WASHINGTON — It was the most forceful conclusion in the Brady Commission's hard-hitting report on last October's stock market crash: While the nation's stock, options and futures markets have become increasingly unified, the regulatory structure designed to oversee them remains fragmented and ineffectual.
But a week after the report's release, Congress shows no sign of following the commission's advice and consolidating regulation under a single "overarching authority," perhaps, but not necessarily, the Federal Reserve Board.
In fact, Senate Banking Committee Chairman William Proxmire (D-Wis.) said in an interview that Congress is likely to "leave as much as possible to the status quo."
In October, according to the Brady Commission, the status quo meant that links between the stock markets in New York and financial futures markets elsewhere contributed to massive selling pressure in both. And regulatory structures designed for separate marketplaces, it held, proved incapable of responding effectively.
The commission, whose chairman was former Sen. Nicholas Brady (R-N.J.), now chairman of the Wall Street firm Dillon, Read & Co., kindled a debate that is certain to continue when congressional committees hold public hearings about the stock market crash beginning later this month.
Prominent on those committees' agendas will be their own turf. Rearranging regulatory authority inevitably means reassigning congressional committees' jurisdiction over the regulatory agencies, and no committee is likely to give up any authority without a fight.
'Flex More Muscle'
"If the world was pure and it wasn't political," said a staff member of the Senate Banking Committee who asked not to be named, "you'd probably want all stock and stock-related instruments under one jurisdiction. But I can't see that happening."
The Securities and Exchange Commission, which regulates the New York Stock Exchange, is in the jurisdiction of the Senate Banking Committee and the House Energy and Commerce Committee. But the Commodity Futures Trading Commission, which is responsible for the futures markets in Chicago, reports to the Senate and House agriculture committees.
Even if Congress declines the Brady Commission's invitation to reshuffle financial regulatory authority, however, it is likely to try to force the regulators to flex more muscle.
"It's clear that there is a regulatory black hole that has been opened and has to be closed," said Rep. Edward Markey (D-Mass.), chairman of the House Energy and Commerce subcommittee on telecommunications and finance. "We can be a little flexible as to what we do to solve the problem as long as we are inflexible in recognizing that the problem must be solved."
At the least, Congress is expected to take action to strengthen regulation of the controversial stock index futures, whose introduction on futures markets in 1982 made possible the computer-driven program trading strategies blamed by the Brady Commission and others for accelerating October's market plunge.
The most likely step is an increase in margin requirements--or down payments--for stock futures, which the Brady Commission said should be consistent with margins for stocks. Commodities exchanges have raised stock futures margins since the market crash, but those margins remain at 10% to 12%, considerably lower than the 50% margin for investments in the stock market.
Critics say the low margin requirement makes speculation in stock futures too easy.
"The difficulty under present circumstances is the fact that you can play the futures market with such a very small commitment," Proxmire said. "We need to provide some uniformity so that you don't have this terrific mishmash, particularly on margin requirements."
Michael Brennan, a professor of banking and finance at UCLA, added: "I don't see why one would want to distinguish between margin levels in futures and margin levels in stock transactions. They are essentially the same thing."
Long before stock index futures were invented, a stew of federal agencies and a hodgepodge of rules governed behavior in different marketplaces, leaving the markets with no conscious coordination.
The SEC was established under a reform after the market crash of 1929 to regulate securities markets.
But, at the same time, the Federal Reserve was empowered to set margins for stock purchases, which had been as low as 10% before the market collapse, a factor blamed for encouraging speculation. Under Fed governance, stock margins were first set in 1934 to range between 25% and 45% and, often for reasons of monetary policy, have been raised as high as 100% before dropping to 50% in 1974.
Other aspects of regulation were left to the stock exchanges themselves, and for 40 years futures exchanges remained wholly self-regulatory despite two attempts in Congress in the 1940s to set margin requirements for futures as well.