NEW YORK - Less than a year after their worst public relations fears exploded into front page news, derivatives dealers are on the offensive and looking to stave off more stringent regulation.

Speakers at last week's North American Regional Conference of the International Swaps and Derivatives Association said they hope to shift the debate away from having regulators establish capital requirements - as proposals by the Bank of International Settlements would require - in favor of letting banks doing it themselves.

The BIS proposal would soon have banks "responding to little things," said Carl Batlin, managing director at Chemical Bank. "Instead, we want to change the discussions so that the measurements and capital calculations are done the same way as the (banks themselves) do them."

The debate comes at a crucial time for commercial banks acting as derivatives dealers. Institutions that deal in over-the-counter derivative instruments have matched the product creation and delivery of investment banking competitors. The fear is that implementing regulations on commercial banks now would put the industry at a disadvantage, hurting not only earnings, but future growth as well.

Mr. Batlin's comments at the conference suggested the association favors a Federal Reserve Board plan that would have individual banks set capital levels for their derivatives activities. The association is expected to release a formal statement today.

Patrick Parkinson, associate director of research at the Fed, said that under this approach banks would precommit capital to their derivatives operations. After a specified period of time, institutions would compare trading losses against the capital allocation.

If the bank missed its targets too often, however, regulators would impose penalties. Mr. Parkinson suggested penalties could take the form of fines, increased capital requirements, direct supervisory restrictions on future trading activities, or public disclosure of regulatory actions.

While some bankers have said public disclosure, in particular, would exacerbate the situation should a bank fail to meet its targets, Mr. Parkinson feels the industry needs to accept some trade-off for ending micromanagement by regulators.

"You can't do away with the regulations and not put something in their place," he said. "I don't think the banks can have it both ways."

Richard Breeden, the former Securities and Exchange Commission chairman, said banks must show themselves worthy of setting their own standards.

"The best protection against unwise regulation is good, strong self- policing," said Mr. Breeden, who is currently chairman of international financial services at Coopers & Lybrand.

The Fed is currently in the midst of a 120-day comment period on the proposal.

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