Geithner’s war on derivatives

Tim Geithner wants to dictate the rule book for global derivatives regulation (AFP)

Last week, we asked our online readers what they thought about Tim Geithner’s recent comments on derivatives regulation. The US Treasury secretary said last Monday that he wants to get tough on the derivatives industry, and that the rest of the world really ought to agree with him.

The problem for Geithner is that banks operating in the US are too big even for him to get his arms around — a unilateral move to get tough on the derivatives industry is all very well, but will simply have the effect of pushing the industry to places where regulators take a more enlightened view. That would be disastrous for US investment banks’ profits, needless to say, but that is not Geithner’s worry.

Instead, the Treasury secretary is apparently worried about the health of the global financial system. “Risk in derivatives will become concentrated in those jurisdictions with the least oversight,” he said. “This is a recipe for another crisis.”

So, the world should follow America’s lead on banking regulation or risk another crisis.

Not everyone agrees. Indeed, Martin Wheatley is a vocal and important critic — as the outgoing chief regulator in Hong Kong, and the incoming head of the UK’s new financial products watchdog, he is a key figure in two of the markets that stand to benefit from any tightening of regulation in the US.

He described Geithner’s comments as “nonsense”. He went on to tell the Financial Times last week: “The truth is, the US is not the global standard setter. The global standard setters are Basel, the Financial Stability Board and Iosco [the International Organisation of Securities Commissions] — they are the bodies through which differences should be worked out.”

Wheatley said that the movement of business to Asia is not a race to the bottom, as Geithner argued, but a question of growth and opportunity. And, anyway, isn’t it a bit rich for the US to tell other jurisdictions how to regulate their financial industries?

 “People in glass houses should not throw stones," said Wheatley. “The US has had lots and lots of gaps in its regulatory structure, many of which are still not addressed.”

Perhaps surprisingly, our readers agree with Geithner — what’s good for the US is good enough for Hong Kong, Singapore and London — with a huge majority saying that the Treasury secretary was right to call for tougher rules.