06Jun96 USA: NOT MUCH SUBTLETY AT CAPITOL HILL FOREX HEARING.

By Aaron Pressman

WASHINGTON, June 6 (Reuter) - Toting a "scale of justice" and wielding giant photographs of allegedly nefarious Internet sites, the Chicago futures exchanges came to Washington for a Congressional hearing on Wednesday.

Subtlety was an early victim.

Ostensibly testifying before the Senate Agriculture Committee on the dry subject of reforming the Commodity Exchange Act which governs their markets, top officials wasted little time before heating up their rhetoric and attacking perceived foes at home and abroad.

Jack Sandner, chairman of the Chicago Mercantile Exchange, warned that competitors were relying on "a very, very misguided, extraordinarily misguided" interpretation of a 1974 amendment to the Act related to foreign exchange trading.

He said the so-called Treasury Amendment created a legal loophole allowing bucket shops and boiler rooms to cheat retail investors with impunity over the Internet. Sandner and other exchange officials urged Congress to scrap the amendment by passing new legislation.

"This one is virtually disgusting," Sandner intoned, before displaying a blown-up picture not of a pornographic cyber shop, but of a firm selling forex products over the Internet.

Sandner did not mention that the Commodity Futures Trading Commission has already shut down over a dozen more-conventional forex bucket shops, despite the existence of the Treasury Amendment.

"The question of markets operating on the Internet is a question that goes well beyond the scope of the Treasury Amendment," Andrea Corcoran, director of the CFTC's division of trading and markets, said in an interview after the hearing.

The CFTC, along with the Securities and Exchange Commission and other regulators around the globe, are reviewing the broader issues related to fraud and law enforcement in cyberspace, Corcoran added.

But Sandner may have been taking aim at some of the exchanges' larger competitors -- the banks and brokerage firms that carry on most of their forex activity over the counter.

Robert Easton, a managed futures fund manager, testified later in the hearing that bucket shop activity in foreign exchange trading was a minuscule portion of the vast off-exchange market.

According to a survey by the Bank for International Settlements, the average daily volume of forex trading worldwide was $1.2 trillion as of April 1995, largely in the OTC market.

The Treasury Amendment allowed the OTC interbank market to flourish, Easton said. "There have been no major market breaks or scandals in the 20 years I've been active," Easton added.

Senate Agriculture Committee chairman Richard Lugar, who presided over the hearing, said afterwards that he needed more information about the scope of the Internet problem.

"If we have situations where thousands, or even hundreds, of people beyond the regulatory pale are doing things, then that is a source of great concern," Lugar told reporters. But given the conflicting testimony, more information is needed "to give some perspective of how much public resources ought to be devoted." --202-898-8312 E-mail:derivatives@reuters.com

(c) Reuters Limited 1996