Friday, April 23, 2010

Treasury won't seek customized derivatives ban

Original posted on Reuters:

The U.S. Treasury is not proposing a ban on customized derivatives, nor is the U.S. Senate considering one, the Treasury's number two official said on Thursday.

Deputy Treasury Secretary Neil Wolin told an International Swaps and Derivatives Association meeting there was a valuable role for customized contracts traded on over-the-counter markets.

"Where managing a particular risk requires the use of a customized contract, we do not object to customization," Wolin said. "But to ensure that the market in customized products does not give rise to unmanaged risk, dealers and other major swap market participants must be subject to much higher prudential standards than they are today."

Wolin's remarks come against a controversy over a proposal to sell derivatives contracts based on Hollywood box office receipts, which would let investors bet on movie ticket sales.

U.S. Treasury Secretary Timothy Geithner told ABC Television's "Good Morning America" program he did not think the movie futures were a good idea. But he said he was not inclined to ban specific products and would instead work to make derivatives markets safer.

Wolin scolded ISDA for taking only tepid initial steps toward transparency, standardization of contracts and more effective collateral requirements.

"We welcome those commitments. But make no mistake: they are not enough. There can be no substitute for effective regulation and oversight of a market so large, so important and -- still today -- so unsupervised."

Wolin said that by imposing conservative capital and margin requirements on derivative dealers and major market participants, "we will help ensure that no firm is able to take large, highly leveraged risks in the derivatives markets, without holding adequate capital."

The deputy Treasury chief also said the department will work with Senate Agriculture Committee Chairman Blanche Lincoln and Senate Finance Committee Chairman Christopher Dodd, and Senate leadership to "make sure that the final derivatives provisions remain strong."

On Wednesday, the Agriculture Committee approved a derivatives bill that would require banks to get out of the swaps markets if they want to keep their federal deposit insurance. Wolin made no mention of this provision in his remarks and declined to comment on specifics of the Senate bills to reporters after his speech.

In addition to laying out the Treasury's arguments for central clearing and standardized contracts and higher capital requirements, he also said any exemptions from such clearing requirements for non-dealers or major swap participants must be kept narrowly focused.

The purpose of this exemption is for firms that are hedging real risks and are predominantly engaged in nonfinancial activities, he said.

"Any exemption must be drawn narrowly. We cannot allow a reasonable exception to become an expansive loophole," Wolin added.

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