Treasury Urges More Regulation for Derivatives; GOP, Wall Street Oppose Plan

Article excerpt

Byline: Sean Lengell, THE WASHINGTON TIMES

Treasury Secretary Timothy F. Geithner told Congress on Friday that substantially more regulation is needed to rein in the over-the-counter derivatives market, which he blamed in part for the near collapse of U.S. credit markets last year.

Establishing a comprehensive framework of oversight is crucial in monitoring the estimated $500 trillion derivatives market, Mr. Geithner told a joint hearing of the House Financial Services and Agriculture committees.

The secretary proposed providing the Securities and Exchange Commission and the Commodity Futures Trading Commission with clear, unimpeded authority to take regulatory and civil action against fraud, market manipulation and other abuses in the derivatives market.

Mr. Geithner said that because of a lack of transparency and the ease with which over-the-counter derivatives are bought and sold, government regulators are ill-equipped to identify risks or the extent of the links among large firms.

Market participants and investors used derivatives to evade regulation or to exploit gaps and differences in regulation and to minimize the tax consequences of investment strategies, he said. The complexity of the instruments that emerged overwhelmed the checks and balances of risk management and supervision.

To increase transparency and improve market oversight, Mr. Geithner suggested greater standardization of the derivatives market and making trading subject to central clearinghouses and exchanges.

Over-the-counter derivatives are financial instruments whose value is derived from something else, such as a mortgage-backed security or a commodity like oil, and traded directly between two parties - in contrast to exchange trading.

Rep. Barney Frank, Massachusetts Democrat and chairman of the House Financial Services Committee, said he supports significantly expanding regulation of derivatives and plans to draft many or all of Mr. …