The Federal Reserve Bank of New York is reevaluating its stance on derivatives, its top official said last week.

In a speech before the Money Marketeers of New York University, New York Fed President William J. McDonough said although banks have done a good job in evaluating their risks, more could be done.

"Our challenge is to design a supervisory approach that evolves with the swift advances in risk-management practices as much as is practicable," he said. "These advances in risk management and internal control have had important implications for the Federal Reserve's supervisory approach to derivatives and other trading activities."

Mr. McDonough's remarks echoed comments prepared by Robert Parry, his counterpart at the Federal Reserve Bank of San Francisco, for a meeting of the Washington Bankers Association.

Parry said he believed it was a mistake to say the banking industry is facing extinction, as some industry observers have suggested.

But, he said, regulators must move toward integrating securities and insurance powers with banking. "It also means no overreacting to burgeoning areas like derivatives and being sensitive to the costs of regulation in general," he said.

Mr. McDonough declined to specify what steps his supervisors are taking. But he pointed to recent problems in the markets that underscore the need for banks to insulate themselves from losses.

"After the long bull markets in many equities, government bonds and emerging markets, the experience of this year has had a useful, sobering effect," he said. Mr. McDonough also called for greater disclosure, saying he was concerned that major market participants did not have enough information about their counterparties in the capital markets.

Mr. McDonough argued that more disclosure would spur better internal-risk reporting and more analysis by investors, rating agencies, and analysts. That, he said, would subject the activities to the discipline of the marketplace.

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