Bank can trade bond options // Fed OKs electronic trading system; would compete with Chicago

The Federal Reserve Board Thursday moved to allow a Californiabank to trade options on U.S. government bonds, a decision that couldbring the bank in direct competition with Chicago's futures andoptions exchanges.

The unanimous Fed vote allows Security Pacific Corp. toestablish an electronic system for trading options on U.S. Treasurybonds. The Security Pacific proposal had drawn sharp attacks fromthe Chicago Board of Trade, Chicago Mercantile Exchange and ChicagoBoard Options Exchange, which had complained that the bank would havea competitive advantage because it would not be faced with the samecosts as regulated exchanges.

The ruling will not take effect immediately, because of amoratorium imposed by Congress that would prevent Security Pacificfrom trading until after March 1. A Board of Trade spokesman saidthe exchange will seek a permanent congressional ban or will take thefight to the courts if necessary.

One industry official expressed surprise that the Fed made itsmove despite the congressional ban, saying: "Maybe they were tryingto assert some independence from Congress."

All six Fed governors approved the Security Pacific requestexcept for Fed Chairman Paul Volcker, who was absent.

The Merc, in a statement, said Security Pacific should berequired to "be under the same rules and regulations as an exchange."

Security Pacific, the nation's seventh-largest bank company with$64 billion in assets, would enter the options business through twosubsidiaries, Security Pacific Options Trading Corp. and SecurityPacific Options Services Corp.

The first subsidiary would act as a so-called "blind broker,"providing the automated network that makes options trading possible.The other company would act as a clearing agent, comparing offers,matching potential deals and settling them.

The Chicago exchanges have complained that the Security Pacificplan does not prevent the bank from trading on its own exchange.Moreover, they say the bank might not have enough capital to protectcustomers in the event of volatile trading.

The fight over the Security Pacific proposal began in earnesttwo years ago after the staff of the Securities and ExchangeCommission took no action on the bank's request that it be allowed toestablish its options market.