Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: FRIDAY, March 10, 1995 TAG: 9503100069
SECTION: BUSINESS PAGE: A-7 EDITION: METRO
SOURCE: Associated Press
DATELINE: WASHINGTON LENGTH: Medium
The voluntary guidelines, contained in a report developed in cooperation with the Securities and Exchange Commission and Commodity Futures Trading Commission, are an unusual response to regulating a rapidly evolving market, which now exceeds $12 trillion.
``I have resisted seeking a legislative fix to this problem, partially because, frankly, I would not know precisely what to ask for in that connection,'' SEC Chairman Arthur Levitt said.
If these new guidelines had been in place in Orange County, Calif., or at Barings PLC, the chances of a financial calamity in either case ``would have been significantly less,'' said Gerald Corrigan, a former New York Federal Reserve Bank president and co-chairman of the industry group.
But, he added, ``Nothing is fail-safe.''
Derivatives are financial contracts intended to provide companies with insurance against risks from changes in interest rates or currency exchange rates. They are linked to the value of underlying stocks, bonds, currencies or other instruments and can be extremely difficult to price.
Major companies and local governments have lost millions in derivatives in the past year. Many have charged they were sold products they didn't understand.
The report focuses on affiliates of broker-dealer firms and their dealings in over-the-counter derivatives, which are arrangements reached privately between Wall Street firms and their customers. Derivatives also trade on futures exchanges, but those are less risky, because exchanges generally guarantee the contracts against default.
The General Accounting Office, in a widely reported warning about the risks of derivatives last year, singled out weak regulatory oversight for brokerage firm affiliates in the over-the-counter market.
by CNB