Open

Coming up

Don't miss

Replay


LATEST SHOWS

AFRICA NEWS

Ebola virus: US to send 3,000 troops to West Africa

Read more

THE BUSINESS INTERVIEW

Inger Andersen, Vice President for the Middle East and North Africa, The World Bank

Read more

FOCUS

Scottish referendum: Should I stay or should I go?

Read more

MIDDLE EAST MATTERS

Paris conference: A coalition against the Islamic State group

Read more

ENCORE!

Encore's Film Show: Spies, doppelgangers and gay rights activists

Read more

IN THE PAPERS

Salmond's 'emotional eve-of poll plea to Scots to seize their historic opportunity'

Read more

THE INTERVIEW

Nick Witney, Senior Policy Fellow, European Council on Foreign Relations

Read more

IN THE PAPERS

'Valls is starting to act like Hollande'

Read more

WEB NEWS

Wikileaks releases 'weaponized malware' customer list

Read more

Business

US Treasury proposes new regulations on derivatives

Latest update : 2009-05-14

The US Treasury has drawn up new proposals to scrutinise derivatives, the financial instruments believed to have contributed to the collapse of big firms in the financial crisis, including a call for capital requirements for firms selling them.

AFP - The US administration Wednesday proposed new rules to tighten supervision of derivatives, the complex financial instruments believed to be a key element of the global financial crisis.
  
The new rules aim to prevent the kind of financial chaos that occurred after the collapse of big financial firms involved in derivatives last year, Lehman Brothers and insurer AIG.
  
The rules proposed by the Treasury call for capital requirements for firms selling derivatives and a requirement for many of these products to be traded through regulated entities.
  
Trillions of dollars in derivatives are traded each day, including various kinds of futures and options contracts, with many outside the scope of regulated exchanges.
  
Among the most controversial derivatives are credit default swaps, which are a form of insurance against a default in some types of securities.
  
The financial system was pushed to the brink last year when AIG and Lehman Brothers were put on the hook for trillions of dollars of failed subprime, or high-risk, mortgage securities.
  
A Treasury statement said the new regulatory effort aims to address "critical gaps and weaknesses in our financial regulatory system."
  
The statement said that rating agencies and regulators "did not understand or address" risks from derivatives until there had been "catastrophic losses," leading to a loss of confidence in the system.
  
Derivatives are aimed at reducing risk in the system by offering guarantees against price fluctuations or defaults, but the turmoil over the past year highlighted that "massive risks in derivatives markets have gone undetected by both regulators and market participants."
  
The new rules aim "to bring greater transparency and needed regulation to these markets."
  
The Treasury said it would work with authorities in other countries "to promote the implementation of similar measures around the world."
  
The initivative calls for securities laws to be amended requiring clearing of certain derivatives now sold outside financial markets through regulated counterparties.
  
These sellers would have "robust margin requirements and other necessary risk controls."
  
Some derivatives would still be allowed to be sold "over the counter" outside a regulated exchange, but the sellers would face "conservative capital requirements" and be required to report financial data to authorities.
  
The move aims to avoid the kind of catastrophe that occurred at AIG, which faced tens of billions of dollars in payouts when the subprime mortgage market collapsed, wiping out the value of mortgage-related securities it had insured.
  
Similar losses were endured by Wall Street firms Bear Stearns and Lehman Brothers.

Date created : 2009-05-14

COMMENT(S)