The problems that plagued the derivatives industry in 1994 are a thing of the past, Gay Evans, chairman of the International Swaps and Derivatives Association, told the organization's members Thursday.

But even as the notional level of derivatives outstandings jumped 59.2% last year, to more than $18 trillion, the industry still faces the threat of regulation from regulators outside the United States, the chairwoman warned.

"Despite all the progress we've made, a specter is haunting our business - the specter of functional regulation," said Ms. Evans. "Many jurisdictions around the world are taking a regulatory approach that singles out derivatives as a special problem that deserves special treatment."

In her state of the industry address at the organization's annual meeting, Ms. Evans pointed out that the calls for regulation are different from those in years past. Whereas legislators in the United States were among those calling for regulation of the industry, these days they are singing a different tune.

In recent weeks, Jim Leach, chairman of the House banking committee, and Federal Reserve chairman Alan Greenspan have both said the issue has left the legislative radar screen. Mr. Greenspan recently told a group of derivatives professionals in Miami that officials can openly discuss the challenges facing the industry without "running the risk of legislative or regulatory overreaction."

But it is offshore where the threat of increased regulation is greatest, Ms. Evans said. In particular, she said the Banque de France has raised concerns about the use of credit derivatives, while officials in Singapore, Indonesia, the Philippines, Taiwan, and Australia are all considering guidelines for derivatives use.

"At a time when we are seeing barriers to free trade crumble in many parts of the world, it would indeed be ironic if obstacles were erected to the free flow of financial innovation," she said.

But these efforts will not eliminate problems associated with financial markets, she said. Indeed, the uneven regulation caused by these actions may actually lead to greater risks.

The approach can "lead to firms taking on risks they don't want, as it threatens to reduce the availability of risk management tools by increasing costs of limiting usage," she said.

Despite the setbacks, she pointed out the industry is making progress in some areas, such as netting agreements. Netting agreements allow counterparties in several derivatives transactions to offset amounts they owe in individual transactions against amounts they are due, thereby reducing their capital requirements and legal uncertainties.

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