Commodities Cop Cannonaded

But the CFTC will probably survive "sunset"

No federal agency has been the butt of such angry cannonades as the Commodity Futures Trading Commission. The CFTC, formed in 1975 to police the trading of commodity futures following widespread charges of price fixing, fraud and manipulation of customers' accounts, deserves a lot of criticism. As a notorious example, it took the commission almost a year to discover that "James Carr," who is alleged to have bilked customers of perhaps $25 million by selling bogus option contracts, was actually an escaped convict named Alan Abrahams.

In a venomous attack on Commission Chairman William T. Bagley, Missouri Senator Thomas Eagleton summed up Washington opinion this way: "The agency is one of the most screwed up in the whole Federal Government. You're working your way up the hit parade for ineptitude and inefficiency." The CFTC had the bad luck to be the first group subjected to a "sunset" law that requires new federal agencies to justify periodically their continued existence. There is some talk in Congress of letting the commission die when its charter expires Sept. 30 and giving some of its policing functions to the Securities and Exchange Commission and the Department of Agriculture.

That is unlikely. Commodities trading is a booming business. Last year the value of commodities contracts traded hit $ 1 trillion, or five times the volume of all stocks and bonds that changed hands. And the CFTC is at last getting tough. Last week it ordered a ban as of June 1 on commodity options trading--characterized by Bagley as "the worst lie-by-day, fly-by-night operation in the financial world."

Unlike commodity futures, which are contracts that give an investor the right to deliver or receive gold, cotton, pork bellies or whatever on a set date at a fixed price, commodity options are purely paper investments giving the buyer the right to purchase a future, gambling on how much prices rise or fall. In the U.S., such options have had the tempting flavor of forbidden fruit. Since the 1930s, trading in some 100 types of options, mainly agricultural products, has not been allowed on U.S. exchanges. But in recent years some inventive firms began selling in the U.S. options supposedly traded in London (some were; some weren't). Usually business was drummed up by fast-talking telephone solicitors telling sugarplum tales of immense profits. The day the ban was announced, the CFTC said it was investigating 30 of the 40 or so companies now dealing in options.

In the opinion of many commodities dealers, the CFTC's ban is overkill because it would apply not only to the hucksters but to such respected New York City firms as Mocatta Metals and Bache Halsey Stuart Shields, which sell options on gold, silver and other metals futures. Senator Walter Huddleston of Kentucky will soon introduce legislation to permit the sale of options, but only by firms that have a net worth of $10 million or more and fully disclose costs, commissions and fees.

On the broader question of the CFTC's lamentable regulatory record so far, critics charge simple incompetence and lassitude. Bagley retorts that the CFTC is just too small to do its job properly. He notes that the SEC, which polices stock and bond trading, has a staff of 1,955 and a budget of $58 million; CFTC has a staff of 440 and a budget of only $13 million. Says Bagley bitterly: "We have 26 investigators for ten markets. The Bethesda police department has that many on duty at night." The CFTC currently wants $900,000 more a year to hire an additional 60 inspectors.

It might get them too: there is considerable sentiment in both Congress and the industry to strengthen and reform the agency rather than kill it. Says Lee Berendt, president of the Commodity Exchange Inc., the world's largest metals futures exchange: "We believe the industry needs a commission, but it has lacked funds, suffers from poor management and has been afflicted by a lack of continuity in policy because of staff turnovers." Those turnovers will continue; Bagley will resign some time after the sunset review, however it goes.

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