Regulating Derivative Trading

From the New York Times:

The Federal Reserve moved Monday to overhaul the financial apparatus behind derivatives trading, a regulatory step intended to assure that the failure of a major bank or investment firm would not create the systemic threat seen in March after the collapse of Bear Stearns.

Timothy F. Geithner, the president of the Federal Reserve Bank of New York and one of the chief architects of the Bear Stearns bailout, convened a meeting of 17 major financial institutions Monday afternoon to discuss creating a central system for the trading and settlement of credit derivatives, a sophisticated type of financial instrument.

Fears about this so-called counterparty risk have rattled nerves on Wall Street amid a worsening credit crisis.

Some forecasters predict that inflation will worsen on the back of high oil prices, prompting the Fed to increase rates in an effort to cool off price increases.

While a rate increase is far from certain, Fed officials have emphasized concerns over inflation in recent days. Ben S. Bernanke, the Fed’s chairman, told a conference on Cape Cod Monday night that the Fed “will strongly resist an erosion of longer-term inflation expectations” in light of higher commodity prices, which he said had “added to the upside risks to inflation.”

Mr. Geithner, speaking in Midtown Manhattan, also expressed concern, saying that foreign central banks might be forced to raise rates to combat a “sustained rise” in prices.

But he stopped short of suggesting the Fed would raise rates, citing a more complicated economic situation in the United States. The Fed’s bailout of Bear, orchestrated by Mr. Geithner, raised questions about the role of the central bank.

Mr. Geithner acknowledged that central bankers faced a delicate balance in seeking to avoid either suppressing innovation or rewarding reckless behavior.


About Luke Ford

Raised a Seventh-Day Adventist at Avondale College in Australia, Luke Ford moved to California in 1977. He graduated from Placer High School in 1984, reported the news at KAHI/KHYL radio for three years, attended Sierra College and UCLA, was largely bedridden by Chronic Fatigue Syndrome for six years, and converted to Judaism in 1993. From 1997-2007, Luke made his living from blogging. Living by Beverly Hills (, he now teaches the Alexander Technique (moving the way the body likes to move). Lessons cost $100 each and last about 45 minutes. In 2011, Luke completed a three-year teaching course at the Alexander Training Institute of Los Angeles. His personal Alexander Technique website is Luke is the author of five books, including: » The Producers: Profiles in Frustration » Yesterday’s News Tomorrow: Inside American Jewish Journalism
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