Securities and Exchange Commission Chairman David Ruder on Tuesday again endorsed a boost in margin requirements on stock-index futures, at least temporarily, to 20 to 25 percent from 12 to 15 percent.
Critics of the futures industry have seized on the fact that margin requirements on futures are lower than those on stocks as a symbol of the speculative excess that brought the stock and futures markets to a near-meltdown on Oct. 19 and 20.
”While the extent to which futures market leverage exacerbated the market decline is uncertain, its impact was significant,” Ruder said.
The SEC has no regulatory authority over the futures markets. The debate over which federal agency will ultimately be responsible for the futures industry is a large part of the turf battle that has erupted since the stock market crashed.
In its postcrash report and in testimony before Congress, the SEC has sought greater latitude to oversee futures activities that affect the stock market, a move vigorously opposed by the futures industry and its regulator, the Commodity Futures Trading Commission.
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The futures commission lacks legislative authority to impose margins on futures trading, but many key members of Congress favor such a move.
Futures margins are performance bonds, or good-faith deposits to ensure performance under contracts to buy or sell commodities or financial instruments. They are set by the futures exchanges themselves and overseen by the futures commission. Margins in stock trading, on the other hand, are down payments to purchase stock on credit.
On Feb. 3, in testimony to the Senate Banking Committee, Ruder suggested raising futures margins to 20 or 25 percent. The SEC`s report on the Oct. 19 crash addressed the issue of higher futures margins but did not specify a level.
While acknowledging the difference between stock and futures margins, Ruder said Tuesday, ”There should be a range of equality in the two systems.”
Ordinary investors need to put up 50 percent to buy stock on margin. But large brokers and other professionals can buy stock by putting up about half that. Ruder`s comments regarding raising margin requirements on futures contracts to 20 to 25 percent would put them in the same range.
In his remarks to the 23d annual Outlook Conference of the New York-based Conference Board, a business-sponsored research group, Ruder also said: ”The commission believes that in normal times the derivative index markets perform an important economic function. They provide a means by which institutions may adjust their portfolio positions quickly and efficiently.”
The Standard & Poor`s 500 and the Major Market Index, the two most popular stock-index contracts, are traded in Chicago.
Ruder`s remarks drew fire from the futures industry, where traders argue that increasing the cost of trading could wipe out stock-index futures markets or drive them overseas.
”It`s ridiculous,” Courtney Smith, vice president of financial futures at Banque Paribas in New York, said of Ruder`s recommendation.
Higher margins ”would destroy the smaller stock-index contracts. The Standard & Poor`s 500 contract might barely survive,” Smith said.
Smith also contended it would hurt Wall Street investment houses, which have reaped considerable profits through program trading. ”Ruder`s raising a red herring. He should attack the liquidity problem (in the stock market)
instead.”
William Brodsky, president of the Chicago Mercantile Exchange, said:
”What was said was Ruder`s opinion. It runs contrary to our views, those of industry officials and other officials in Washington.”
Ruder said efforts to prevent a recurrence of Black Monday continue. He and Kalo Hineman, acting chairman of the futures commission, have met with their respective staffs ”to discuss a wide range of market-related topics.” The SEC has also met with the Federal Reserve Board and representatives of the stock and futures exchanges, Ruder said.
And, emphasizing the global nature of today`s markets, Ruder said he recently returned from Tokyo and soon will leave for London to talk about the need for greater coordination across national boundaries.
”The October market turbulence was not limited to the U.S. markets,”
Ruder said, ”but was a worldwide phenomenon. International automation of quotation, routing, execution, clearance and settlement systems is simply inevitable,” he said, ”and the time has come to increase efforts toward a coordinated global market regulatory system.”