WASHINGTON - The Obama administration is asking Congress to extend 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 American International Group Inc.
In a letter sent yesterday to congressional leaders, Treasury Secretary Timothy Geithner said he wanted to create a central electronic-based system that would track the buying and selling of derivatives. He also wanted to ensure that financial firms selling the instruments have enough capital on hand in case they default and to subject them to stringent standards of conduct and new reporting requirements.
"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.
"Key elements of that robust regulatory regime must include conservative capital requirements, business-conduct standards, reporting requirements, and conservative requirements relating to initial margins on counterparty credit exposures," he added.
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.
It was unclear how the rules would affect hedge funds, which are large, mostly unregulated entities that use complex trading tactics to earn big returns for high-dollar investors. Many hedge funds use derivatives contracts to offset risk on other transactions.
The proposal is strikingly similar to legislation proposed by a small group of major Wall Street banks. Critics of that proposal say the regime would give the same banks that contributed to the financial meltdown exclusive control over a larger part of the derivatives market.