WASHINGTON -- A key House subcommittee chairman said Thursday that he plans to begin drafting legislation aimed at curbing the risk in the $12 trillion derivatives market, but Republicans and some Democrats on the panel urged caution.

"I cannot agree with those who would argue that the 'thousand points of light' of industry volunteerism and a few incremental changes by regulators can effectively address the risks posed by exotic derivatives," said Rep. Edward J. Markey, D-Mass.

"The derivatives market will operate much more efficiently if there is an effective regulatory structure in place," said Rep. Markey, who chairs the House Energy and Commerce subcommittee on telecommunications and finance.

But the subcommittee's senior Republican, Rep. Jack Fields of Texas, said legislation is unnecessary.

"What is so unique about derivatives that requires changes in the regulatory structure already in place?" he asked, arguing that regualtors already have responsibility for equally risky activities.

"The management of risk is fundamentally a management decision," with oversight from corporate boards of directors, he said.

And Rep. Lynn Schenk, D-Calif., said the very fact that the derivatives market was so large demonstrates "that derivatives make good financial sense for a myriad of businesses."

Ms. Schenk said she had sympathy for the "unsophisticated town treasurer" who got in over his head with derivatives.

Educational Remedy

"Perhaps our time would he better spent educating town treasurers than in protecting Fortune 500 companies," she added, however.

The House Energy and Commerce subcommittee met to review a report that was issued Wednesday by the General Accounting Office. The congressional watchdog agency concluded that "significant gaps and weaknesses" existed in the regulation of derivatives, and urged new legislative and regulatory steps.

In particular, the GAO urged Congress to tighten regulation of securities and insurance firms involved in derivatives.

Regulation of bank derivative activities, while not perfect, is significantly better than regulation for securities and insurance firms, said Comptroller General Charles Bowsher, head of the GAO.

Rep. Markey agreed, arguing that a "regulatory black hole" exists with respect to the insurance and securities industry.

The GAO report sparked a flurry of activity on Capitol Hill. In addition to the House subcommittee hearings, the Senate Banking Committee also met Thursday afternoon to hear from Mr. Bowsher.

Senate Banking Committee Chairman Donald W. Riegle expressed broad concern about the regulation of the derivatives market.

"I do not think it is right that insured deposits are used to fund potentially speculative derivatives operations," the Michigan Democrat said during his hearing.

Sen. Riegle also said there is too little disclosure about derivatives activity, and he is concerned that clearinghouses have not been formed to reduce systemic risk.

"I think it is dangerous to permit major derivatives dealer operations in firms with little or no federal regulation or oversight," he added.

Pricey Professionals

The GAO's Mr. Bowsher warned that any effort at regulation would be hampered by the difficulty of obtaining qualified people.

To compensate, Mr. Bowsher said, the GAO is urging Congress to require a higher degree of corporate governance - similar to the safety and soundness standards mandated for banks in the 1991 Financial Institutions Reform, Recovery, and Enforcement Act.

Mr. Markey said he would look at the GAO's recommendations as he drafted his own bill. The subcommittee chairman conceded that legislation faces a number of obstacles this year, but expressed confidence that it could be dealt with.

Meaningful derivatives legislation is considered a long shot this year. Instead, most observers believe the GAO report is more likely to serve as a starting point for next year's legislative debate.

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