Summary

During the past two decades, fundamental changes in global financial markets, particularly the increased volatility of interest rates and currency exchange rates, have prompted public and private institutions to turn increasingly to derivatives--financial products whose values are based on the value of an underlying asset, reference rate, or index. Basic types of derivatives include forwards, futures, options, and swaps. Because of derivatives growth and increasing complexity, Congress, federal regulators, and some industry members are concerned about the risks that derivatives may pose to the financial system, individual firms, investors, and U.S. taxpayers. These concerns have been heightened by recent reports of huge losses by some derivatives investors, some totaling hundreds of millions of dollars. This testimony summarizes the major conclusions and recommendations contained in GAO's recent report on derivatives (GAO/GGD-94-133, May 18). The testimony also discusses H.R. 4503, proposed legislation that would require regulators to set consistent standards for accounting, disclosure, capital, and examinations; could produce better call report data, including information on revenues gains and losses by product class; would provide regulators greater access to information in an emergency; and would encourage international cooperation to harmonize derivatives regulation.