Financial Derivatives: Actions Needed to Protect the Financial System

GAO discussed federal oversight of derivatives activities. GAO noted that: (1) most of the over-the-counter derivatives activity in the United States is concentrated among 15 major U.S. dealers who are extensively linked with each other, end-users, and exchange-traded markets; (2) these dealers' sudden failure or abrupt withdrawal from trading could cause significant problems and prompt the federal government to intervene to save the financial system; (3) in 1993, the Group of Thirty and federal regulators issued recommendations and guidelines for derivatives dealers, but there is no regulatory mechanism to ensure their compliance with these standards; (4) the federal government needs to ensure that safeguards exist to protect the safety and soundness of the financial system, allow the derivatives market to grow and innovate, and close significant gaps in securities regulation in cooperation with foreign regulators; and (5) proposed legislation addresses many of the GAO recommendations on derivatives regulation, but it does not cover derivatives activities by securities firms' and insurance companies' affiliates.