US steps towards regulating esoteric instruments

As President George W Bush and other major world leaders gather in Washington for a summit to consider ways to battle the worst financial crisis...

As President George W Bush and other major world leaders gather in Washington for a summit to consider ways to battle the worst financial crisis since the 1930s, a presidential panel announced steps Friday to strengthen oversight of complex financial instruments partly blamed for the global financial crisis.

The action taken by the President8217;s Working Group on Financial Markets is designed to bring more openness to the murky world of derivatives and credit default swaps 8212; a type of corporate debt insurance 8212; that played a role in the turmoil.

Under one move, the Federal Reserve, Securities and Exchange Commission and Commodity Futures Trading Commission agreed to exchange information on credit default swaps from private groups that will be set up to act as central clearinghouses for such transactions. That should help provide crucial information on the parties involved in the complex and unregulated products.

Credit default swaps, a roughly 60 trillion worldwide market, played a large role in the credit crisis that brought the downfall of Lehman Brothers Holdings Inc., pushed giant insurer American International Group Inc. to the brink of bankruptcy, and forced Merrill Lynch 038; Co. to sell itself to Bank of America Corp. The swaps are commonly used contracts to insure against the default of financial instruments such as bonds and corporate debt. But they also are bought and sold as bets against bond defaults. Headed by Treasury Secretary Henry Paulson, the White House group includes Fed Chairman Ben Bernanke and Securities and Exchange Commission Chairman Christopher Cox.

The White House group also called for public reporting of prices, trading volumes and other information on credit default swaps to 8220;increase market transparency8221; for participants and the public. It also said regulators should have access to information about trades and positions on the investments for the purpose of 8220;monitoring market trends, identifying potential issues, and preventing market manipulation and insider trading8221;. The panel urged regulators in the US and overseas also should expand their efforts to share information.