WASHINGTON -- Federal regulators are worried that the rapid growth of sophisticated derivative transactions may pose risks for globally linked financial markets, but they believe those risks are manageable.
Susan Phillips, a Federal Reserve Board governor, and Brandon Becker, deputy director of the SEC's division of market regulation, both told of fears that the failure of a derivatives trader or other disruption in the derivatives market could have broader consequences.
These include disruption of stock markets and damage to large broker-dealers and banks.
However, both officials suggested that, at present, the risks can be kept under control.
Both stressed in remarks made here to the International Swap Dealers Association's North American Regional Conference that more information was needed about how firms manage and account for these products, as well as on the risks they pose.
Mr. Becker said his views were not necessarily the Securities and Exchange Commission.
The remarks of Ms. Phillips and Mr. Becker come almost a year after Gerald Corrigan, president of the New York Federal Reserve Bank, told bankers involved in derivatives that they should "take a hard look" at these transactions.
"Derivatives" is a broad category that includes trading in instruments such as options and interest-rate and currency swaps.
These transactions are not subject to the same level of regulation as items that appear on balance sheets.
Mr. Corrigan's remarks triggered fears about derivatives, Consuela Washington, counsel for the House Energy and Commerce Committee, told the swaps group.
She said some members of Congress and others began to call for derivatives studies, fearing that "regulatory black holes" may exist with respect to over-the-counter instruments.
But Ms. Phillips and Mr. Becker, in their speeches to the group, were more specific about concerns surroundings derivatives and how regulators are addressing them.
Ms. Phillips said regulators are worried about derivatives because, "We're seeing more and more activities by a broader range of financial and nonfinancial firms." She added that derivatives "have become an important source of profits for banks and other intermediaries."
A key concern, she said, is that the failure of a large firm or dealer may result in a "loss of liquidity," which could have a "domino effect" and cause problems for other firms.
Ms. Phillips said the biggest concern about derivatives among regulators is "whether the reporting and accounting systems have fully caught up to the practices in the market."
