Fed Suggested as Watchdog for Markets

The President’s commission on the October stock market crash called Friday for the Federal Reserve Board or another government agency to take the lead in developing a more coordinated approach to regulation of the U.S. stock, bond and commodities markets.

The Brady Commission on Market Mechanisms, turning its report over to President Reagan in a White House meeting, called also for the development of “circuit-breaker” mechanisms to interrupt trading when the markets overheat. It urged a coordinated approach to the setting of margin--or credit--requirements, the creation of a central multimarket trading information system and a central system for the clearing of trades.

Nicholas F. Brady, the Wall Street executive and former U.S. senator who headed the panel, said at a White House briefing that the commission’s 10-week study showed that the markets failed to work properly when they came under the crushing pressure of a relatively small number of institutional investors unloading billions of dollars worth of stocks and futures in a few hours.

In recent years, investors have learned to turn profits quickly by buying and selling stocks, options and futures with lightning swiftness in separate markets in New York and Chicago. But, as stocks tumbled in October’s landslide, a financial market comprising a number of separate exchanges showed itself “incapable of acting as one,” said Brady.

Brady said the recommendations did not involve a radical alteration of the regulatory apparatus but “relatively minor changes.” That description of the study--and the commission’s conclusions themselves--confirmed a Times story Thursday that disclosed the group’s findings. Brady said: “What we’re talking about is a reordering of regulation.”

White House officials have been careful not to endorse the report, and President Reagan said in a statement only that he intended to “carefully review the document.” Neither Reagan nor any high-ranking White House official appeared with Brady at the press conference.

Other Probes Under Way

White House spokesman Marlin Fitzwater has said that there is not likely to be near-term action on the report, because the Securities and Exchange Commission, the General Accounting Office and congressional committees also are studying the crash.

The report said the “circuit-breaker” mechanism might include limits on daily price swings or temporary trading halts. Those mechanisms would be invoked when trading volume had reached a certain level or when there were large imbalances between buy and sell orders. But the commission members stopped short of endorsing mandatory price-swing limits or any of these measures for any particular market, saying they had not had sufficient time to study such ideas.

“We just don’t have the answer as to how precisely to do this,” Brady said. He said he “apologized” for the false impression created in some news reports that the commission was calling for limits on daily price swings for all kinds of securities.

Similarly, the commission said there was a need to set margin rules in each market with a sensitivity to how such rules would affect trading in other markets. But the panel did not specifically prescribe increases in margin requirements in stock index futures and other derivative investments, as some have urged.

Using Borrowed Funds

Some critics have charged that the 10% margin requirements on stock index futures, for example, destabilize the markets by allowing investors to control huge investment sums with borrowed funds.

The report thus seemed to be something short of the radical prescription that many in the financial markets in New York and Chicago had feared this week. Sen. Alan Cranston (D-Calif.) suggested that the commission’s efforts were not the definitive study that many had expected.

With its 10-week study period, the commission’s report “will probably not be significant in terms of what Congress will do to help in the market,” said Cranston, noting that his Senate Banking Committee will conduct its own investigation of the crash.

Robert N. Kirby, a commission member, said the idea of the “circuit breakers” was to allow the markets “time outs” that would permit investors to digest information they needed to make key investment decisions. During the crash, he said, the prices of stock index futures diverged so sharply from the prices of underlying stocks that investors did not know which way to turn.

“It called into question the integrity of the markets themselves,” said Kirby, chairman of Capital Guardian Trust Co., a Los Angeles investment management firm. With the rapid computer-tied execution of trades, “we came pretty damn close to a meltdown of the markets because nobody had time to digest the information they needed.”

Identifying the Dumpers

Kirby said the central information system could be useful in publicly identifying the investors that hurt the markets by dumping huge portfolios of stocks. During the crash, he said, a handful of investors accelerated the fall by dumping billions in stocks.

“This might make people a little more socially responsible,” he said. “If these investors knew their names were going to appear in print, they might not have sold that way.”

The commission said the Federal Reserve Board was well equipped to become the lead regulatory agency because of its routine monitoring of the interactions in monetary markets. The Fed also has experience coordinating the activities of central banks and other financial agencies, and it has the standing and influence to carry out the job, the panel said.

Commission members said Fed Chairman Alan S. Greenspan has not yet read the report. Some observers have speculated, however, that the Fed would not relish such a role and that it would meet resistance from the SEC and the Commodity Futures Trading Commission, the two lead regulators of the markets.

Brady said that the markets “did pretty well under tremendous pressure” but predicted that they would do better with more centralized planning.

The commission said that several factors helped set off the crash after five consecutive years of rising stock prices. Among them were the quick rise of interest rates, worries about the trade deficit and concern with proposed tax law changes that may have slowed takeover activity.