WASHINGTON - Members of Congress again are trying to repeal the short-short rule, a tax regulation that limits the use of derivatives by mutual funds.
As part of the revenue reconciliation provisions of the budget bill, the effort probably won't be voted on until fall, said David Mangefrida, partner in the Washington office of Ernst & Young L.L.P.
And even then, the overall bill won't necessarily get broad support given the political situation in Washington, he said.
Although there has not been major opposition to a repeal of the provision, it has died in previous attempts as part of larger bills that weren't passed.
The short-short regulation stipulates that no more than 30% of a mutual fund's gross income comes from the sale of securities held less than three months. If that 30% threshold is broken, the fund pays taxes on earnings, as would the owner of the shares.
John O'Brien, chairman and chief executive of money manager Leland O'Brien Rubinstein Associates Inc., Los Angeles, said the rule effectively prevents mutual funds from widely using hedging-based strategies with futures and options.
Outstanding positions up
CHICAGO - Outstanding futures positions in the Russell 2000 Index, a small-capitalization equity benchmark, are up about 75% this year.
Open interest at the Chicago Mercantile Exchange stood at 12,478 contracts as of June 10, which represent $2.4 billion in notional value. At the end of 1996, open interest was 7,140 contracts, which represented about $1.3 billion of market exposure.
While a recent rebound in small-cap share prices has contributed to the increase in volume, use of the Russell 2000 futures contracts already was on the rise, said Richard H. Redding, vice president of index products for the CME.
Andrew Olma, chief index equity strategist for Barclays Global Investors, San Francisco, said the Russell 2000 is "catching on a little bit," but BGI still couldn't use it too extensively because of liquidity constraints.
Reasons for currency hedging
CHICAGO - Even if currency hedging has no effect in the end, which seems to be the case, corporations have reasons to do it anyway, said Kenneth Frier, vice president, financial risk management, Walt Disney Co., Burbank, Calif.
Speaking before the Risk Magazine 1997 U.S. Congress, Mr. Frier said corporate managers face more risk for underperforming than they do for overperforming.
If currency exposure increases the chance of underperformance, corporate managers will try to limit that exposure.
At Disney, currency changes can chop 5% from earnings. Hence, Walt Disney executives choose to hedge. Mr. Frier said his views were his own and didn't necessarily reflect those of his employer.
Boosting OTC presence
GREENWICH, Conn. - AIG International Inc. is working to build its presence in over-the-counter commodities transactions, said Adam De Chiara, head of commodity index trading.
With the increased interest in commodities by institutions, AIG executives decided to try to expand its existing business of acting as a counterparty to OTC commodities transactions, Mr. De Chiara said. AIG is an AAA rated counter party, he said. AIG can structure transactions using customized indexes or established indexes, such as the Goldman Sachs Commodities Index, he said.