WASHINGTON -- A Washington regulatory official yesterday warned lawmakers and policymakers against unwittingly setting up the derivatives market for a possible "regulatory takeover" that might be unwarranted.
"I'm hearing disturbing noises that lead me to believe that policymakers and regulators may be setting the stage for a regulatory takeover of the [over-the-counter] derivatives market," Wendy L. Gramm, chairwoman of the Commodity Futures Trading Commission, told industry officials in a speech in which she also said she would be stepping down from her post on Jan. 20.
Gramm listed several studies on derivatives that have recently been launched by congressional committees,] the government, and private groups.
Any of these studies could produce "alarmist and incorrect ~findings' "that could be used as "ammunition" during the next reauthorization of the Commodity Exchange Act "for anyone to take a potshot at the derivatives market," she said.
The act will expire at the end of fiscal year 1994 and the commission could be required, in reauthorization legislation, to regulate derivatives products. Congress only touched on derivatives in recent legislation authorizing the commission to stay in business through 1994, allowing the commission to exempt swap agreements from its regulations.
Gramm said that wile regulators must monitor the derivatives market and while studies "are essential for an informed discussion" of these products and their risks, some of the studies might be motivated by competitive concerns or a desire to stymie innovation.
"Careful attention should ... be paid to the motivation of the people calling for these studies," she said, asking, "Do those seeking reevaluation and possibly curbs on the use of these instruments have any jurisdictional or competitive axes to grind?"
She said she worried that some of the studies might "be used to impede competition or hinder innovation -- all in the name of ~customer protection' or ~market integrity.'"
She said regulators and policymakers "must be careful to separate legitimate issues fro anticompetitive impulses masquerading as a sincere interest for better regulation."
Regulators should ask three questions in addressing the need for regulation of derivatives, she said. The first is whether the products produce unintended effects that cannot be dealt with in the private market. The second is whether government intervention will take care of the perceived problem. The third is whether the social benefits outweigh the costs of government intervention.
Gramm said the experience with these products so far shows that many of the concerns raised may be unfounded. For example, she said, while some regulators worry that defaults in such products will cripple the financial system, a recent study by the International Swap Dealers Association shows that swap-default losses to date have been relatively minor.
Gramm noted that the commission last week proposed rules allowing swap agreements to be exempt from futures regulations if they meet certain criteria. The exemptions would be limited to agreements that are not subject to electronic trading or a clearing system. However, "bilateral margining" or "payment netting arrangements" are allowed and "the door is left open to consider clearing and trading proposals in the future," she said.
She told the group: "We at the CFTC, in our own small way, are working to support the principles of free enterprise and to implement the idea that the best judges of how to run a business are the people who depend on that business for their livelihood." She added that, "We do not regulate for regulation's sake" or "to expand our turf."
Brandon Becker, deputy director of the Securities and Exchange Commission's division of market regulation, told the industry officials that the SEC's informal discussions with derivatives market participants indicate that the risks associated with these products are being managed.
He qualified that statement by noting that the SEC has not yet completed a more formal investigation, which it had begun earlier this year after adopting rules requiring securities firms to report their holdings and derivatives.
Gramm's term had not been due to expire until April 15, 1995. She became chairwoman of the futures commission in 1988, following a stint as the administrator for information and regulatory affairs at the Office of Management and Budget.