RTTNews - A top Obama administration official told lawmakers Friday that the foundation for a safer and more stable financial system must be laid down to prevent a future financial collapse.
Speaking before the United States House of Representatives Agriculture and Financial Services Committees, U.S. Treasury Secretary Timothy Geithner said that critical shock absorbers were inadequate in withstanding last year's global recession.
Geithner went on to discuss financial reforms proposed by the Obama Administration in June, focusing particularly of regulation of the over-the-counter derivatives market, which was the central topic of focus at the hearing.
In prepared remarks, Geithner stressed establishing a comprehensive framework of oversight for the OTC derivative markets is crucial to laying the foundation for a safer, more stable financial system.
Geithner cited the growth of the over-the-counter derivative markets and their lack of transparency as a main contributor to the financial crisis, as they too easily allowed risk to be managed and transferred and led investors to take on larger amounts of risk than was prudent.
The secretary then highlighted the Obama Administration's objectives in regulating the OTC markets.
The plan will provide for strong regulation and transparency for all OTC derivatives, regardless of the reference asset, and regardless of whether the derivative is customized or standardized, Geithner said. In addition, our plan will provide for strong supervision and regulation of all OTC derivative dealers and other major participants in the OTC derivative markets.
Geithner said that the administration would require that standardized derivative contracts be cleared through well regulated central counterparties and executed on regulated exchanges or electronic trade execution systems.
Central clearing of standardized OTC derivatives will reduce risks to those on both sides of a derivative contract and make the market more stable, he said.
Geithner also said that the administration would encourage greater use of standardized OTC derivatives to allow migration of the derivatives into central clearinghouses.
Taking steps to make the OTC derivative markets fully transparent were also strongly recommended. Geithner said that regulators will have confidential access to transactions of individual market participants, and that the public will have access to aggregated data on open positions and trading volumes.
These reforms will bring OTC derivative trading into the open so that regulators and market participants have clear visibility into the market and a greater ability to assess risks in the market, he said.
Geithner said that these recommendations, along with others, will help make the derivative markets more efficient and transparent and prevent market manipulation and abuses, and move toward better protecting the nation's economy.
Our plan will help prevent the OTC derivative markets from threatening the stability of the overall financial system, he said.
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