Did Chicago misjudge the strength of the opposition?

By John Thackray

When Senators Richard Lugar (R-Ind.), Tom Harkin (D-Iowa) and Patrick Leahy (D-Vt.) unveiled their radical amendments to the Commodity Exchange Act in February, they confidently predicted that their Senate Agricultural Committee would vote on the bill by Memorial Day. By mid-summer not only was there no vote, but it was clear that Chicago's futures exchanges had suffered a major, perhaps irreparable, political setback over the bill's proposal to permit listed futures exchanges to run a totally unregulated "professionals only” market. These exchanges have lusted after this freedom for a long time. When offered a professionals-only market pilot test by the CFTC several years ago they said no thanks—they wanted not half a loaf but a whole one.

In mid-February, spirits were highest in the Lugar camp after Federal Reserve chairman Alan Greenspan broadly supported efforts to deregulate listed futures. The future exchanges jubilantly ran large newspaper ads quoting the good chairman in 40-point type. After that giddy moment, it was all downhill. The draft bill generated such widespread hostility that some Washington hands concluded that the sponsoring senators and the exchanges had failed to do their homework.

Before the mid-April hearings by the House Agriculture Subcommittee on Risk Management and Specialty Crops (yes, you read that right—that's the official name), CFTC chairwoman Brooksley Born's relentless campaign to squash the professional market proposals looked like a lonely and losing fight. By the end of the hearings, however, she had lots of company. A key witness was Federal Reserve governor Susan Phillips, who supported the principles of deregulation of futures but failed to endorse the bill's professional market features. Phillips' ambiguity permitted Born later that day to claim with a straight face to be "very gratified” at the Fed's position, saying "it is essentially the same” as the CFTC's.

No less gratifying, from her point of view, was the strong support from the SEC. CFTC/SEC relations have often been stormy because of clashes over territorial rights at the interstices of futures and securities. The SEC's Richard Lindsey, head of market regulations, told congressmen that "self regulation was no guarantee of market integrity.” More to the point, he argued that if the professional market came into being soon there would be futures equities on single stocks, a prospect the SEC has long opposed. The result: the regulatory balance between the SEC and the CFTC would be destabilized, and speculators would have the capacity to manipulate stock prices. This objection had already been well-aired by all U.S. stock exchanges and the Chicago Board Options Exchange.

One of Lugar's most unexpected antagonists is Cargill, the Minneapolis-based agricultural behemoth. A Cargill letter to Lugar said it wanted the professional market to be subject to some regulation and that as proposed it did not "add value to the marketplace.” Another surprise was dealt by New York Mercantile Exchange chairman Dan Rappaport, who declared that the professional market should be subject to certain reporting and speculative limit and other regulatory protections.

As a senator from farm-belt Indiana, Lugar must surely have been surprised that agricultural interests were against him. Originally, farmer groups had swallowed the listed exchanges' posture that they are being stifled by regulation and consequently are losing their share of total global trading. But when it appeared that the house version of the bill did not, like Lugar's, exclude agriculturals from the professional market, they got cold feet. A pledge by Chicago Board of Trade chairman Patrick Arbor to ban grain and soybean futures trading on professional markets did not tranquilize the farm groups. Even if the Lugar language prevailed in the House/Senate Conference Committee, Secretary of Agriculture Dan Glickman worried aloud that a freer regulatory climate in the professional market would siphon off large speculative traders and their capital, so that liquidity in a parallel but smaller market would decline, reducing the markets' value for hedging and price-basing by farmers.

Although Lugar and his cohorts have overreached, they will likely obtain some face-saving compromise. The current status of the proposal is "something of a moving target,” said CFTC commissioner Joseph Dial in mid-June. But behind the scenes he saw "several encouraging signs.” The bills' sponsors, he noted, have stated that "neither the professional market provision, nor other sections that the CFTC finds problematic, are set in stone.” Rumor has it that the Treasury Department is playing midwife to a deal in which there will be a professional market with only a little less oversight than existing futures markets. Plus ca change, leaders of Chicago futures markets will still have lots of regulation to rail against.