House Panel Votes to Regulate Derivatives

     WASHINGTON (CN) – In a step toward a potentially major financial overhaul, the House Financial Services Committee voted Thursday to give federal regulators oversight of the roughly $592 trillion derivatives market for the first time, something the Obama administration has long called for as part of its effort to reform the financial system.

     The 43-26 vote fell mostly along party lines.
     The measure would impose regulation on the sale of most derivatives.
     Treasury Secretary Timothy Geithner has said the secrecy of derivatives played a major role in the economic crisis and prevented the government from realizing the extent of the catastrophe.
     The measure is part of a bill up for debate in at least four committees in the House and Senate.
     A derivative is a financial contract that transfers to another party the risk that an asset’s price will change. In the case of American International Group, the company had sold protection against investment risks without adequate capital to back up its commitments, resulting in a $180 billion government bailout.
     Over-the-counter derivatives, which are simply privately negotiated derivatives, grew explosively, rising more than six-fold in the last 10 years. They now play a critical role in financial markets, leading many to push for regulation.
     The measure falls in line with the Obama administration’s call that standardized derivative trades be reported to and cleared by the Commodity Futures Trading Commission and the SEC.
     The finance committee will spend the rest of the day debating a bill creating a new federal regulatory agency.
     The Obama administration has proposed a Consumer Financial Protection Agency that would require more capital cushion behind investments and would extend regulation beyond the banking sector to cover all firms that play a critical role in the market.
     Obama has said that the broader goal of these reforms is to make the market more resilient against periodic crises and price bubbles in order to prevent a repeat of the conditions that created the current economic crisis.

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