Geithner Explains Plan to Regulate DerivativesU.S. Treasury Secretary Timothy Geithner proposes giving securities and futures regulators the authority to police the mostly unregulated over-the-counter derivatives market.
"Our plan will help prevent market manipulation, fraud and other abuses by providing full information to regulators about activity in the OTC derivative markets," Geithner testified to Congress late last week.
The $450 trillion privately-traded global derivatives market includes credit default swaps, the financial instrument that last fall almost brought down the biggest insurance company in the world, American International Group.
Geithner testified before two key Congressional committees on the government's plan to regulate derivatives. His testimony states all major dealers such as JPMorgan Chase and Goldman Sachs will now be overseen under "substantial supervision and regulations," including conservative capital requirements and strong business conduct standards.
The Securities and Exchange Commission (SEC), which oversees securities, and the Commodity Futures Trading Commission (CFTC), which supervises futures markets, would have authority to impose strict derivatives recordkeeping and reporting requirements. The U.S. derivatives market is controlled (90 percent) by JPMorgan Chase, Citigroup, Bank of America and Goldman Sachs.
The SEC and the CFTC would also have clear authority for civil enforcement and regulation of fraud, market manipulation and other abuses.
The Obama administration has already proposed sweeping reforms for the country's financial regulation (https://www.bankinfosecurity.com/regulations.php?reg_id=1513) including broad proposals to regulate derivatives. Obama's plan will remove counterparty risks by requiring greater use of central counterparties and imposing stricter capital standards on participants. The plan also encourages more use of standard contracts to position the derivative instruments into exchanges and central clearinghouse.