US's Geithner wants global rules on derivatives

US Treasury Secretary Timothy Geithner on Monday called for new global rules to govern the USD 600-trillion derivatives market, warning that light regulation in some nations could fuel dangerous risk-taking.

Speaking to a banking conference, Geithner urged other countries to follow the United States in tightening derivatives trading rules and insisting as many trades as possible move through central clearing houses where they can be monitored.

"The United States has taken an important leadership role in comprehensive reform of the over-the-counter derivatives market," he said. "Alignment with Europe and Asia is essential."

Derivatives, which are financial instruments that derive their value from some underlying variable, were at the heart of the 2007-2009 financial crisis. Alarm over derivatives trades played a large role in the government-led rescue of Bear Stearns, the collapse of Lehman Brothers and the near-collapse and bailout of insurance giant AIG.

Geithner noted that last year's Dodd-Frank overhaul of US financial regulations requires that standardized derivative contracts be centrally cleared.

He said the new law excludes some complex, highly customized derivatives from the clearing requirement, but that in those cases heightened margin standards would apply to certain counterparties.

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Geithner urged other nations to adopt similar margin requirements.

"Just as we have global minimum standards for bank capital - expressed in a tangible international agreement - we need global minimum standards for margins on uncleared derivatives trade," he said.

US regulators are moving to put in place hundreds of rules required by the Dodd-Frank regulatory oversight law. They aim to toughen derivatives regulation, require banks to hold more capital and put in place rules on banker pay, among many other reforms.

Banking groups and Republicans in Congress have called for delaying or scaling back many of the new regulations.

Geithner said that it would be a mistake for other jurisdictions to try to benefit from US efforts to tighten its regulations by reducing theirs to try to gain business.

He cited the example of Britain, which has reversed course after pursuing a relatively easy regulatory policy in the hope of garnering banking business.

"The United Kingdom's experiment in a strategy of 'light touch' regulation to attract business to London from New York and Frankfurt ended tragically," Geithner said.

"That should be a cautionary note for other countries deciding whether to try to take advantage of the rise in standards in the United States," he added.

Geithner said the United States wants to avoid "another race to the bottom around the world" as efforts are made to impose regulations to lessen the risk of another financial crisis.

But, he said, it will take cooperation.

"As we act to contain risk in the US, we want to minimize the chances that it simply moves to other markets around the world," Geithner said.

"Risk in derivatives will become concentrated in those jurisdictions with the least oversight," Geithner said. "This is a recipe for another crisis."