White House Backs SEC in Turf Battle Over CFTC

The Bush Administration said Tuesday that it will introduce legislation this week stripping the Commodity Futures Trading Commission of control over stock-index futures.

The announcement marks a victory for the Securities and Exchange Commission, which regulates the nation’s stock markets, in a turf battle with the rival CFTC, which oversees U.S. futures markets.

Treasury Under Secretary Robert Glauber told a Senate panel the Administration wants the SEC to have authority over all stock-related financial products, including stock-index futures and stock-index options.

The committee chairman, Sen. Patrick J. Leahy, (D-Vt.), after complaining that the proposal would further delay futures market reform legislation, said he would ask Senate leaders to bring it to the floor for action.

Glauber said the Administration believes that one market regulator should control all aspects of the financial community but that creating a new agency or merging the SEC and CFTC could take too much time.

“Instead, the Administration supports a less sweeping approach that would only unify regulation of the ‘one market’ of stocks, stock options and stock-index futures under the SEC,” he said.

Glauber described the SEC as “the agency with the greatest expertise in the combination of these products.”

While the CFTC and SEC “are doing a good job under difficult circumstances,” Glauber said the answer to the jurisdictional dispute was to simplify “regulatory fragmentation.”

The Administration plan also calls for giving the SEC control of setting margins, the down payment investors must make when buying stocks or futures contracts on credit.

Glauber announced the Administration plan in testimony before the Senate Agriculture Committee, which oversees the CFTC.

The dispute centers on which agency should oversee financial products that have elements of both a security and a futures contract. These so-called hybrid products include stock-index futures.

Leahy complained that the dispute has held up passage of a bill that adds several market reform measures to the CFTC’s reauthorization.

“Congress remains blocked from enacting the tough reforms we all agreed are needed,” he said. Leahy also said the committee “should consider responsible, appropriate solutions--possibly even the ultimate merger of the SEC and CFTC if this is shown to be justified and feasible.”

John Damgard, president of the Futures Industry Assn., who sat in on the hearing, said: “There will be no jurisdictional change this year. But it sure mucks up the reauthorization scene, which I think everybody will agree is unfortunate.”

The Senate hearing began as the first trial stemming from a massive fraud investigation into the Chicago futures exchanges got under way with jury selection Tuesday.

Last year, 47 traders and one clerk were indicted on various fraud charges following an FBI undercover probe at the Chicago Mercantile Exchange and the Chicago Board of Trade, the world’s two largest futures exchanges.

In the wake of that scandal, the CFTC was criticized roundly by several members of the Senate Agriculture Committee last fall for being too lax a watchdog.

The committee was scheduled to hear from representatives of the four agencies of the White House Working Group on Financial Markets, which was set up in the wake of the 1987 stock market crash to handle intermarket issues.

In addition to the Treasury’s Glauber, other witnesses testifying were Federal Reserve Board Chairman Alan Greenspan, SEC Chairman Richard C. Breeden and CFTC Chairman Wendy L. Gramm.

The four already have aired their views before congressional panels and in numerous speeches and interviews. Breeden and Glauber are on one side, Gramm on the other, with Greenspan somewhere in between.

Breeden and Glauber have said the SEC should be given control of stock-index futures, which now are controlled by the futures exchanges with CFTC oversight. The products allow investors to speculate on the stock market without buying the underlying stocks.