Industry officials warned Friday that derivatives trading activity will shift to foreign markets if the Commodity Futures Trading Commission regulates the multibillion-dollar swaps market.

"Chase will be forced to move this business to another location, probably London, where we don't have the specter of legal jeopardy that has been raised by the CFTC," Dennis Oakley, managing director of Chase Manhattan Bank, told the House Banking Committee.

The Futures Commission, despite objections from the Treasury Department and other financial regulators, said in May that it planned to declare swaps to be futures contracts and thus subject to the agency's supervision.

Mr. Oakley said companies that sell swaps in the over-the-counter market may have their pending contracts ruled null and void because the Futures Commission requires futures contracts be traded on a regulated exchange.

"This action has U.S. and foreign market participants examining the validity of existing OTC derivatives and swap contracts executed under U.S. law," said George M. James, managing director of Morgan Stanley, Dean Witter & Co.

To appease the financial services industry, House Banking Committee Chairman Jim Leach, R-Iowa, has introduced legislation that would bar the Futures Commission from creating rules on swaps until late 1999.

"At this point the CFTC does not appear to have made a case for anything except its desire to carve out greater regulatory jurisdiction," Rep. Leach said Friday.

Former CFTC Chairman Wendy L. Gramm said she also opposed the agency's plan. "No problems have been identified that suggest the need for a change in regulatory regime," she said.

Scott Gordon, chairman of the Chicago Mercantile Exchange, and other commodities exchange officials endorsed Futures Commission oversight of swaps and urged the agency be given supervision of over-the-counter derivatives as well.

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