WASHINGTON -- One of the authors of the General Accounting Office's derivatives report yesterday defended the report's call for Congress to enact legislation to close gaps in the federal regulation of derivatives.

James Bothwell, the director of financial institutions and market issues for the GAO, told a group of economists meeting here that the report does not call for a major new regulatory regime for derivatives.

The report, which was issued May 18, merely recommends that the derivatives-related regulatory safeguards that are already in place for banks be extended to securities firms and insurance company affiliates, he said. These affiliates, unlike banks, are largely unregulated at the federal level, Bothwell said.

"The regulatory system that we're talking about already exists for banks, which represent about 70% of the derivatives market," Bothwell told those attending a luncheon sponsored by the National Economists Club.

The GAO is recommending that this regulatory system be extended to the five securities firm affiliates and three insurance company affiliates that are major dealers in the derivatives market, he said.

"What we're talking here is a handful firms in this market," Bothwell said. "I don't think it should be a great burden" or impose major costs for those firms, he said.

One economist asked Bothwell why securities firm affiliates need to be federally regulated since they are subject to "market discipline" and must maintain certain levels of capital to obtain and keep triple-A credit ratings.

"Our response to that is, if you believe that there's a public interest here, you shouldn't rely on a private institution to protect that interest," Bothwell said.

Credit rating agencies have not always been able to predict the financial troubles of companies, he said, reminding the economists that "Mutual Benefit [Life Insurance Company] was triple-A-rated one day and bankrupt the next."

Bothwell said that the GAO "is not trying to deter" the derivatives market, but believes that it is necessary for Congress to give federal regulators legislative authority to oversee all derivatives dealers and to set capital standards for their derivatives activities.

The GAO official was asked by another economist why the recommendations in the derivatives report should be given weight when federal regulators and industry officials all appear to be opposed to them.

Bothwell said he believes the Clinton Administration "is sort of in a wait-and-see [mode]" on the derivatives market. Federal regulators may be waiting for the Treasury Department, which oversees the working group on financial markets, to take a strong stance, he said.

Securities and Exchange Commission Chairman Arthur Levitt has left the door open to the view that derivatives legislation may be needed in the future, Bothwell said. Mary Shapiro, an SEC commissioner who was recently nominated to become chairman of the Commodity Futures Trading Commission, has expressed concerns about derivatives and may re-examine the commission's use of its authority to exempt swaps as futures,

he said.

The International Swaps and Derivatives Association, which has strongly criticized the report, does not represent all derivatives market participants, Bothwell said.

Swiss Bank Corp. strongly endorsed the GAO report two weeks ago, he said.

Bothwell said that the Swiss Bank endorsement may have been prescient. The Financial Times yesterday reported that the company may have suffered up to $70 million in losses from derivatives dealings with a financially troubled Turkish bank that could not fulfill its obligations.

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