Treasury asks for control of derivatives market
WASHINGTON -- The Obama administration is asking Congress to extend its oversight of the financial system to include the shadowy market of derivatives, the kind of complex financial instruments that helped bring down the giant insurer AIG.
In a draft two-page letter to congressional leaders, the Treasury Department said it wants to create a central electronic-based system that would track the buying and selling of derivatives. It also wants to ensure that financial firms selling the instruments have enough capital on hand in case they default and subject them to stringent standards of conduct and new reporting requirements.
The legislative proposal, announced Wednesday by Treasury SecretaryTimothy Geithner, is the administration's first major step in overhauling the nation's financial regulatory system.
"All (over-the-counter) derivatives dealers and all other firms whose activities in those markets create large exposures to counterparties should be subject to a robust regime of prudential supervision and regulation," Treasury wrote in its draft letter.
"Key elements of that robust regulatory regime must include conservative capital requirements, business conduct standards, reporting requirements and conservative requirements relating to initial margins on counterparty credit exposures," the department adds.
New rules would deter financial firms from taking undue risk, prevent fraud and ensure they are marketed appropriately, according to the letter.
Current law largely excludes regulation of the instruments, which are referred to as "over-the-counter" derivatives because they are traded privately rather than through commodity exchanges now regulated by the Commodity Futures Trading Commission.
It was unclear how the rules would affect hedge funds, which are large, mostly unregulated entities that use complex trading tactics to earn big returns for high-dollar investors. Many hedge funds use derivatives contracts to offset risk on other transactions.
The proposal is strikingly similar to draft legislation produced and circulated by a small group of major Wall Street banks. Critics of that proposal say the regime would give the same banks that contributed to the financial meltdown exclusive control over a larger part of the derivatives market.
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