June 22, 2009 / 7:16 PM / 10 years ago

Fed: central OTC clearing would curb market risk

WASHINGTON (Reuters) - Centralized clearing of over-the-counter derivatives would help to reduce the risk that these instruments pose to the wider financial system, a senior Federal Reserve official said on Monday.

Patricia White, associate director of Research and Statistics at the Federal Reserve, said in testimony prepared for the U.S. Senate that OTC derivatives had amplified shocks during the financial crisis, which resulted in the failure of investment bank Lehman Brothers in September.

“The Board believes that moving toward centralized clearing for most or all standardized OTC products would have significant benefits,” she told the Senate Subcommittee on Securities, Insurance and Investment.

Regulators have been working to limit the risks of spillover from problems in one market to the wider system. The spillover made matters much worse during the current financial crisis and the White House has proposed a sweeping overhaul of the regulatory structure.

Reporting by Alister Bull, Editing by Neil Stempleman

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