The action taken by the President's Working Group on Financial Markets is designed to bring more openness to the murky world of derivatives and credit default swaps - a type of corporate debt insurance - that played a role in the turmoil.
Under one move, the Federal Reserve, Securities and Exchange Commission and Commodity Futures Trading Commission agreed to exchange information on credit default swaps from private groups that will be set up to act as central clearinghouses for such transactions. That should help provide crucial information on the parties involved in the complex and unregulated products.
Credit default swaps, a roughly $60 trillion worldwide market, played a large role in the credit crisis that brought the downfall of Lehman Brothers Holdings Inc., pushed giant insurer American International Group Inc. (AIG, Fortune 500) to the brink of bankruptcy, and forced Merrill Lynch & Co. to sell itself to Bank of America Corp. (BAC, Fortune 500) The swaps are commonly used contracts to insure against the default of financial instruments such as bonds and corporate debt. But they also are bought and sold as bets against bond defaults.
Headed by Treasury Secretary Henry Paulson, the White House group includes Fed Chairman Ben Bernanke and Securities and Exchange Commission Chairman Christopher Cox.
The White House group also called for public reporting of prices, trading volumes and other information on credit default swaps in a bid to "increase market transparency" for participants and the public.
It also said regulators should have access to information about trades and positions on the investments for the purpose of "monitoring market trends, identifying potential issues, and preventing market manipulation and insider trading."
The panel urged regulatory agencies to review whether they have adequate authority to police against fraud and market manipulation, and to propose changes if needed. Regulators in the U.S. and overseas also should expand their efforts to share information.
The announcement comes as President George W. Bush and other major world leaders gather in Washington for a summit to consider ways to battle the worst financial crisis since the 1930s and explore options for preventing another such calamity.
The credit and financial chaos has hurt the U.S. economy, and is threatening to plunge the world economy into a recession.
Five prominent hedge fund managers on Thursday told Congress they support a new central exchange to open the opaque world of credit default swaps, but the billionaires offered differing views on the need for stricter regulation of hedge funds themselves.
The creation of public exchanges or clearinghouses would provide needed transparency for credit default swaps and reduce financial risks, several of the fund executives said.
Cox has urged Congress to rein in the market for credit default swaps with new legislation.
"The virtually unregulated over-the-counter market in credit default swaps has played a significant role in the credit crisis, including the now $167 billion taxpayer rescue of AIG," Cox said in a statement Friday. "The SEC has regulatory and supervisory authorities over the clearing agencies that may be established for credit default swaps, and we will use those authorities to strengthen the market infrastructure and to protect investors."
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