Congress expected to gingerly take approach toward derivatives, aides say.

WASHINGTON -- Lawmakers are likely to take a modest approach toward crafting derivatives legislation and will look toward existing regulation as well as efforts from the industry to set needed safeguards, congressional aides said yesterday.

"We're going to keep what we feel is a modest approach," said Terri Miller, a House Banking Committee aide. "We're not out to eliminate derivatives," she told a conference on derivatives usage by mutual funds hosted by the Strategic Research Institute.

"We will also continue our dialogue with the regulators and industry representatives," Miller said. "We feel to a great extent that the market will police itself."

She said congressional aides recently have been talking to futures exchange officials about curbing regulations that put the exchanges at a disadvantage. Miller said lawmakers want to make sure that regulators are empowered to take necessary actions without imposing too much of a regulatory burden.

"We don't want to drive the business oversees," she said. "We're not prohibitors, we're not banners, we just want to make sure they're being used properly."

Nonetheless, Miller said that recent losses may be a warning sign that some changes in overseeing the derivatives market are needed.

"We should look at the losses as a possible early warning sign," she said. "You don't want Congress to legislate when there's a crisis."

Miller said suitability is probably the most controversial issue with respect to derivatives.

The Office of the Comptroller of the Currency has come up with appropriateness standards for banks and is drafting suitability rules with respect to government securities, including government derivatives.

The Securities and Exchange Commission along with top securities industry representatives is expected to release next month voluntary guidelines for derivatives firms affiliates, which could include suitability standards.

Consuela Washington, counsel to the House Energy and Commerce Committee, agreed that setting suitability standards is a difficult issue.

"A lot has been said about suitability," Washington said at the conference. "It's also one of the toughest issues to come along."

Washington said that it is unclear whether Rep. Edward Markey, D-Mass., will reintroduce derivatives legislation.

"We're still trying to figure out who's in charge," Washington said. She expects committee structure changes, which may include changes in the energy and commerce panel, to be out next week.

"It should come as no surprise that when you're a 900-pound gorilla that everyone wants what you have," Washington said about the rumored committee changes. "Needless to say, a number of our Republican members were not thrilled" with the prospect of losing jurisdiction over issues that could include securities.

Washington said that the rumored committee changes won't do away with jurisdictional disputes.

In an effort to curb jurisdictional disputes relating to banking and securities issues, lawmakers may leave securities oversight in the House Energy and Commerce Committee but place bank securities issues under the House Banking Committee.

Nonetheless, with the expected changes, jurisdictional questions are still likely to exist, Washington said.

"There still needs to be coordination among the committees," Washington said. She added that futures trading oversight isn't likely to be taken from the agriculture committees in the House and Senate.

Meanwhile, Sen. Alfonse D'Amato, R-N.Y., who is expected to become chairman of the Banking Committee, will probably become more involved in derivatives oversight, a former banking aide said.

"I suspect he'll have to become more active," said Sharon Heaton, former senior counsel to the Senate Banking Committee. She left her post two weeks ago.

Heaton also agreed that suitability standards will remain a concern in the next Congress.

"When dealing with pension funds and municipalities, you do have a different series of concerns," Heaton said. "When people are putting the money in funds, they have to understand those risks."

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