HIGHLIGHTS-Geithner testifies on over-the-counter derivatives
(Updates with Geithner on oil price volatility)
WASHINGTON, July 10 (Reuters) - The following are highlights from the U.S. House Financial Services and House Agriculture committees' joint hearing on Friday on the Obama administration's proposal to regulate over-the-counter derivatives with Treasury Secretary Timothy Geithner. For a story on Geithner's testimony, see [ID:nN10491020] For the text of Geithner's prepared testimony, see [ID:nN10510916]
GEITHNER ON CONTROLLING OIL PRICE VOLATILITY:
"I think what the CFTC chairman proposed the other day ... is a prudent approach to policy, is to look for ways to limit volatility. It's very hard to not look at the last two years of pattern in the global energy markets, even though there's been such enormous shifts in confidence about the strength or weakness of the global economy, not to believe we've seen a level of volatility that has been damaging, fundamentally, to the capacity of business to manage risk and damaging to confidence. I think it is worth trying to see whether you can limit that risk through better disclosure -- hard to do, a lot of people have tried it. If you're going to do that effectively you're going to have to do that in a common approach to where oil and other commodities are traded globally."
GEITHNER ON EFFECTIVENESS OF STIMULUS:
"The stimulus package is on its expected path in terms of the rate of putting money in the pockets of taxpayers, to provide substantial forms of assistance to states to reduce the risk of their being forced to fire tens of thousands of teachers, workers, firemen, and there are very substantial investments in infrastructure projects that have already started to take effect and will have their maximum impact on he economy in the second half of the year. My own sense is, and I think this is the consensus of broad-based economists, that there have been substantial improvements in arresting what was the worst recession globally we've seen in generations."
GEITHNER ON DEFINING STANDARDIZED CONTRACTS:
"I don't think we have made a financial judgment as to what extent we want to define those attributes of standardized contracts in statute or in regulation. My suspicion is that we'll lay out road principles in statutes and have them defined with more clarity in regulation. The important thing is that we move to standardize on the central clearing and we establish comprehensive enforcement authority, comprehensive transparency, comprehensive reporting, and sufficiently conservative margin and capital requirements across the entire market."
GEITHNER ON URGENCY OF REFORM:
"It's not surprising that we're having this debate. It's the typical pattern of the past. As the crisis starts to recede, the impetus to reform begins to fade in the face of the complexity of the task and opposition by the economic and institutional interests that are affected. It's not surprising because the reforms proposed by the president, and the reforms that your two committees are discussing, would substantially alter the ability of financial institutions to choose their regulator, to shape the content of future regulation and to continue the financial practices that were lucrative for parts of the industry for a time but that ultimately proved so damaging. But this is why we have to act and why we need to deliver very substantial change."
GEITHNER ON DANGER OF CURRENT REGULATION OF OTC DERIVATIVES:
"Under our existing regulatory system, some types of financial institutions were allowed to sell large amounts of protection against certain risks without adequate capital to back those commitments. The most conspicuous and most damaging examples of this were the monoline insurance companies and AIG. These firms and others sold huge amounts of credit protection on mortgage-backed securities and other more complex real-estate related securities without the capacity to meet their obligations in an economic downturn."
GEITHNER ON OBJECTIVES TO REGULATE MARKET:
"In designing its proposed reforms for the OTC derivative markets, the Administration has attempted to achieve four broad objectives: * Preventing activities in the OTC derivative markets from posing risk to the stability of the financial system; * Promoting efficiency and transparency of the OTC derivative markets; * Preventing market manipulation, fraud, and other abuses; and * Protecting consumers and investors by ensuring that OTC derivatives are not marketed inappropriately to unsophisticated parties."
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