The government's top securities regulator called Thursday for Congress to impose new oversight on financial derivatives, warning that allowing risky instruments like credit default swaps to continue unfettered could bring further economic damage.
The chairman of the Securities and Exchange Commission, Mary Schapiro, said banks that deal in the swaps must be subject to rigorous requirements for holding capital. They must also conduct their business in accordance with rules and their price information must be transparent, she said.
Schapiro made the statement as credit default swaps, a form of insurance against loan defaults, have come under heightened scrutiny in the U.S. and Europe.
The leaders of France, Germany and Greece have called for a clampdown on trading in the swaps, which they blame for worsening Greece's debt crisis and undermining the European currency in recent weeks. A nationwide strike in Greece to protest the cash-strapped government's austerity measures — the second strike in a week — brought the country to a virtual standstill Thursday.
Another U.S. regulator, Commodity Futures Trading Commission Chairman Gary Gensler, said Wall Street banks are seeking exemptions to the proposed new regulations for derivatives that could shield more than half the trades that should be subject to disclosure. Gensler criticized Wall Street's stance on proposed oversight for the shadowy $600 trillion market for derivatives — blamed for hastening the 2008 financial crisis.
Credit default swaps account for an estimated $60 trillion of the worldwide derivatives market.
Gensler told a financial industry gathering in Florida that Wall Street has not been "enthusiastic" about the proposed new regulations now before Congress.
Schapiro didn't specifically address the Greek situation or the call by European leaders for restraints on swaps trading, in her response to a question from The Associated Press. On Tuesday, the European Commission threatened to ban speculative trading of credit default swaps by investors who don't actually own a country's underlying debt — known as "naked" trades.
Referring to credit default swaps generally, Schapiro said in the statement: "If we continue to allow these risky financial products to operate in the dark we should not be surprised at the damage we find when the lights come on. That's why it is so important for Congress to bring ... derivatives under the regulatory umbrella."
In addition to capital requirements that are needed for dealers in the swaps, regulators and market players "must have access to information to know what is being traded, at what price and in what volume," Schapiro said. "And regulators must have the tools to police the markets, including monitoring trends and writing rules to address abuses."
The collapse of credit default swaps nearly toppled American International Group Inc. in the fall of 2008, prompting the government to support the insurance conglomerate with about $180 billion in aid.
Gensler, in several speeches in recent days, has been renewing his call for new regulation aimed at bringing transparency to, and prevent manipulation in, the sprawling global derivatives market. At his address Thursday to the meeting of the Futures Industry Association in Boca Raton, Fla., he also got in some mild barbs at Wall Street.
Billions in trading profits for the big investment banks could be threatened by new rules for derivatives, which passed the House in December as part of the overhaul of financial regulation and is now before the Senate. Many in the financial industry have indicated support for requiring derivatives trades to go through clearinghouses, "that is, as long as it only applies sometimes," Gensler said.
While more than 1,000 U.S. banks trade derivatives, five big Wall Street institutions — JPMorgan Chase & Co., Goldman Sachs Group Inc., Bank of America Corp., Citigroup Inc. and Wells Fargo & Co. — account for about 97 percent of the total reported to be held by U.S. banks.
"Wall Street appears to be aligning themselves with corporate end users in an effort to exempt customer transactions from central clearing," Gensler said. "Wall Street seems to be making the case" that banks using derivatives to hedge against risk should be exempt from having to use clearinghouses in the same way as derivatives trades involving companies, he said.
Only about 9 percent of derivatives trades involve companies using them as a hedge, which Gensler and other regulators consider a legitimate exception from the clearing requirements.
The exception the banks are seeking, he warned, could leave hidden 60 percent of the derivatives trades that rightfully should go through clearinghouses because they aren't customized transactions designed for companies.
"Let there be no mistake: Wall Street has not been enthusiastic about this reform," Gensler said in the text of his speech. "After the worst crisis in 80 years, though, we need real reform that protects the American public."
The value of derivatives hinges on an underlying investment or commodity — such as currency rates, oil futures or interest rates. The derivative is designed to reduce the risk of loss from the underlying asset.
Companies of all kinds use derivatives to hedge against risks — airlines ensuring against spikes in fuel prices, for example. A potent coalition of nearly 200 companies that use derivatives — including Boeing Co., Caterpillar Inc., Ford Motor Co., General Electric Co. and Shell Oil Co. — has lobbied Congress to make the case that legislative proposals to regulate derivatives could severely increase costs for corporate America.
Financial institutions that deal in derivatives are opposed to mandatory clearing for corporate customers because banks say it would have the effect of discouraging companies from using swaps to manage risks, Cory Strupp, managing director for government affairs of Wall Street's biggest lobbying group, the Securities Industry and Financial Markets Association, said Thursday.