WASHINGTON — The Oba ma 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 two-page letter sent Wednesday to congressional leaders, Treasury Secretary Timothy Geithner said he wants to create a central electronic-based system that would track the buying and selling of derivatives. He 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.
Derivatives are financial instruments whose values are derived from an underlying figure or commodity — ranging from currency-rate “swaps” to oil futures and inflation bets. The derivative reduces the risk of loss from the underlying asset. The global business world holds $600 trillion of these contracts.
The legislative proposal 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,” Geithner wrote in his letter.
New rules would deter financial firms from taking undue risk, prevent fraud and ensure the derivatives are marketed appropriately, the letter said.
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.
The plan was received warmly by House Democrats.
Rep. Barney Frank, D- Mass., chairman of the Financial Services Committee, and Rep. Colin Peterson, D-Minn., chairman of the Agriculture Committee, said in a joint statement that they agree there should be “strong, comprehensive and consistent regulation” of the derivatives market and promised to work toward that end.
