15 May 2009, David Benyon, Operational Risk & Regulation
WASHINGTON, DC - US Treasury secretary Timothy Geithner has this week unveiled plans to regulate the over-the-counter derivatives market in the US.
The move by the Obama administration is in line with steps taken by the European Commission to supervise such trades by forcing them through regulated central counterparties.
The OTC market - estimated to be worth more than $680 trillion - has received bad press throughout the global financial crisis for its opacity, with trades often taking place over the phone, making oversight difficult.
"This is enormously important," said Geithner. "We need better, broader authority, better information, and we need a better commitment of supervisory authorities to enforce those laws."
Channelling 'standardised' OTC derivatives through central clearing houses would reduce the risk of investors being dangerously exposed to a single counterparty in the case of default.
The plan envisages requiring central clearers to produce publicly available data on trading volumes, and to show regulators the trades of individual counterparties.
The new laws could cause increases in bank regulatory capital, as well as providing oversight for a large part of the credit default swap market - products partially blamed for the collapse and federal bail-out of insurance giant AIG.
Geithner said that while "non-standardised" OTC derivatives would remain off the radar under the changes, their popularity had markedly declined recently, and the dealers and firms in those markets with large exposures to them would in any case become subject to tightened regulation.
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