In testimony before two congressional panels that will play a role in writing legislation on derivatives, Geithner set out proposals that would make big dealers like JPMorgan Chase and Goldman Sachs subject to much stronger supervision.

“We propose to require all OTC (over-the-counter) derivatives dealers be subject to substantial supervision and regulation, including conservative capital requirements, conservative margin requirements and strong business conduct standards,” Geithner said in comments that acknowledged there were few limits in the past.

The Obama administration is trying to bring about a sweeping overhaul of the US financial regulatory system in the wake of a two-year old credit crisis that has hobbled economies worldwide.

One Piece in a Puzzle

Its proposals on derivatives are just one small piece of this larger effort. Months of political wrangling lie ahead before anything is put into law. Derivatives are financial instruments that derive their value from an underlying asset like a Treasury bond, a commodity like oil or copper or a mortgage-backed security.

Geithner stressed the need to move decisively on a regulatory overhaul before impetus to do so is lost.

“It’s the typical pattern of the past,” he said. “As the crisis starts to recede, the impetus to reform begins to fade in the face of the complexity of the task and opposition by the economic and institutional interests that are affected.”

In the United States, four big banks control more than 90 per cent of derivatives markets: JPMorgan Chase, Bank of America, Citigroup Incorporated and Goldman Sachs.

Geithner told the House of Representatives Financial Services and Agriculture committees that the existing system allowed some financial institutions to sell large amounts of derivatives, which are intended to offset or manage risks, even without the capital to back those commitments.

He cited the example of insurer American International Group, which has required huge infusions of taxpayer funds to stay afloat. Geithner said the Securities and Exchange Commission and the Commodity Futures Trading Commission should have authority to impose record-keeping and reporting requirements on all OTC derivatives.

“Our plan will help prevent market manipulation, fraud and other abuses by providing full information to regulators about activity in the OTC derivative markets,” he said.

Dividing Up the Turf

The administration wants to give clear authority for enforcing rules against fraud, market manipulation and other abuses in derivatives markets to both the SEC and CFTC, but the agencies need to divvy up the specific areas each will handle. Geithner said the Treasury was helping the agencies resolve differences on how oversight should be split. “They’ve made a lot of progress, but they’re not there yet,” he said.

SEC Chairman Mary Schapiro wants her agency to police “securities-related” OTC derivatives, like the credit default swaps that were involved in many of last year’s financial disasters. Her plan has the CFTC handling all other OTC derivatives, like those based on underlying values of interest rates, foreign exchange, commodities, energy and metals.