A federal agency actually demurring from legislation that would increase its power may seem an unlikely scenario in Washington, but that is the position the Commodity Futures Trading Commission (CFTC) has consistently maintained in the face of pressure from politicians and domestic exchanges during the past year to do otherwise.

That pressure will likely continue into the 105th Congress as three bills introduced in 1996 to revamp the Commodity Exchange Act (CEA), which governs the authority of the CFTC, continue to wind their way through legislative channels.

By last spring, Congress had already held committee hearings on the need for the 22-year-old CEA to reflect technological changes that had completely altered the face of trading. In June, soon after the first round of hearings, Japan's Sumitomo Corp. announced its top copper trader lost $1.8 billion in allegedly unauthorized futures trades, later upgraded to $2.8 billion. Domestic exchanges, most notably the New York Mercantile Exchange, whose Comex commodities metals division competes directly with the London Metal Exchange (LME) for copper futures contracts, used the news to turn up the heat in its push to strengthen the authority of the CFTC over foreign exchanges that possess physical delivery markets in the United States.

The Sumitomo announcement provided the perfect grist for Nymex's argument that without authority over foreign exchanges like the LME, the CFTC could not adequately protect the U.S. market. Charges intensified when fingers started pointing to the LME's Long Beach, Calif., copper warehouse after it was revealed that some of the questionable trades occurred through the London exchange. The argument, however. was not new for Nymex, which loudly complained when the LME first established its U.S. base for delivery of copper contracts in the spring of 1995.

While it has provided limited information upon request to the CFTC after establishing its warehouses here, the LME does not answer to U.S. regulatory authorities but rather its own: Britain's Securities Investment Board. The LME has scoffed at Nymex's complaint, stating that the U.S. market was never in jeopardy because it held no copper positions for Sumitomo and would not reveal contract details to a competitor. Asked if its competition with Comex played a role in the reluctance of the LME to fully divulge information to the CFTC in a timely fashion until a formal investigation into the scandal was launched in September 1995, LME chief executive David King sniffed that the LME had no desire to take over Comex's measly 10 percent of the copper futures market.

Meanwhile, the CFTC, playing the role of den mother between two squabbling siblings, has plainly stated that it would be a mistake to endow the agency with the same regulatory authority over foreign exchanges that it currently practices domestically. Instead, the CFTC is trying to motivate foreign regulators with physical delivery markets to upgrade their own internal regulatory practices.

An agreement signed by regulators last year to more openly exchange information was the first step toward what the CFTC perceives as a move to strengthen the worldwide regulatory market. To continue that process, the CFTC, the SIB and Japan's regulatory authority are hosting a meeting later this month to allow regulators with physical delivery markets to exchange ideas on how to effectively regulate a global market--a meeting which could result in another agreement.

If such an agreement is effected, it could be used to diminish widespread political support for a limited bill introduced by Rep. Charles Schumer (D., N.Y.) in response to the concerns voiced by Nymex. The bill would simply extend the CFTC regulatory authority over foreign exchanges. The danger in broadening that authority, claim CFTC officials, is that it opens the door for foreign regulators to do the same to U.S. exchanges that conduct trades abroad.

Schumer's bill has no cosponsors and will likely be overshadowed by a more encompassing bill introduced by Sens. Richard Lugar (R., Ind.) and Patrick J. Leahy (D., Vt.), which gives the CFTC more discretionary authority if circumstances dictate additional power is needed. The case-by-case approach has been sanctioned by the CFTC, which is less than enthused with Schumer's more heavy-handed bill.

What the CFTC should not count on is Nymex quietly backing away from the issue. Despite the fact that Schumer has done little so far to obtain co-sponsors or to indicate that he will vigorously pursue that route come January, and despite the fact that the bill will be sent to the House Agriculture Committee for hearings, of which Schumer is not a member, Nymex will closely track the debate to ensure that its interests are represented in any change to the CEA.

COPYRIGHT 1996 Reed Business Information
COPYRIGHT Gale Group

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