Geithner pushes to regulate derivatives

WASHINGTON, July 10 (UPI) -- U.S. Treasury Secretary Timothy Geithner told lawmakers Friday that over-the-counter derivatives trading should be subject to strong regulatory oversight.

The market that "grew explosively" to a $700 trillion behemoth by 2008 was left largely unregulated, allowing banks to gain "substantial regulatory capital relief" by turning to "special purpose insurers subject to little or no initial margin requirements," he said.

In layman's terms, the banks insured themselves against losses by buying insurance from unregulated companies. Since that looked great on paper, it allowed the banks to stretch their risks even further. When the housing bubble burst, the banks and insurers, like American International Group, were both pushed to the brink of collapse.

Geithner told members of the House Financial Services and Agriculture Committees that derivatives required a four-step approach.

Geithner proposed a clearinghouse system for all derivatives trading that would remove leave "credit exposure to the clearinghouse only," dissolving risk to counter-parties.

The system should also include regulation to prevent "market manipulation, fraud and other abuses," and be fully transparent, he said. In addition, he advocated for standardized trading, "ensuring that OTC derivatives are not marketed inappropriately to unsophisticated parties."