Geithner urges derivatives curbs

Timothy Geithner said financial 'shock absobers' had not been adequate

US Treasury Secretary Timothy Geithner wants securities and futures regulators to police the largely unregulated over-the-counter market in derivatives.

Derivatives are the complex financial instruments that brought down some of Wall Street's biggest names.

AIG and Lehman Brothers were among the firms ruined by dealing in derivatives.

In testimony to Congress, Mr Geithner said his plan would "help prevent market manipulation, fraud and other abuses" by keeping regulators informed.

New regulation

The $450 trillion (£278 trillion) privately-traded global derivatives market includes the notorious credit default swaps, the financial instrument which devastated AIG.

Four large banks control more than 90% of the derivatives market in the US: JP Morgan Chase, Bank of America, Citigroup and Goldman Sachs.

Mr Geithner is now proposing that all standardised derivative contracts be cleared through well-regulated central clearing houses, and executed either on regulated exchanges or regulated electronic trade execution systems.

He also wants to move towards "convergence of the regulatory frameworks that apply to securities and futures markets, and establishing more uniform standards and enforcement of standards for financial products and activities across the system".

It is also proposed that all major dealers in derivatives would be subject to "substantial supervision and regulations".

These regulations would include conservative capital requirements and strong business conduct standards.

'Too weak'

"This financial crisis has exposed a set of core problems with our financial system," said Mr Geithner.

"The system permitted an excessive build-up of leverage, both outside the banking system and within the banking system.

"The shock absorbers that are critical to preserving the stability of the financial system - capital, margin, and liquidity cushions in particular - were inadequate to withstand the force of the global recession, and they left the system too weak to withstand the failure of major financial institutions."

Mr Geithner said the US had not had an adequate set of tools to contain the risk of broader damage to the economy and to manage the failure of large, complex financial institutions.

"Risk management practices at financial firms failed to keep abreast of the rising complexity of financial instruments."