A proposal by the Commodity Futures Trading Commission that could result in the banning of a wide range of new financial instruments has been greeted with a hail of criticism.
Federal regulators, commercial banks, oil companies, investment banks and the life insurance industry all have weighed in against a CFTC plan to extend its jurisdiction over a proliferating number of "hybrid" financial instruments."Hybrids" are financial instruments that resemble ordinary debt offerings or bank deposits but in many cases have their returns pegged to the prices of commodities like oil or gold, or to movements in interest rates or foreign exchange rates.
The outpouring of objections has isolated the futures agency within the Reagan administration and raised questions about its ability to work in concert with other federal regulators, futures experts said.
What is more, the controversy comes as the administration is striving to show financial markets that the CFTC and other government regulators can work together more closely than they did before last October's stock market crash.
One of the first hybrids was offered in the summer of 1986 by the Standard Oil Co. of Ohio. The firm issued $75 million worth of four- and six-year notes with a promise to pay investors a premium if the price of West Texas intermediate crude oil rose above $25 per barrel.
Last August, the commission subpoenaed Chase Manhattan Bank and Wells Fargo and Co. in connection with instruments it said could be illegal if not offered on futures exchanges.
A federal judge subsequently ordered Wells Fargo to stop offering gold market certificates, which the CFTC said were really cash-settled options on gold. The commission is still investigating Chase's hedging product that is linked to commodity prices.
Last December, the CFTC issued an advance notice of proposed rulemaking to address concerns over the increasingly popular hybrids, which futures exchanges claim should be required to be traded on federally-regulated markets in Chicago, New York, Kansas City, Philadelphia and Minneapolis.
The CFTC is charged by law with ensuring that all futures and options are traded on regulated exchanges.
The rule, still under review, would ban all off-exchange transactions with a commodity element that are not specifically permitted or exempted by the CFTC, or require them to be traded on exchanges.
Opponents of the CFTC proposal claim it would smother financial creativity, drive investors overseas and leave banks and other firms open to legal challenges from customers who may be looking for a way to recoup investment losses.
The Treasury Department said in a letter that the proposal "would seriously inhibit the efficient operation of financial markets by stifling creativity in developing new techniques of hedging various types of risk and raising capital."
"The Commission has cast a seemingly limitless net into the financial markets without any evidence as to whether the instruments it might capture warrant regulation," the Student Loan Marketing Association, or Sallie Mae, said.
Sallie Mae is a private, stockholder-owned corporation originally chartered by Congress that buys student loans from banks and lends those institutions funds to make more loans.
Security Pacific National Bank said the proposal could drive capital-raising activities off-shore.
Opponents of the rule also said it raised questions about the legality of well-established instruments like floating-rate debt, foreign currency-denominated debt, interest-rate swaps and securities or mortgages with interest or dividend rates tied to financial indicators like U.S. Treasury bills.
Swaps, most often put together by banks, can help commodity users and producers hedge against price changes.
Sallie Mae, which has issued notes pegged to the yen-dollar exchange rate, said the proposal had "foreclosed significant financing opportunities to Sallie Mae, resulting in millions of dollars of additional financing costs."
Chevron International Oil Co. Inc. said the proposal, by suggesting some existing instruments were illegal, lent "support to claims of illegality made by sophisticated trading entities seeking to avoid their trading losses."
The Comptroller of the Currency, which regulates the nation's banks, also criticized the proposal, and futures officials said letters were being drafted by the Federal Reserve Board and the Securities and Exchange Commission.
Thomas Russo, a partner with Cadwalader Wickersham & Taft and former CFTC official, said the plan reflected badly on efforts to coordinate regulations.
"One of the lessons of Oct. 19 was that federal agencies are supposed to work together," Russo said, referring to the day the stock market crashed. "If this is an example of the CFTC and other agencies working together, then I think we have a problem."
CFTC Commissioner William Seale said federal law required the agency to address the issue of off-exchange instruments, but that Congress might have to rule on the issue next year when the commission is up for reauthorization.
Russo said the new CFTC chairman, Wendy Gramm, was appointed after the rule was proposed, giving her a chance to "step back and say this was a bad idea."