Statement by Assistant
to the President for Press Relations Fitzwater on the Formation of the Working
Group on Financial Markets
In
view of the extraordinary events in the financial markets in 1987 and the
findings of the numerous market studies, including studies by Federal agencies,
self-regulatory organizations, and the President's Task Force on Market
Mechanisms, it is clear that further, closely coordinated work needs to be
done. Despite our financial system's notable success in withstanding the shock
of those events, we need to ensure that the public is protected by assuring
financial integrity of the markets during periods of significant price changes.
We
also must be concerned about the quality and fairness of our markets for all
participants and the willingness of individuals and institutions to participate
in these markets. In addressing these issues, we must keep clearly in mind the
vital national interest in preserving the efficiency and international
competitiveness of our financial markets and institutions.
To
these ends, the President is asking the Secretary of the Treasury to chair a
select Working Group on Financial Markets to coordinate the Government's
efforts to evaluate recommendations and to seek the resolution of the complex
issues involved. The other Working Group members will be the Chairmen of the
Board of Governors of the Federal Reserve System, the Securities and Exchange
Commission, and the Commodities Futures Trading Commission.
The
President expects that they will consult with the various exchanges,
clearinghouses, self-regulatory bodies, and major market participants as they
proceed. He has asked the Working Group to consult also with the Congress as
this work progresses. The goals of the Working Group are twofold: first, to
ensure the continued integrity, competitiveness, and efficiency of our nation's
financial markets, and second, to maintain the public's confidence in those
markets. Much can be done within the existing legal framework by both
regulators and market participants, but the President has asked the Working
Group to consider also whether any legislature changes are necessary.
In
the President's judgment and that of his senior advisers, the major items the
Working Group should address are investor confidence, credit and settlement
system risks, and maintenance of orderly, efficient, and internationally
competitive markets. The issues raised by the several studies that in our view
merit the greatest attention are listed below. None of them is simple, and
while deserving high priority, may not be resolved quickly or without
considerable reflection. A significant number of issues have been suggested by
most of the reports and commentators, while others have had more limited
support. The list, which was developed in consultation with all members of the
Working Group, is not intended to include all of the suggestions made nor all
of the items that may be addressed by the Working Group; nor is it intended to
imply an endorsement of all items listed. The major issues the President has
asked the Working Group to address are attached.
Issues
for Consideration
A.
Investor Confidence
1.
Adequacy of mechanisms to address intermarket
front-running and price manipulation.
2.
Expansion of information dissemination and trade processing capacities of
exchanges, member firms, service bureaus, and clearing systems.
3.
Better evaluation and enforcement of affirmative market-maker obligations.
4.
Adequacy of customer protection rules and their enforcement in all markets.
5.
Adequacy of regulatory agency and self-regulatory organization resources and
staffing levels.
6.
Assessment of a variety of approaches to assuring better access and order
execution for individuals' orders.
B.
Credit System Issues
1.
Coordination of clearing system operations and information exchange.
2.
Adequacy of private sector capital for futures floor traders, market-makers,
broker-dealers, and futures commission merchants, including any appropriate
revisions of capital rules.
3.
Adequacy and clarity of private sector credit arrangements for exchange
settlement systems and market participants.
4.
Progress toward on-line clearing and same-day trade comparisons for all equity
and derivative products.
5.
Changes in margin requirements and additional security deposits for financial
protection against price-spike volatility, settlement capability for variation
margin, and positions with concentrated risk.
6.
Establishment of harmonized leverage requirements for uncovered customer
positions in cash and derivative markets.
C.
Market Mechanisms
1.
The desirability of simultaneous, brief trading halts in all markets based on
clear authority and carefully established and known standards.
2.
Coordination of openings and continuing trading of index futures and options
with the trading of the underlying stocks.
3.
Establishment of separate trading of index ``baskets'' of stock.
4.
Providing for or requiring physical delivery for settlement of index futures
and options.
5.
Development of block trading procedures for index futures and options on
futures.
6.
Revision of the equity market short-sale rules.
7.
Use of ``open outcry,'' ``one price auction,'' and specialist book disclosure
approaches in large, intraday order imbalance situations in specialist markets
to facilitate price discovery and market clearing and minimize intermarket disruptions and discontinuities.
8.
Emergency measures to restrict large, rapid liquidations of positions.
9.
Preestablished standards for shortened trading hours
for all markets in periods of sustained heavy volume.
10.
Investigation of the usefulness of enhanced reporting requirements for
broker-dealer recordkeeping, large trader tracking systems, and program trades,
with due consideration to financial privacy concerns and international capital
flows.
11.
Imposition of price limits for index futures and options.
12.
Full day closings in response to specified price moves.
13.
Restrictions on access to the DOT system for program trades based on either
volume or price move limits.
14.
Price limits on individual stocks.
15.
Aggregate cash and derivative market position limits.
D.
Regulatory Structure
1.
Careful consideration of the desirability of more formal intermarket
coordination and cooperation mechanisms, different regulatory regimes, a
``tie-breaking referee'' for intermarket issues, or
emergency powers.
2.
Development of mechanisms for international coordination on multimarket
issues.