WASHINGTON — U.S. Treasury Secretary Timothy Geithner sought Friday to assuage concerns from lawmakers over the impact of new derivatives regulations. Many lawmakers fear that the new rules may impose higher costs on farmers, airlines, oil producers and others who need the customized, over-the-counter products to hedge their risks.
"If we were to mandate central clearing of all products, we would in effect be banning customized products," Mr. Geithner said. "We’re not proposing to do that."
The Obama plan, which Mr. Geithner discussed during a joint hearing of the House of Representatives’ Agriculture and Financial Services committees, proposes to bring the entire over-the-counter derivatives market under federal regulation and empower securities and commodities regulators to police them.
Many believe problems caused by derivatives helped precipitate the financial crisis. Products considered "standardized" would need to be processed through clearinghouses.
They also would likely migrate onto regulated exchanges or electronic execution systems to help make prices more transparent. Many contracts that companies tailor to meet their own unique business risks, however, wouldn’t be forced into clearinghouses, but would instead be subject to reporting and stricter capital requirements.
Mr. Geithner stressed that margin and capital requirements for these products need to be higher because of the inherent danger of defaults. The Treasury secretary said those charges will encourage greater use of clearing and exchange-trading, which he said would actually make for less expensive hedging.
Some lawmakers fear mandated clearing and higher capital charges could hurt small businesses that won’t be able to afford customized hedging anymore.
"Denying or effectively limiting access to these risk tools by eliminating, in effect, OTC contracts, which mandated clearing essentially does, jeopardizes the ability to hedge risk, exposing customers to increasing price volatility," said Rep. Frank Lucas (R., Okla.), the ranking member of the House Agriculture Committee.
Mr. Geithner’s testimony Friday didn’t shed much new light on details that lawmakers and industry players are clamoring to hear. Specifically, it remains unclear how regulators will determine when a contract is considered standardized. Mr. Geithner conceded the administration isn’t ready to carve out a definition, although he promised it would be broad and "designed to be difficult to evade."
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