The Treasury Department wants a central electronic-based system to track the buying and selling of over-the-counter derivatives, a class of financial instruments that includes the risky contracts that helped bring down the giant insurer AIG, according to a draft letter to Congress. The letter, obtained by the Associated Press, says the goal is to bring transparency to the shadowy market. Doing so would deter financial firms from taking undue risk, prevent fraud and ensure they are marketed appropriately, the letter states.
Current law largely excludes the privately traded derivatives from regulation. “All OTC 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,” the letter states. “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,” it adds.
Treasury Secretary Timothy Geithner, who was expected to brief reporters today, said in congressional testimony last month that he wants to force these types of contracts to be cleared through a central system. “Let me be clear: The days when a major insurance company could bet the house on credit default swaps with no one watching and no credible backing to protect the company or taxpayers from losses must end,” Geithner told Congress.
