Will Chicago's Pits Outmuscle Wall Street?

Can $645,000 in political contributions trump the interests of Washington's financial regulators and an $88 trillion--yes, that's trillion--industry? They can when the interests of Chicago's futures pits are at stake on Capitol Hill.

Regulators, congressional committees, and Chicago's financial powerhouses are caught up in a bruising battle over "single-stock futures"--contracts to buy or sell shares of a stock at some future date. Futures exchanges, led by the Chicago Board of Trade and the Chicago Mercantile Exchange, are demanding the right to trade such contracts. Fighting back are big stock and options exchanges, plus the Securities & Exchange Commission. They say futures markets don't offer safeguards against insider trading and manipulation--a hazard for individual investors attracted to stock futures. Thanks to lower margin requirements, an investor could buy a futures contract for 100 shares of, say, Microsoft for as little as $391--vs. $3,913 for 100 shares on the Nasdaq.

The slugfest threatens to scuttle a cause near and dear to Treasury Secretary Lawrence H. Summers and Fed Chairman Alan Greenspan: providing new legal backing for swaps and other custom-designed financial derivatives, which don't fit neatly into U.S. securities or futures law. These instruments--with a face value of $88 trillion--are used by everyone from banks to oil drillers as hedges against interest-rate or currency swings. Wall Street makes billions setting up the deals. Regulators have made legislation to bolster derivatives--and keep the business of packaging and trading them from fleeing to less regulated markets in Europe--their top priority.

But not even Greenspan has proved a match for the Chicago pits. Fearful that swaps will erode their trading, the exchanges are demanding futures on individual stocks as payback for support of swaps legislation. When the world's biggest futures exchange, the Swiss-German Eurex, links up with the CBOT later this year, "every investor in the world will be able to trade futures on U.S. stocks--except Americans," grouses a CBOT official. The Chicagoans are deploying their usual hefty war chests: Political action committees and execs at the Merc have given $359,500 to congressional and Presidential candidates in this election cycle, and the CBOT has given $286,250. That far outstrips the $145,200 given by the Chicago Board Options Exchange and the New York Stock Exchange's $111,186. Both oppose single-stock futures.

TURF WARS. So does SEC Chairman Arthur Levitt. At a July 12 House Commerce Committee hearing, Levitt said he is concerned that the bill creating single-stock futures doesn't give his SEC cops enough policing power. Instead, the Commodity Futures Trading Commission would largely oversee the new instruments. But Levitt is bucking the GOP--particularly Senate Banking Chairman Phil Gramm (R-Tex.), who wants both single-stock futures and deregulation of swaps. "Our members see this as just a turf fight between the SEC and CFTC," says a key House GOP aide.

In the end, the Hill's calendar may be the securities industry's best friend. With only about 30 working days left, stock-friendly lawmakers can probably block action on futures this year. But that would be a mixed triumph for Wall Street: Its swaps business will still be at risk from overseas rivals, and a pro-futures bill might emerge from the House to set the stage for legislation next year. Little wonder that futures exchanges are bullish on single-stock futures.

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