WASHINGTON -- Federal Reserve Vice Chairman David W. Mullins urged the derivatives industry Wednesday to implement programs that keep the industry sound, in order to stave off stiff regulatory action.

Speaking in New York before the International Swaps and Derivatives Association, Mr. Mullins said without this self-regulation, the derivatives industry could face the same regulatory morass as the banking and government securities markets.

"If the industry does not assume the responsibility for addressing public policy concerns and do this job well, others are quite willing to take discretion out of the industry's hands and do the job perhaps much less well," he said.

On Congress' Agenda

In his speech, which was released here, Mr. Mullins said he anticipates that Congress will take up the issue of derivatives regulation soon after several government and industry studies are released later this year.

And he warned that policymakers are increasingly focusing on investor protection issues, and this interest could spill over into the derivatives industry.

"Although users of derivatives products mostly are institutions, they are not necessarily sophisticated institutions," he said.

The Fed governor also laid out a public-policy agenda to foster the industry while minimizing systemic risks.

Recommended Steps

He urged central banks to: strengthen the legal framework for derivatives; coordinate tax regulations; modernnize accounting and disclosure standards; and build supervisory expertise.

Mr. Mullins also called for speedy implementation of a recent Basle proposal to recognize, in capital standards, the risk-reducing benefits of netting arrangements.

"We must be concerned about efficiency and flexibility in the regulatory process," Mr. Mullins said. "Regulatory micromanagement would be particularly counterproductive in this innovative marketplace."

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