ORAL TESTIMONY OF
COMMISSIONER JOHN E. TULL JR.

BEFORE THE
SENATE AGRICULTURE, NUTRITION AND FORESTRY COMMITTEE

DECEMBER 16, 1998

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Senator Lugar and all the Members of this Committee:

I thank the Committee for the opportunity to appear before you today. The Commission's written testimony goes into considerably more detail than I am going to say here. Further, some of what I am about to say is not part of the Commission's written testimony but are the views of this Commissioner only.

Since Chairperson Born has already related the factual chronology of events regarding LTCM and Exhibit 1 to the Commission's testimony is a brief outline of those events, I will not reiterate them.

Therefore, the question is what determinations can be made from the recent events involving LTCM? It is actually, too soon to tell whether any regulatory changes are appropriate. Before such a determination can be made the Commission, the President's Working Group and the Congress must carefully study the matter. Certainly, the near collapse of LTCM raises questions which need to be examined. Such as, transparency of the fund and of the instruments it used; the leverage of the fund and the amount of credit extended to the fund as well as lending practices; disclosures to investors, creditors and counterparties; and lastly, systemic risk. This list is not an inclusive nor exclusive list of questions that should be examined, but only serves as examples of questions that may be addressed.

Some of these questions were raised in the Commission's Concept Release or questionnaire on over-the-counter instruments, issued on May 12, 1998. To me, that some of these questions were raised in the Concept Release certainly does not indicate that regulation is required. What I believe it does indicate is that further information should be gathered from all sources on these questions and thus, considered. The responses to the Concept Release may prove useful to the Commission and the President's Working Group in addressing these questions, and to that end, the Commission staff is taking a look at the comments we have received.

In addition, as you know, the President's Working Group is conducting two studies, one study which Sen. Lugar requested at the July 30th hearing before this Committee, on over-the-counter instruments. And the other study, on hedge funds, was undertaken by the President's Working group shortly after the bail-out of Long-Term Capital Management. It is my understanding that all of the members of the President's Working Group, including the Commission, have devoted a great deal of resources to these studies in an attempt to complete the studies in a timely, cooperative and thorough manner. I am fully supportive of the Commission's effort.

The President's Working Group is a unique forum particularly well suited to undertake these two studies. Both hedge funds and over-the-counter instruments touch on the responsibilities of all those members that make up the President's Working Group. For example, LTCM traded both futures and securities, and banks were both lenders and counterparties to LTCM.

Each member of the President's Working Group brings a unique point of view to the table based on the industry it regulates. It is this diversity of perspectives and expertise that will enhance the studies. Therefore, it is encouraging to me that the President's Working Group undertake them. And I look forward to their recommendations.

In addition to the studies undertaken by the President's Working Group, I also look

forward to the guidance that is forthcoming from Congress on these complex and inter-related issues.

I will gladly answer any questions that you may have.