WASHINGTON Federal regulators proposed setting minimum capital levels that banks and other firms that trade derivatives must hold as a cushion against risk.
The Securities and Exchange Commission voted Wednesday to seek public comment on the proposed rules, which also would set collateral requirements and keeping customer funds separate from a firm's. The financial overhaul law passed in 2010 called for new oversight of derivatives, the complex investments blamed for hastening the financial crisis, and required the SEC to write the rules.
The value of derivatives hinges on an underlying investment or commodity - such as currency rates, oil futures or interest rates. The derivative is designed to reduce the risk of loss from the underlying asset.
The SEC's proposal applies to derivatives based on securities such as stocks and bonds. It is similar to rules proposed previously by the Commodity Futures Trading Commission for other kinds of derivatives.
SEC officials said the proposal, which is open to comment for 60 days and could be formally adopted after that, is the final set of rules for derivatives that the agency must put into effect under the 2010 law. The agency has been writing a number of related rules since 2010, and some of them have been formally adopted.
Taken together, "these rules are intended to make the financial system safer, and the derivatives markets fairer, more efficient and more transparent," SEC Chairman Mary Schapiro said before the vote.
Derivatives have been traded in an opaque $600 trillion market around the globe. Giant insurer American International Group Inc. nearly collapsed from losses on its derivatives contracts in the fall of 2008 and was rescued by the federal government in the biggest bailout of the financial crisis, $182 billion.
Derivatives trading is dominated by about 20 big banks worldwide, many of them Wall Street firms. Five big U.S. banks - JPMorgan Chase (JPM), Goldman Sachs (GS), Bank of America (BAC), Citigroup (C) and Wells Fargo (WFC) - account for an estimated 97 percent of the derivatives held by the U.S. banking industry.