(Adds detail on testimony, hearing)
WASHINGTON, July 10 U.S. Treasury Secretary
Timothy Geithner is expected to propose on Friday giving
securities and futures regulators authority to police the
largely unregulated over-the-counter derivatives market,
according to a document obtained by Reuters.
"Our plan will help prevent market manipulation, fraud and
other abuses by providing full information to regulators about
activity in the OTC derivative markets," Geithner said in the
testimony to be delivered to Congress.
The $450 trillion privately-traded global derivatives market
includes credit default swaps, the financial instrument that
nearly toppled insurer American International Group (AIG.N).
Later on Friday, Geithner is due to testify before two key
Congressional committees on the government's plan to regulate
According to the document, all major dealers such as
JPMorgan Chase (JPM.N) and Goldman Sachs (GS.N) would be subject
to "substantial supervision and regulations," including
conservative capital requirements and strong business conduct
The Securities and Exchange Commission, which oversees
securities, and the Commodity Futures Trading Commission, which
supervises futures markets, would have authority to impose
recordkeeping and reporting requirements on the derivatives.
The SEC and the CFTC would also have clear authority for
civil enforcement and regulation of fraud, market manipulation
and other abuses, the document said.
The Obama administration has already proposed sweeping
reforms for the country's financial regulation including broad
proposals to regulate derivatives.
Its plan is geared toward removing counterparty risks by
requiring greater use of central counterparties and imposing
stricter capital standards on participants.
The administration is also trying to encourage greater use
of standardised contracts to help push the instruments onto a
central clearinghouse and exchanges.
That has stoked concern among financial institutions who say
certain contracts are customised to their clients and not meant
to be cleared or traded on an exchange.
In the testimony, Geithner provided more detail on what will
be deemed a standardised contract.
The administration will propose a broad definition that will
be capable of evolving with the markets and will be designed to
be difficult to evade," he said. Other characteristics include
high volume of transactions in the contract and a presumption
that a derivative accepted for clearing by any central
counterparty is standardised.
In the United States, four large banks control over 90
percent of the derivatives market: JPMorgan Chase, Bank of
America (BAC.N), Citigroup (C.N) and Goldman Sachs.
(Reporting by Rachelle Younglai; Editing by Hans Peters and