Agencies Seek Study of OTC Derivatives

The Treasury Department, Federal Reserve Board and Securities and Exchange Commission proposed legislation to keep the Commodity Futures Trading Commission from moving to regulate over-the-counter derivatives, which are used by companies to hedge risk. The CFTC, citing a desire for legal certainty in the $28-trillion OTC derivatives market, said last month it would consider whether to start regulating these contracts between corporations. The three federal agencies asked Congress to curb the CFTC’s activities through the year 2000 while the administration studies the rapidly growing OTC derivatives market. The proposed bill asks the President’s Working Group on Financial Markets to conduct a yearlong study into regulation of OTC derivatives. That interagency group consists of the Fed, Treasury, SEC and the CFTC. OTC derivatives have been exempt from regulation since 1993. They are privately negotiated, custom-tailored contracts whose value is tied to underlying assets such as stocks, commodities or currencies. They are used by banks, corporations and pension funds to hedge against the risk of rate swings.