Commodity Futures Trading Commission's Regulation of Leverage Contracts
GGD-88-41: Published: Apr 14, 1988. Publicly Released: May 18, 1988.
- Full Report:
Pursuant to a congressional request, GAO examined the: (1) nature and components of leverage contracts; (2) extent to which the three leverage transaction merchants (LTM) complied with applicable laws and regulations; (3) various federal and state regulations governing LTM; (4) issues the Commodity Futures Trading Commission (CFTC) should explore in its mandated report on leverage contracts; (5) possibility of trading leverage contracts on a registered futures exchange; and (6) regulatory structure the Securities and Exchange Commission (SEC) might apply to leverage contracts if they are viewed as securities.
GAO found that CFTC: (1) generally conducted the necessary oversight and review to determine LTM compliance with applicable laws and regulations; (2) did not conduct sufficient tests to determine LTM compliance with sales practice regulations; (3) imposed moratoria restricting entry into leverage contracts; (4) as required by recent legislation, is studying leverage contract issues and planning to lift the restrictions; (5) will need more staff to accommodate the resulting increase of LTM; and (6) does not have jurisdiction over precious-metal purchasing arrangements which involve cash transactions. GAO also found that: (1) federal regulations contain certain provisions regarding LTM activities, including registration, sales, disclosures, and examinations; (2) state regulators have no direct jurisdiction over leverage contracts but may enforce certain fraud statutes; (3) proposed legislation requiring the trade of leverage contracts on organized futures exchanges would have banned the contracts; and (4) SEC would regulate leverage contracts as over-the-counter options if they were viewed as securities. GAO believes that CFTC should study the: (1) use of self-regulatory organizations for LTM regulation; (2) resource impact of the lifted restrictions on CFTC; and (3) extent to which it and other authorities should regulate third-party financing transactions.