27 July 2009

Treasury plans to regulate OTC and securities market

Treasury Secretary Geithner announced to publish a draft legislation “very soon” and called on international banking regulators to develop to resolve failures of cross border financial firms.

Treasury Secretary Geithner announced to publish a draft legislation “very soon” and called on international banking regulators to develop to resolve failures of cross border financial firms.

 

“The OTC derivatives markets became a major channel of contagion through the financial sector in the crisis”, Treasury Secretary Geithner said in his testimony before the House Financial Services Committee and announced to issue a draft legislation on derivatives “very soon”.

 

The plan would provide strong regulation and transparency for all OTC derivatives regardless of whether the derivative is customized or standardized, he said. “In addition, I discussed how our plan will provide for strong supervision and regulation of all OTC derivative dealers and all other major participants in the OTC derivative markets”.

 

Geithner also intends to propose enhanced regulation of the securitization markets. Securitization created various conflicts of interest that market discipline failed to correct, Geithner said. The lack of transparency prevented market participants from understanding the full nature of the risks they were taking, he underlined.

 

The current plan requires securitization sponsors to retain five percent of the credit risk of securitized exposures; it requires transparency of loan level data and standardization of data formats to better enable investor due diligence and market discipline; and, with respect to credit rating agencies, it ends the practice of allowing them to provide consulting services to the same companies they rate, requires these agencies differentiate between structure and other products, and requires disclosure of any "ratings shopping" by issuers.

 

On crises resolution, Geithner outlined underlined that “no one should assume that the government will step in and bail them out if their firm fails”.

 

The Treasury’s proposal is modeled on the existing FDIC resolution regime for banks and will “allow the government to resolve failing large, interconnected financial institutions in a way that imposes costs on owners, creditors and counterparties”, he said.

 

The biggest firms should prepare, continuously update, and periodically provide to regulators a credible plan for their rapid resolution in the event of severe financial distress.

 

Finally, with regard to creating an international level playing field, Geithner announced to “call on the international banking regulators to develop proposals by the end of this year for countries to have the necessary tools to quickly resolve failures of cross-border financial firms.”

 

Full speech

 

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