July 10, 2009 / 2:24 PM / 8 years ago

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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