Agency Called Unfit to Regulate Stock-Index Futures : Commodities: Ex-Sen. Thomas Eagleton tells a Senate panel the CFTC is a lap dog of the Chicago-based futures industry.

WASHINGTON —  A former U.S. senator who served three years on the board of a Chicago commodities exchange told a divided Senate panel Wednesday that the Commodity Futures Trading Commission is inept and ill-equipped to regulate stock-index futures markets.

Thomas Eagleton, who resigned from the Chicago Mercantile Exchange board of governors in a bitter dispute last year, told the Committee on Banking, Housing and Urban Affairs that the CFTC is a lap dog to the futures industry centered in Chicago.

“The CFTC trembles at the sight of Chicago,” Eagleton said at a hearing on a Bush Administration bill that would end the CFTC’s exclusive authority over futures markets and would move stock-index futures regulation to the Securities and Exchange Commission.

The proposal has produced a pitched battle between the two agencies and between the futures and securities industries.

Eagleton, a former senator from Missouri, and several securities industries spokesmen said regulation of financial products derived from stock markets, including stock-index futures, should come under the SEC for uniform policing to try to prevent repeats of the stock market plunges of October, 1987 and 1989.

Representatives of two Chicago exchanges, which virulently oppose the Administration’s bill, had been slated to testify Wednesday, but instead will testify in two weeks.

Committee members also took opposing stands on the bill, and several acknowledged its chances of Senate approval are slim.

“I have the very strong suspicion that there are not the votes to accomplish” the power shift between the two agencies, said Christopher Bond, a Missouri Republican.

He suggested that one compromise would be giving the Federal Reserve authority over stock-index futures margins--which some consider a key element in strengthening futures market regulation.

Exchanges currently set margins--the amount of cash that the exchanges require to trade contracts--subject to CFTC oversight.

Critics of the futures industry and of the CFTC argue that stock-index futures margins are too low, allowing speculators to hold under-leveraged positions and increasing market volatility.

Joseph Hardiman, president of the National Assn. of Securities Dealers, said the fact that traders and institutions can control “such a large amount of stock with so little money” could result in “a major market disruption.”

Hardiman and others from the securities industry also told the committee that the 1989 stock market plunges were made worse by computer program and arbitrage trading in stock market futures. They said CFTC regulation of those futures markets was inadequate.

Eagleton called the CFTC a “pygmy” as a regulator. He said it is a “political dumping ground,” has been under-funded and under-staffed and is “the play-toy of Chicago,” partly because the agency must be reauthorized every three years, requiring political support.

But Alan Dixon, an Illinois Democrat, said a bill that has been held up by the current power struggle would have increased CFTC funding and regulatory powers.