Unregulated Derivatives Backed; Regulators Say Institutional Traders Know the Risks
The multitrillion-dollar market in privately arranged financial derivatives does not need government regulation and should not be subject to U.S. futures laws, top U.S. regulators said yesterday.</br></br>In a long-awaited report that eased market fears, the regulators recommended that Congress rewrite the Commodity Exchange Act (CEA), which governs U.S. futures trading, to provide clear legal certainty for widely used financial derivatives.</br></br>Derivatives are investments whose values are linked to underlying factors such as interest rates or currency exchange rates. The Bank for International Settlements has estimated that the total notional amount of outstanding over-the-counter derivatives contracts reached $80 trillion in 1998.</br></br>Market participants have worried for years that U.S. futures regulators could try to assert jurisdiction over the currently unregulated OTC market. That might have thrown the legal status of many contracts into question.</br></br>A special working group of U.S. regulators, including the Federal Reserve, Treasury Department, Securities and Exchange Commission and Commodity Futures Trading Commission (CFTC), studied the issue for more than a year. Congress will use the group's findings in a rewrite of U.S. futures laws due to be completed next year.