A LOUD NEW UPROAR IN THE COMMODITY PITS Proposals to stiffen capital requirements for brokers are so stringent that even Merrill Lynch and Cargill would get hit.
By - Craig C. Carter

(FORTUNE Magazine) – COMMODITIES BROKERS, who deal in everything from pork bellies to Treasury bills and precious metals, emerged from their trading pits months ago to fight sweeping new regulations proposed by the Commodity Futures Trading Commission (CFTC), a federal watchdog agency. The longer the industry studies the proposed regulations, the harder it fights. The proposals are intended to bring greater financial stability to the highly volatile commodities business, but the industry says that the changes are so drastic that even big operators like Merrill Lynch and Cargill would get hit, and some healthy small firms could be driven out. At the center of the battle is CFTC Chairman Susan M. Phillips, 41, a former University of Iowa administrator and Brookings Institution fellow. Phillips says that the commission proposals are designed to prevent bankruptcies by ensuring that a firm's capital is sufficient to cover the risks of its trading positions. The proposals, warns Phillips, will affect ''any firm, be it large or small, trying to support an inordinate amount of risk.'' To give the industry more time to devise alternative proposals, the commission has postponed a decision until March. The most controversial proposal has to do with so-called concentration levels. Firms that do a disproportionate amount of their business with just a few clients -- or who have sizable positions on just one side of the market -- could be forced to come up with additional capital. Chairman John J. Conheeney, 56, of Merrill Lynch Futures, the brokerage house's commodity trading arm, complains that the new rules will boost his operating costs. Hal T. Hansen, 49, president of Cargill Investor Services, a Cargill subsidiary, says the proposed concentration rules would force Cargill Investor Services to boost its capital $24 million. The New York Commodity Exchange estimates that about 30% of member firms subject to the regulations would not meet the proposed capital rules. The Chicago Board of Trade claims that up to 40% of its members would be adversely affected. The Board of Trade has amassed a $1-million fund, largely to fight the CFTC in court. The exchange, which handles about 50% of all commodities transactions, argues that the proposed regulations are so complicated and burdensome that its members will be hard pressed to know if they are in compliance. The board says that its staff has spent about 3,700 hours just analyzing the impact of the proposals and isn't finished yet. The outlook: the CFTC will make the new regulations less stringent than those proposed -- or the Board of Trade will have plenty to sue about.