Treasury Secretary Timothy Geithner is set to propose on Friday giving securities and futures regulators authority to police the over-the-counter derivatives market, according to a document obtained by Reuters.
Our plan will help prevent market manipulation, fraud and other abuses by providing full information to regulators about activity in the OTC derivative markets, Geithner says in the testimony to be delivered to Congress.
The $450 trillion privately-traded global derivatives market includes credit default swaps, the financial instrument which nearly toppled insurer American International Group.
Later on Friday, Geithner is due to testify before two key Congressional committees on the government's plan to regulate derivatives.
According to the document, major dealers such as JPMorgan Chase and Goldman Sachs would be subject to substantial supervision and regulations, including conservative capital requirements and strong business conduct standards.
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The Securities and Exchange Commission, which oversees securities, and the Commodity Futures Trading Commission, which supervises futures markets, would have authority to impose recordkeeping and reporting requirements on the derivatives.
The SEC and the CFTC would also have clear authority for civil enforcement and regulation of fraud, market manipulation and other abuses, the document said.
The Obama administration has already proposed sweeping reforms for the country's financial regulation, including broad proposals to regulate derivatives.
Its plan is geared toward removing counterparty risks by requiring greater use of central counterparties and imposing stricter capital standards on participants.
The administration is also trying to encourage greater use of standardized contracts to help push the instruments onto a central clearing house and exchanges.
That has stoked concern among financial institutions who say certain contracts are customized to their clients and not meant to be cleared or traded on an exchange.
In the testimony, Geithner provided more detail on what will be deemed a standardized contract.
The administration will propose a broad definition that will be capable of evolving with the markets and will be designed to be difficult to evade, he said.
Other characteristics include high volume of transactions in the contract and a presumption that a derivative accepted for clearing by any central counterparty is standardized.
In the United States, four large banks control over 90 percent of the derivatives market: JPMorgan Chase, Bank of America, Citigroup and Goldman Sachs.
(Editing by Hans Peters and David Holmes)