhaps there should be some limitation, at least for state and local government, on speculative activity," she said. "When you look at the losses and the problems that have occurred, they have been when end users have crossed the line from risk management into using these investment vehicles to try to generate trading profits."

Bair said the commission wants to be able to keep state and local governments in a position to use derivatives for risk management. "They are vital tools that way and we don't in any way want to interfere," she said.

Meanwhile, Bair said the CFTC's recently released proposals to establish a professional trading market could be a good safeguard for state and local governments.

The agency's proposals would ease regulation and allow so-called sophisticated investors to more easily trade products, which could include derivatives.

"If we can find a way to provide more customized risk hedging instruments in an exchange-type environment, I think that would be a very good thing, especially for smaller municipalities who may need more customized instruments but also might benefit from the regulatory protections in an exchange environment."

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