Banks want to trade currencies - and buy and sell currency options - privately, not just through the Chicago Mercantile Exchange and other regulated markets. Critics say this would rock Wall Street.

When the Commodity Futures Trading Commission, or CFTC, brought charges against William Dunn and Delta Commodities, regulators believed they had a flawless case. Dunn, a trader at Delta, had been selling currency options, or forward contracts, privately, without going through a futures exchange as required by law.

But Dunn and Delta appealed the case to the 2nd U.S. Circuit Court of Appeals in New York, arguing that their actions were not covered by the law due to an oversight in its phrasing. After much debate, the court deferred the case to the U.S. Supreme Court. This fall, the high court will hear arguments that could have dramatic ramifications, possibly eliminating all federal fraud and manipulation provisions from the laws governing currency trading .

The key concern in the Dunn case involves what is known as the interbank foreign-exchange market. American banks, including First National Bank of Chicago, the Bank of New York and Citibank, conduct about $1.3 trillion in "forex" transactions - exchanges of dollars, pounds, marks and yens - daily with counterparts in London, Berlin and Tokyo. These are private transactions conducted by sophisticated professionals.

But some in the industry wonder if these activities should be conducted on a public futures exchange and regulated by the CFTC. Speculative currency options, as opposed to currency trades, are regulated instruments subject to CFTC overview. If the Supreme Court rules in Dunn's favor, however, it will permit traders on the exchanges to buy and sell options on the private markets, away from the futures pits in New York and Chicago.

"Simply put, unless we win that case, we could lose the bulk of our markets," says Patrick Arbor, chairman of the Chicago Board of Trade, or CBOT, one of the largest futures markets in the world. "And if that happens, you won't have to worry about reauthorizing the CFTC, because it will have few viable markets left to regulate."

The CFTC, the CBOT and other trade groups have filed friend-of-the-briefs briefs, each urging the court to interpret the laws in a different way. "We think the existing statutory regulations are adequate," John Gaine, general counsel of the Managed Futures Association, tells Insight. "That's been our position. But any guess as to what would happen on the court is rank speculation."

Acting U.S. Solicitor General Walter Dellinger had asked the court to delay its hearing, noting that Treasury Secretary Robert Rubin was reviewing the law and considering changes, but the court denied the request. Frustrated, the futures exchanges took their case to Capitol Hill. Senate Agriculture Committee Chairman Richard Lugar of Indiana and Sen. Patrick Leahy of Vermont, the ranking Democrat on the committee, are expected to introduce a proposal designed to revamp the futures-trading laws by the first week in September, according to legislative aides and industry insiders. Though the bill is not likely to move this year - Congress is expected to adjourn for the year in October - it sends a message to the court that legislators can handle the issue.

"This has been a time of rapid and dramatic change in futures and options trading," said Lugar in a prepared statement. "Our responsibility is to maintain public confidence in the markets. There is strong public interest in maintaining viable futures markets as a means of price discovery and risk management."

Lugar and Leahy are consulting with Rubin and CFTC Chairwoman Brooksley Born, seeking advice about the proper wording for the legislation. "We would appreciate hearing relevant views before the Labor Day holiday," wrote Lugar and Leahy in Aug. 1 letter to Rubin. But a spokeswoman for the Supreme Court tells Insight the court can "take as long as it wants to" in reviewing the Dunn case. Until then, nothing passed by the Congress or Treasury will have final authority over the world's money-changers.

COPYRIGHT 1996 News World Communications, Inc.

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