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