Magazine article American Banker

Lawmaker Calls for Regulators to Tighten Control of Derivatives

Magazine article American Banker

Lawmaker Calls for Regulators to Tighten Control of Derivatives

Article excerpt

WASHINGTON - Iowa Congressman Jim Leach on Monday called on financial regulators to beef up supervision of the derivatives market.

Rep. Leach warned that he would introduce comprehensive legislation to control the financial industry's use of these relatively new financial instruments if the regulators drag their feet.

The lawmaker, who is the House Banking Committee's ranking Republican, presented 30 detailed recommendations on derivatives issues including accounting, disclosure, and capital treatment.

Study of Risks Posed

They were inspired by a 900-page study which in part focused on the risks posed by the rapid expansion of derivatives activities by banks and other financial institutions.

"Early in January you can expect some possibility of a broad framework bill to be introduced," Rep. Leach said. "But that approach will be tempered by what interim response we see from the regulators and the administration."

The recommendations mark Rep. Leach's first formal proposal for government regulation of the derivatives market. The congressman has become one of the most vocal lawmakers on the subject, issuing warnings on the risks of the growing market, but calling for a thoughtful, reasoned response.

His recommendations included the following:

* The creation of an interagency commission to establish uniform rules for capital, accounting, disclosure, and suitability for dealers and end users.

* Harmonization of cross-industry and cross-border standards.

* The development of guidelines to discourage unsophisticated, poorly capitalized firms from trading derivatives.

"In the derivatives arena, there is a particular problem of new kids on the block," Rep. Leach said. "If problems develop in the derivatives marketplace, it is a good bet that they will be less likely to stem from the major firms operating in the mainstream than from firms that are new entrants or operating at the fringes of the market. …

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