Lawmakers say they have accord on derivatives oversight

WASHINGTON -- Two influential House lawmakers on Thursday announced an agreement on guidelines for legislation to impose broad new oversight on the financial instruments blamed for hastening the global economic crisis.

They said the House could vote in September on a bill to regulate derivatives, legislation that is a crucial element of Congress' effort to overhaul the system of financial rules.

The outline agreed to by Democratic Reps. Barney Frank, chairman of the House Financial Services Committee, and Collin Peterson, who heads the House Agriculture Committee, closely resembles the Obama administration's proposed plan for regulating derivatives.

Both proposals involve a new network of clearinghouses to provide transparency for trades in credit default swaps and other derivatives.

There would be incentives for derivatives to be traded on regulated futures exchanges, by imposing stringent capital requirements on dealers in so-called over-the-counter derivatives.

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Left unresolved, however, is the question of whether so-called "naked" credit default swaps — where investors don't own the underlying bonds — would be banned. Financial industry interests say that would effectively gut the market for credit default swaps and hamper efforts to restore the battered credit markets in the wake of the crisis.

Derivatives are traded around the globe in a $600 trillion market that is largely unbridled. Credit default swaps, a form of insurance against loan defaults, account for about $60 trillion. The collapse of the swaps brought the downfall of Wall Street banking house Lehman Brothers Holdings Inc. and nearly toppled American International Group Inc. last fall, prompting the government to support the insurance conglomerate with about $180 billion.

The value of over-the-counter derivatives hinges on an underlying investment or commodity — such as currency rates, oil futures or interest rates. The derivative is designed to reduce the risk of loss from the underlying asset.