WASHINGTON -- The Clinton Administration does not believe derivatives are inherently more dangerous to financial markets than other risk management tools, Frank Newman, Treasury undersecretary for domestic finance, said yesterday.
Recent large losses by corporations using derivatives had no destabilizing effect on the derivatives market as a whole, Newman said.
"Derivatives, we believe, are a perfectly legitimate risk management tool. They can be used wisely or unwisely, like a lot of other things," Newman said during a speech at a conference of the Bank Administration Institute.
"There have been some very notable cases lately where investors got hurt. That hasn't hurt the system," he said. Yet the tremendous growth of derivatives and the complexity of certain new products has prompted regulators to sit up and take notice, Newman said.
"They do require attention. They are growing very rapidly in sheer volume of transactions," he said. "There are some more exotic instruments around, and obviously they require a little more attention, but the vast majority of contracts are much more of the traditional mechanisms."
One general aim of the administration is to hold financial institutions accountable for their own use of derivatives, Newman said. Firms need to have "adequate policies and internal controls" to handle their exposure to derivatives, he said.
Regulators also increasingly will hold senior executives responsible for their firms' derivatives activity, Newman said. "This is something senior management ought to be responsible for," he said. "Does your board have adequate information.?"
Newman also said the current terminology used to describe derivatives is very imprecise as are the tools now used to measure the scope of derivatives activity. He predicted that the regulation of derivatives will evolve as the market itself evolves. "This whole process is in flux," he said.
