WASHINGTON - Treasury Secretary Nicholas Brady wamed yesterday that over-the-counter derivatives "present real and substantial risks" and should be monitored by a single agency that regulates both the stock and derivatives markets.

But Brady said in a speech at Harvard University's Kennedy School of Government that federal regulators should not overreact to the rapidly growing derivatives market.

"The government's initial role should be limited to ensuring that the derivatives industry has its own house in order," he said.

Concerns about the liquidity of the derivatives markets have evolved because of two developments, he said. Derivatives have allowed market participants to take positions that create linkages between different market segments, and there has been a "clear trend" toward the concentration of credit risk in a few highly rated firms.

Brady said that while settlement problems in the derivatives markets "have been rare so far ... we should maintain a watchful eye."

He said the stock and derivatives markets should be regulated by one agency because the modern-day financial system "is in reality one market."

He reiterated a Bush administration call to combine the Securities and Exchange Commission and the Commodity Futures Trading Commission to eliminate "turf fights."

He also repeated another proposal that Congress create single committees that can deal with both stocks and derivative products to eliminate jurisdictional disputes.

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