- The Washington Times - Saturday, July 11, 2009

Treasury Secretary Timothy F. Geithner told Congress on Friday that “substantially” more regulation is needed to rein in the over-the-counter derivatives market, which he blamed in part for the near-collapse of U.S. credit markets last year.

“Establishing a comprehensive framework of oversight is crucial” in monitoring the estimated $500 trillion derivatives market, Mr. Geithner told a joint hearing of the House Financial Services and the Agriculture committees.

The secretary proposed providing the Securities and Exchange Commission and the Commodity Futures Trading Commission with “clear, unimpeded authority” to take regulatory and civil action against fraud, market manipulation and other abuses in the derivatives market.

Mr. Geithner said that because of a lack of transparency and the ease with which over-the-counter derivatives are bought and sold, government regulators are ill-equipped to identify risks or the extent of the links among large firms.

“Market participants and investors used derivatives to evade regulation or to exploit gaps and differences in regulation and to minimize the tax consequences of investment strategies,” he said. “The complexity of the instruments that emerged overwhelmed the checks and balances of risk management and supervision.”

To increase transparency and improve market oversight, Mr. Geithner suggested greater standardization of the derivatives market and making trading subject to central clearinghouses and exchanges.

Over-the-counter derivatives are financial instruments whose value is derived from something else, such as a mortgage-backed security or a commodity like oil, and traded directly between two parties - in contrast to exchange trading.

Rep. Barney Frank, Massachusetts Democrat and chairman of the House Financial Services Committee, said he supports “significantly expanding regulation of derivatives” and plans to draft many or all of Mr. Geithner’s recommendations into legislation.

“We need to give encouragement to investors who may be afraid to invest,” Mr. Frank said. “That’s why I regard sensible regulation as very pro-market. You protect the people with integrity from those who might try to cut corners.”

But some Republican lawmakers said they are skeptical that a significant overhaul is needed.

“Derivatives are about shifting risk … and I fear that the administration is going down the path of shifting that risk not to the investors or to the dealers, but ultimately to the taxpayers,” said Rep. Spencer Bachus of Alabama, the top Republican on the Financial Services Committee.

Beefing up regulation of the financial markets also has been met with resistance from Wall Street, where many fear such action would stifle trade, reduce liquidity and potentially lead to future market meltdowns.

Because the derivative market is global, Mr. Geithner said he would work with finance ministers from other countries to “ensure that our regulatory regime is matched by similarly effective efforts in other countries.”

“These standards, to be effective, have to be applied and enforced on a global basis,” he said.

Mr. Geithner said that although he has a good working relationship with his European counterparts, he is “a little concerned” over their tendency to come up with a “European solution” in dealing with market problems.

“So we’re going to try to work with them to make sure that we end up with a thing that works for these markets,” he said, “and is reducing overall risk.”

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