U.S. regulators seek OTC derivatives crackdown

(Reuters) - The Obama administration moved on Wednesday to exert more control over the shadowy over-the-counter derivatives market, now closely linked to the global credit crisis.

Federal regulators proposed subjecting all over-the-counter derivatives dealers -- whose trades are not made through an exchange, making them hard to monitor -- to "a robust regime of prudential supervision and regulation," including conservative capital, reporting and margin requirements.

The plan, sketched out by Treasury Secretary Timothy Geithner and top regulators at a news conference, marks a big step in the administration's push to rewrite rules for banks and financial markets in response to a credit crisis that has sent economies around the globe reeling.

U.S. officials have pumped billions of dollars of taxpayer money into banks and automakers to try to stem the crisis. Last week, they wrapped up "stress tests" at the nations 19 largest banks and told ten of them to raise a combined $74.6 billion.

The Obama administration is now aiming to bolster regulatory oversight of the financial system.

Over-the-counter derivatives are presently difficult to monitor and supervise. Billionaire investor Warren Buffett has called derivatives "financial weapons of mass destruction."

Under current law, they are only loosely policed.

"We're going to require for the first time all standardized over-the-counter derivative products be centrally cleared," Geithner told the news conference.

EXPLOSION IN TRADING

Trading of OTC derivatives, instruments that derive their value from other assets, exploded in size in recent years, with many large firms -- such as mega-insurer American International Group (AIG.N) -- charging into the burgeoning market.

The global market is pegged at about $450 trillion.

When the U.S. real estate bubble burst, firms such as AIG were left with mountains of complex, hard-to-sell financial instruments on their books.

In the United States, four large banks control over 90 percent of the derivatives market: JPMorgan Chase & Co (JPM.N), Bank of America Corp (BAC.N), Citigroup Inc (C.N), and Goldman Sachs Group Inc (GS.N). All have received taxpayer aid.

Officials did not make clear which agency would be in charge of the crackdown. They said they would work together to prevent "forum shopping" for weak rules. Lawmakers disagree over which agency should oversee OTC derivatives clearing.

Laws enforced by both the Securities and Exchange Commission and Commodity Futures Trading Commission would have to be amended by Congress to accommodate the administration's plans.

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