Geithner Explains Plan to Regulate Derivatives

U.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 ( 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.

About the Author

Linda McGlasson

Linda McGlasson

Managing Editor

Linda McGlasson is a seasoned writer and editor with 20 years of experience in writing for corporations, business publications and newspapers. She has worked in the Financial Services industry for more than 12 years. Most recently Linda headed information security awareness and training and the Computer Incident Response Team for Securities Industry Automation Corporation (SIAC), a subsidiary of the NYSE Group (NYX). As part of her role she developed infosec policy, developed new awareness testing and led the company's incident response team. In the last two years she's been involved with the Financial Services Information Sharing Analysis Center (FS-ISAC), editing its quarterly member newsletter and identifying speakers for member meetings.

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