WASHINGTON - Iowa Congressman Jim Leach on Monday called on financial regulators to beef up supervision of the derivatives market.
Rep. Leach warned that he would introduce comprehensive legislation to control the financial industry's use of these relatively new financial instruments if the regulators drag their feet.
The lawmaker, who is the House Banking Committee's ranking Republican, presented 30 detailed recommendations on derivatives issues including accounting, disclosure, and capital treatment.
Study of Risks Posed
They were inspired by a 900-page study which in part focused on the risks posed by the rapid expansion of derivatives activities by banks and other financial institutions.
"Early in January you can expect some possibility of a broad framework bill to be introduced," Rep. Leach said. "But that approach will be tempered by what interim response we see from the regulators and the administration."
The recommendations mark Rep. Leach's first formal proposal for government regulation of the derivatives market. The congressman has become one of the most vocal lawmakers on the subject, issuing warnings on the risks of the growing market, but calling for a thoughtful, reasoned response.
His recommendations included the following:
* The creation of an interagency commission to establish uniform rules for capital, accounting, disclosure, and suitability for dealers and end users.
* Harmonization of cross-industry and cross-border standards.
* The development of guidelines to discourage unsophisticated, poorly capitalized firms from trading derivatives.
"In the derivatives arena, there is a particular problem of new kids on the block," Rep. Leach said. "If problems develop in the derivatives marketplace, it is a good bet that they will be less likely to stem from the major firms operating in the mainstream than from firms that are new entrants or operating at the fringes of the market."
Rep. Leach's recommendations follow several recent reports on derivatives activity.
The Commodity Futures Trading Commission recently recommended the formation of an interagency task force to consider derivatives regulation. And the four federal banking agencies have already launched a working group to discuss disclosure and accounting treatment of the instruments. But Rep. Leach said he wanted a more structured, coordinated initiative.
"We have to have a formalized effort," he said. "When people know they are accountable, they're going to be more concerned."
Douglas E. Harris, the comptroller's deputy on derivatives issues, said that many of the disclosure and accounting issues recommended by the congressman are already being addressed by the agencies in their interagency reviews.
In addition, he said, some of Rep. Leach's proposals mirror guidelines that the Office of the Comptroller of the Currency recently released for national banks engaged in derivatives trading.
But some of Rep. Leach's recommendations go well beyond the comptroller's statements.
For example, while the comptroller suggested that national banks evaluate whether their customers understand the risks of derivatives, Rep. Leach would have regulators consider explicit "suitability standards" that would carry legal weight and expose firms to potential liability.
Rep. Leach also recommended strengthening risk-based capital standards and maintaining strong leverage capital standards; establishing joint regulatory exams for major derivatives dealers and joint training programs for bank examiners; and barring banks without technical expertise from engaging in derivatives activities.
