Treasury Secretary Geithner’s OTC Derivatives Letter to Congress:

On May 13, 2009 the United States Secretary of the Treasury-Timothy Geithner-sent a letter to members of the United States Senate urging them to adopt new regulations in the over the counter (OTC) derivatives markets. Many economists blame the opaqueness and uncertainty of the credit markets on the mostly hidden transactions involving OTC derivatives. Geithner emphasis that under current law these transactions are exempt for regulations and that bringing them under a regulatory framework will eliminate many abuses. These abuses include, “1) preventing activities in those markets from posing risk to the financial systems; 2) promoting efficiency and transparency in those market; 3) preventing market manipulations, fraud, and other market abuses; and 4) ensuring that derivatives are not marketed inappropriately to unsophisticated parties.”

Geithner’s letter addresses the details and laws that are needed to ensure that the broad objectives are meet in OTC derivative regulation he is proposing. The new regulations proposed are larger capital requirements, increased requirements to margin purchases, financial reporting requirements, and standardization of derivatives contracts. Reporting transactions and volumes should be available to government regulators much like they are required in standard equity markets. In the end of the letter the Secretary of the Treasury expresses his commitment to help shape regulation that does not impede on the enforceability of OTC derivative contracts. The adherence to the contractual law appears to be a concern for Geithner but this concern should also be warranted to the financial obligations of other sectors of the bailout-automobile industry- which have not received their ordinal priority in recent months.