NEW YORK (Reuters) - A systemic regulator needs a global reach to address a financial firm’s multinational operations and increased use of derivatives around the world or risk being ineffective, a top Federal Reserve policy maker said on Tuesday.
The U.S. needs to “adequately empower those in the systemic risk-regulatory and resolutions roles. If we cannot, we will do well to find other ways to limit systemic risk,” Eric Rosengren, president of the Boston Federal Reserve Bank said in remarks prepared for delivery to a panel in Hong Kong.
The financial meltdown has led to calls in the United States for a so-called systemic regulator to oversee institutions that are big or interconnected enough to pose a risk to the financial system. The Federal Reserve is widely seen as the most likely candidate for this role.
Rosengren said the need for a systemic regulator to be able to address firms’ global operations and use of financial derivatives is key as firms global presence and derivatives activity will likely grow over time.
The case of the bailout of American International Group (AIG.N), which was heavily involved in derivatives, highlights the need for more transparency and regulation of derivatives, Rosengren said.
“I believe a systemic regulator should have the ability to require transactions to be moved to an exchange as the contract becomes standardized and widely used,” he said.
Rosengren also said that international agreements on receivership procedures will be needed for globally active institutions, citing the case of the failure of Lehman Brothers, which operated in over 40 countries.
“Until global resolution practices are adopted, resolution of internationally active organizations will remain problematic,” Rosengren said, adding that he hoped his remarks had provided “a sense of urgency”.
Reporting by Kristina Cooke; Editing by Diane Craft