Financial Times THURSDAY OCTOBER 1 1998 

LTCM bail-out prompts rule review

By Nikki Tait in Chicago

The near-collapse of Long-Term Capital Management, the US hedge fund, demonstrated the "lack of transparency and . . . unrestrained lending" in the over-the-counter derivatives industry, the chief US futures regulator said yesterday.

Brooksley Born, head of the Commodity Futures Trading Commission, also said the $3.6bn bail-out of LTCM had prompted the CFTC to examine the adequacy of rules covering so-called "commodity-pool operators" and whether any of these had been broken.

Commodity pool operators run a collective investment fund trading in derivatives. LTCM had been registered as a CPO with the CFTC. The agency was looking at the scope of its regulations in this area and LTCM's compliance to see "whether our regulations are adequate in light of what we have now learned through this episode, and whether any laws or regulations have been violated".

Ms Born's comments came as US regulators, including Alan Greenspan, Federal Reserve chairman, prepared to testify over the affair before a congressional committee in Washington today.

The CFTC oversees the futures industry, but the OTC part of the derivatives industry has been largely exempted from oversight, on the grounds that it involves one-to-one contracts between sophisticated financial institutions.

An attempt earlier this year by the CFTC to review OTC regulation was criticised by the derivatives industry and regulators such as the Securities and Exchange Commission and the Fed. Legislation that would prevent the CFTC from making rule changes as a result of that review is pending in Washington.

But Ms Born claimed yesterday that the LTCM affair "tended to confirm" the concerns that had prompted the CFTC's review. She said the LTCM episode "illustrates the lack of transparency of the OTC derivatives market . . . the unrestrained lending that's going on in that market, and the lack of adequate prudential controls which may be involved in that market."