US report urges tight controls over derivatives: Congressional warning of threat to financial stability

A US CONGRESSIONAL report yesterday branded derivatives a potential threat to financial stability and recommended sweeping regulations of the burgeoning market to head off a 'bail-out paid for by taxpayers'.

The long-awaited report by the General Accounting Office says all unregulated players should either be brought under the supervision of the US Securities and Exchange Commission or be regulated by three or four agencies, as the US government securities market is.

The report 'recommends that Congress require federal regulation of the safety and soundness of all major US over-the-counter derivatives dealers' - including insurance companies and the seven trading subsidiaries established by big Wall Street firms to avoid the SEC's rules on disclosure and capital reserves.

The report, commissioned by Democrats in the House of Representatives two years ago, concedes that derivatives - the umbrella term for abstract financial instruments such as futures, options and swaps - serve an important hedging function, helping companies to predict prices despite swings in interest rates, currencies and commodity values. But it said risks were posed by the fact that US derivatives trading is concentrated among 15 key dealers that operate globally and are extensively linked to one another.

'The sudden failure or abrupt withdrawal from trading of any of these large dealers could cause liquidity problems in the markets and could also pose risks to others,' the report says. While it is unlikely that Washington would act to prevent any one trader from failing, it would intervene to 'keep the financial system functioning in cases of severe financial stress.'

The report, which will almost certainly encourage calls by the House banking committee's chairman, Henry Gonzalez, for new legislation, drew a sharp rebuke from the leading trade associations whose members deal in derivatives, including the Public Securities Association, the American Bankers Association, and the International Swaps and Derivatives Association.

The recommendations would sharply increase the cost of derivatives and reduce their availability, they said. Legislation 'will harm the American economy' and could drive the dollars 12,000bn business offshore, the groups said.

They said many regulators who once worried about internal controls and risk management - notably the former Federal Reserve governor Gerald Corrigan - have come to agree that the system is well equipped to monitor the market.

But the report by the Accounting Office - whose director, Charles Bowsher, is to testify before Congress today - said the weaknesses and gaps in derivatives regulation demonstrate the need to 'revamp and modernise the entire US financial regulatory system.'

In the meantime, the report's recommendations include:

Disclosure by firms of the identities of the counter-parties to their derivatives deals, as well as information on their profits;

The establishment of minimum capital standards for dealers;

The creation of independent audits and internal reporting of derivatives trading to company directors and external auditors;

New accounting standards for firms that invest in derivatives requiring them to disclose their holdings to shareholders, and possibly requiring them to make their value known to the market;

Pressing regulators in other countries to harmonise disclosure, capital, examination and accounting standards for derivatives.

Mr Gonzalez has promised to have a bill regulating the market ready for debate before Congress's summer recess begins in July.

View From City Road, page 43

(Photograph omitted)

Start your day with The Independent, sign up for daily news emails
News
Lois Pryce... Life Without a Postcode. Lois lives on a boat with her husband.. Registering to vote in the election has prooved to be very difficult without a fixed residential post code. (David Sandison)
newsHow living on a houseboat meant I didn't officially 'exist'
Arts and Entertainment
Cassetteboy's latest video is called Emperor's New Clothes rap
videoThe political parody genius duo strike again with new video
Sport
Steven Fletcher scores the second goal for Scotland
cricketBut they have to bounce back to beat Gibraltar in Euro 2016 qualifier
News
news
ebooks
ebooksA special investigation by Andy McSmith
  • Get to the point
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Recruitment Genius: Retirement Coordinator - Financial Services

Negotiable: Recruitment Genius: To provide a prompt, friendly and efficient se...

Recruitment Genius: Annuities / Pensions Administrator

Negotiable: Recruitment Genius: You will be the first point of contact for all...

Ashdown Group: HR, Payroll & Benefits Officer - Altrincham - up to £24,000.

£18000 - £24000 per annum + benefits: Ashdown Group: HR, Payroll & Benefits Of...

Ashdown Group: Learning and Development Programme Manager

£35000 - £38000 per annum + benefits : Ashdown Group: A highly successful, int...

Day In a Page

Election 2015: How many of the Government's coalition agreement promises have been kept?

Promises, promises

But how many coalition agreement pledges have been kept?
The Gaza fisherman who built his own reef - and was shot dead there by an Israeli gunboat

The death of a Gaza fisherman

He built his own reef, and was fatally shot there by an Israeli gunboat
Saudi Arabia's airstrikes in Yemen are fuelling the Gulf's fire

Saudi airstrikes are fuelling the Gulf's fire

Arab intervention in Yemen risks entrenching Sunni-Shia divide and handing a victory to Isis, says Patrick Cockburn
Zayn Malik's departure from One Direction shows the perils of fame in the age of social media

The only direction Zayn could go

We wince at the anguish of One Direction's fans, but Malik's departure shows the perils of fame in the age of social media
Young Magician of the Year 2015: Meet the schoolgirl from Newcastle who has her heart set on being the competition's first female winner

Spells like teen spirit

A 16-year-old from Newcastle has set her heart on being the first female to win Young Magician of the Year. Jonathan Owen meets her
Jonathan Anderson: If fashion is a cycle, this young man knows just how to ride it

If fashion is a cycle, this young man knows just how to ride it

British designer Jonathan Anderson is putting his stamp on venerable house Loewe
Number plates scheme could provide a licence to offend in the land of the free

Licence to offend in the land of the free

Cash-strapped states have hit on a way of making money out of drivers that may be in collision with the First Amendment, says Rupert Cornwell
From farm to fork: Meet the Cornish fishermen, vegetable-growers and butchers causing a stir in London's top restaurants

From farm to fork in Cornwall

One man is bringing together Cornwall's most accomplished growers, fishermen and butchers with London's best chefs to put the finest, freshest produce on the plates of some of the country’s best restaurants
Robert Parker interview: The world's top wine critic on tasting 10,000 bottles a year, absurd drinking notes and New World wannabes

Robert Parker interview

The world's top wine critic on tasting 10,000 bottles a year, absurd drinking notes and New World wannabes
Don't believe the stereotype - or should you?

Don't believe the stereotype - or should you?

We exaggerate regional traits and turn them into jokes - and those on the receiving end are in on it too, says DJ Taylor
How to make your own Easter egg: Willie Harcourt-Cooze shares his chocolate recipes

How to make your own Easter egg

Willie Harcourt-Cooze talks about his love affair with 'cacao' - and creates an Easter egg especially for The Independent on Sunday
Bill Granger recipes: Our chef declares barbecue season open with his twist on a tradtional Easter Sunday lamb lunch

Bill Granger's twist on Easter Sunday lunch

Next weekend, our chef plans to return to his Aussie roots by firing up the barbecue
Joe Marler: 'It's the way I think the game should be played'

Joe Marler: 'It's the way I think the game should be played'

The England prop relives the highs and lows of last Saturday's remarkable afternoon of Six Nations rugby
Cricket World Cup 2015: Has the success of the tournament spelt the end for Test matches?

Cricket World Cup 2015

Has the success of the tournament spelt the end for Test matches?
The Last Word: Justin Gatlin knows the price of everything, the value of nothing

Michael Calvin's Last Word

Justin Gatlin knows the price of everything, the value of nothing