US plans derivatives regulations
The US Treasury wants more regulation of derivatives - the complex financial instruments that brought down some of Wall Street's biggest names.
Proposals to be set out by Treasury Secretary Timothy Geithner will call for an electronic system to monitor buying and selling in the market.
Firms trading in derivatives will need enough capital in case they default and will face tough reporting requirements.
AIG and Lehman Brothers were among the firms ruined by dealing in derivatives.
“ The days when a major insurance company could bet the house on credit default swaps with no one watching and no credible backing to protect the company or taxpayers from losses must end ” Timothy Geithner Treasury Secretary
Perhaps the most notorious form of derivative is the credit-default swap.
Insurance giant AIG sold these to investors as a form of insurance to protect against defaults on mortgage-backed securities.
But the firm had to accept a hefty federal bailout after it was unable to support the contracts.
Under the Treasury's plan, the likes of AIG would have to prove they had enough reserve capital to support their sale of the derivatives.
These measures would reduce risk to the financial system, Mr Geithner said.
Hedging and speculation
Existing US law largely excludes regulation of such instruments - referred to as "over-the-counter" because they are privately traded.
"The days when a major insurance company could bet the house on credit default swaps with no one watching and no credible backing to protect the company or taxpayers from losses must end," Mr Geithner told Congress.
In a draft letter, to congressional leaders, the Treasury said that "all (over-the-counter) derivatives dealers and all other firms whose activities in those markets create large exposures to counterparties should be subject to a robust regime of prudential supervision and regulation".
"Key elements of that robust regulatory regime must include conservative capital requirements, business conduct standards, reporting requirements and conservative requirements relating to initial margins on counterparty credit exposures," the department added.
Derivatives are basically financial contracts which are a way of allowing traders to hedge their bets.
They can protect companies and banks against unexpected developments, for example sudden falls or rises in the value of currencies or commodities.
Derivatives are also used in speculation, whereby investors can increase profit if the value of the underlying contract moves in the way they expect.
Story from BBC NEWS:http://news.bbc.co.uk/go/pr/fr/-/2/hi/business/8049123.stmPublished: 2009/05/13 21:35:16 GMT© BBC MMIX
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default (FAIL) verb [I]

to fail to do something, such as pay a debt, that you legally have to do:People who default on their mortgage repayments may have their home repossessed.



default noun [C or U]

Defaults on loan repayments have reached 52 000 a month.Any default on your mortgage repayments may mean you will lose your house.Since they refuse to reply, I think we've won the argument by default (= because of their failure to act).The default rate (= the number of people failing to do something) is estimated at 1 in 10 of tax payers.



notorious adjective

famous for something bad:one of Britain's most notorious criminalsThe company is notorious for paying its bills late.



notoriously adverb

The crime of rape is notoriously (= famous as being) difficult to prove.



notoriety noun [U]

the state of being famous for something bad:He achieved/gained notoriety for murdering eleven women in the north of England.



hefty adjective

large in amount, size, force, etc:a hefty bill/fineHer salary will go up by a hefty 10%.a hefty woman with dyed blond hair



bail sb/sth out (HELP), UK ALSO bale sb out phrasal verb [M]to help a person or organization that is in difficulty, usually by giving or lending them money:She keeps running up huge debts and asking friends to bail her out.



bailout noun [C usually singular]

MAINLY USThree years of huge losses forced the bank to seek a government bailout.The Clinton administration last winter assembled the $50 billion emergency bailout package to ease a financial crisis in Mexico.