WASHINGTON The new chairman of the Commodity Futures ding Commission plans to take a closer look at the agency's current hands-off approach to the over-the-counter derivatives market and, if anything, will take a tougher approach to regulating the market.

In an interview, Mary Schapiro, who was sworn in as the new head of the commission on Oct. 13, said the possible policy shift may be needed to protect less sophisticated investors, including some state and local governments.

Schapiro, who just finished a fiveyear stint as a Commissioner on the Securities and Exchange Commission, said she plans to go back and review rules previously established by the CFFC that placed over-the-counter derivative products, including interest rate swaps and other hybrid instruments, outside of the agency's jurisdiction.

While the agency's previous actions were an effort to bring legal certainty to an important market and limit derivatives trading to sophisticated investors, Schapiro fears that the commission's exemption may have gone too far, giving too many investors easy access to the complex market.

"We're going to look at the eligibility criteria to see if we were maybe overly broad the first time in saying who would be eligible to trade in the swaps market," Schapiro said.

One of her primary concerns is that some investors, particularly municipalities, may not be all that qualified to trade swaps.

For example, current commission rules include all government entities as eligible participants, regardless of their size and investment expertise.

Several state and local governments, including Charles County, Md., have reported millions of dollars in losses from investing in over-the-counter derivatives.

"I'm concerned about the losses by state and local governments and other publicly funded entities," Schap'wo said. "Clearly, reading about the losses every day in the paper is what makes you go back and think: Are the eligibility criteria right? Is there overreaching by the dealers with respect to how these transactions are being marketed?"

In an effort to protect municipalities, Schapiro said the agency may decide to impose an assets-under-management test, which would limit smaller entities from using derivatives, or require that independent advisers be used.

"Finding a way to draw those lines is going to be very difficult and that's what we' re working on," she said. "We don't want to tighten up the eligibility criteria to the extent that we have cast out the Port Authority of New York in order to protect Charles County, Md., or some small town in Iowa."

So far, Schapiro said, all her feedback has come from firms. "I've heard some nervousness expressed by the dealer community," she said. "The swaps exemption is terribly important in how they operate, obviously."

To that effect, Schapiro said the commission does not intend to revoke the exemption entirely.

"We're not doing anything dramatic, but we're looking, as we absolutely must," she said. "We're not doing this in a vacuum."

The new chairwoman has also indicated to U.S. futures exchanges that she doesn't plan to let go of the agency's powers to regulate them, even though the exchanges fear that the regulatory burdens place them at a big disadvantage compared with the over-thecounter derivatives market.

"I want people to understand that I have sympathy for the lack of a level playing field, but the way we would level that field would be to raise the regulatory oversight of the OTC market, not by deregulating the futures markets," Schapiro said.

In demonstrating this, the agency's response last month to requests from futures exchanges for some regulatory relief was a big eye-opener.

The commission put out proposals that were much narrower than the requests it had received, from the Chicago Board of Trade and the New York Mercantile Exchange, to develop a professional trading market where contracts could be traded among sophisticated investors, free of most oversight by the commission.

The Schapiro-mn agency made it very clear that it isn't planning on closing its eyes to derivatives transactions on exchanges m even to those that would be limited to sophisticated investors.

Last year, the Chicago Board of Trade submitted a petition asking the agency to deregulate trades in certain products on U.S. futures exchanges conducted in an established professional trading market. The board's goal was to create an exchange trading environment that could better compete with the over-the-counter derivatives market.

This fall, the New York Mercantile Exchange asked for a similar exemption.

Schapiro said that the exchange requests were too broad.

"What the exchanges wanted wasn't what Congress intended when they gave us the authority to provide exempted relief on the exchange-traded side," Schapiro said.

Granting such an exemption "really ignores the critical function that futures markets p.lay in our economy," she said. "We would lose price transparency, whichis absohately essential in my view to market success, and we would have lesser levels of customer protection."

The commission currently has proposals out for commenFthat do grant some relief to certain exchange trades. For example, they.allow for streamlined disclosure requirements and would provide faster approval of new products that would be traded in the professional trading market.

"I think what we have done is give [exchanges] relief on the things that they have historically told us they cared most about: the ability to list new products more quickly, the ability to do some upstairs trading and find some other methods of transactions that aren't the traditional open outcry on the floor," Schapiro said, adding that the commission will work quickly in approving these proposals.

Schapiro said she also has plans to strengthen the agency's enforcement division.

"I'm probably a far more aggressive enforcer than any of my predecessors," she said. "It's my view that you are not an effective regulator if you are not a n effective enforcer."

To reach that goal, Schapiro brought over John Polise from the SEC's division of enforcement to come up with ways to overhaul the division.

However, Schapiro has no immediate plans for major staff changes in the division, including the division's director, Dennis Klejna, who has held the division's top job since the agency was created in 1975.

"It's certainly far too soon to tell and it's not my focus," Schapiro said. "My concern right now is finding out what we do and how we're doing it."

Overall, the new chairwoman expressed concerns about the need for suitable sales practice guidelines in the over-the-counter derivatives market.

"We're working with the SEC and talking to a lot of firms about the issues associated with sales practices, and we're trying to do our own information gathering about really how these instruments are sold," she said. "I believe they are sold, not bought, and we need to look at that."

She said dealers have an obligation to provide enough material information to guarantee that customers understand the investments, and to define up front what their relationship is with a customer.

She warned, however, that investors have the first obligation to understand the market in which they are investing.

"Certainly, purchasers have the responsibility not to buy something they don't understand, not to buy something that doesn't fit within their investment parameters, not to gamble with the public money," she said.

She said, however, that investors are now more aware of the risks in overthe-counter derivatives and, in some cases, are pulling out of the market.

According to Schapiro, the agency's professional trading market proposals that are out for public comment may be an answer to some of these investors.

"I think something has happened in the last year that could make this exempted futures market a lot more attractive, and that is that we've had a really good period of self-education,"she said.

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