The Obama administration took another step in the direction of financial management regulatory control yesterday, asking Congress to extend its oversight of financial markets to include derivatives. Derivatives and other instruments, such as mortgage-backed securities, contributed to American International Group’s need for federal funding last September.

Treasury Secretary Timothy Geithner said in a two-page letter sent to Congressional leaders that he wants to create a central, electronic-based system that would track the buying and selling of derivatives. In the letter, he told Congress that the administration wants to make certain that financial firms selling the instruments have enough capital on hand in case they default. The letter also indicated the desire to establish stringent standards of conduct and another set of reporting requirements.

The letter is the first indication, say experts, that the administration is serious about overhauling the nation’s financial regulatory system.

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.

"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.
New rules would deter financial firms from taking undue risk, prevent fraud and ensure they are marketed appropriately, according to the letter.

It was unclear how the rules would affect hedge funds, said the Associated Press.

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