Geithner adopts part of Wall St derivatives plan

The US Treasury’s plan to regulate the over-the-counter derivatives market outlined by Secretary Timothy Geithner on May 13 contains recommendations similar to those made by Goldman Sachs Group Inc, JPMorgan Chase & Co, Credit Suisse Group AG and Barclays Plc three months earlier.

The banks sent the Treasury a plan written in February titled “Outline of Potential OTC Derivatives Legislative Proposal,” saying the Federal Reserve should extend capital and margin requirements to companies and hedge funds that trade in the $592 trillion unregulated market, according to a document obtained by Bloomberg News and confirmed by the Treasury. Energy companies, corporations and hedge funds don’t face such requirements now, while banks do under central bank oversight.

“The banks appear to wish to maintain the intra-dealer market and raise barriers to new entrants to keep the OTC business as compartmentalised as possible and to protect their profitable market conditions,” said Brad Hintz, an analyst at Sanford C Bernstein & Co in New York. “The Street’s lobbyists appear to be asking for a ‘club’ structure in OTC trading.”

On May 13, US officials called for increased oversight of over-the-counter derivatives to reduce risk to the financial system. Derivatives contributed to the failures last year of Lehman Brothers Holdings Inc and American International Group Inc, leading to the seizure of credit markets and causing more than $1.4 trillion in writedowns and losses amid the worst financial crisis since the Great Depression.