Who Will Rule the Futures?

Nearly everyone who has called for financial reforms in the aftermath of Black Monday has a common item to recommend: tighter controls on stock-index futures. These relatively new instruments, which enable buyers to place bets on the up-and-down movements of the stock market as a whole, have been accused of intensifying the market's mood swings. But a turf battle has erupted between two Government agencies over which one deserves the right to crack the whip. Should it be the Commodity Futures Trading Commission, which presides over futures trading in soybeans and pork bellies, or its sister agency, the Securities and Exchange Commission, which watches over the stock markets?

The problem is that a stock-index futures contract is neither commodity nor security. Rather, it is an unusual hybrid, born during the financial-invention boom of the 1980s, that involves taking a position on the future price of a group of stocks, typically the Standard & Poor's 500. The CFTC first won jurisdiction over the instruments in a bitter tussle six years ago, but the SEC has been looking for a chance to gain control over the fast-growing market ever since. Last week the SEC made its move. In testimony before the Senate Banking Committee, SEC Chairman David Ruder asked Congress for broad new powers that would make his agency the ultimate regulator of stock-index futures and any new investment vehicles based on stocks. The securities and stock-index-futures markets, he argued, have become too intimately entangled to divide their supervision between two regulatory agencies. Said he: "We are the agency that knows about the securities market."

Ruder chose his moment well. A day earlier, the SEC released a 900-page investigation of October's crash that provided the most detailed account yet of how trading in stock-index futures turned what might have been just a bad day on Wall Street into a debacle of historic proportions. The SEC identified at least three critical moments on Black Monday when futures-related program trading accounted for more than 60% of the volume on the Big Board, as traders caught with plummeting futures contracts rushed to sell the underlying stocks. At the height of the crash, the SEC suggested, the tail was wagging the dog.

Ruder's proposal was opposed not only by the CFTC but by two of the SEC's five commissioners, who said that a power struggle between the agencies would only divert attention from the need to reform the markets before they tumbled again. In fact, two of the largest financial markets last week took pre- emptive steps to lessen their volatility. The Chicago Mercantile Exchange, which handles trading in stock-index futures, proposed new daily limits on how far the price of a futures contract should be permitted to swing, and called for greater coordination between the stock and futures markets. At the New York Stock Exchange, directors voted to restrict futures-based program trading on the Big Board whenever the Dow Jones industrial average rises or falls 50 points or more in a day. At this rate, the markets may put houses in order even before the regulators do.