Geithner seeks more control on derivatives

By Charles Abbott

WASHINGTON (Reuters) - Obama administration officials outlined comprehensive proposals to rein in the free-wheeling market in financial derivatives on Friday, which has been blamed for helping to create the global economic crisis, and proposed stronger investor protections.

More administration proposals are expected in coming weeks to expand the powers of the federal agencies that oversee trillions of dollars in equities and futures markets.

The Commodity Futures Trading Commission could act on its own power and put new regulations in place by late October, said one of its five commissioners. The agency plans hearings this summer on whether to limit the number of oil and other futures contracts that a trader can hold, as a way to limit market volatility.

"We're looking at a pretty fast timeline," Bart Chilton, a CFTC commissioner, told Reuters in an interview. "We're going to use our authority to the fullest extent possible. That doesn't mean we're going to be draconian or go too far."

Treasury Secretary Timothy Geithner told a joint hearing of two U.S. House committees that over-the-counter derivatives must be brought under federal regulation. Financial reform was a front-rank issue when Congress convened in January but was overtaken by health care reform and climate change bills.

"We propose to require all OTC (over-the-counter) derivatives dealers ... be subject to substantial supervision and regulation, including conservative capital requirements, conservative margin requirements and strong business conduct standards," Geithner said in comments that acknowledged there were few limits in the past.

OTC derivatives are complex instruments whose value is based on an underlying asset. The sector peaked at a face value of $700 trillion in 2008. Analysts say OTC derivatives amplified last fall's economic slump, partly because some firms invested too heavily and cash reserves were far too small.

In the United States, four big banks control more than 90 percent of derivatives markets: JPMorgan Chase, Bank of America, Citigroup and Goldman Sachs.