US urges derivatives crackdown

THE United States will today urge other Group of Seven industrial nations to consider a crackdown on trading in derivatives, amid growing concern that the practice has pushed up long-term interest rates too far.

The G7 talks come amid clear indications that the US may impose curbs on risks taken by big US banks in derivatives trading, following the upheaval in bond and equity markets since February.

Derivatives are financial instruments that allow dealers to gamble on or hedge against future movements of currencies, bonds, commodities and shares. The mushrooming volume of trade in these instruments now far exceeds the volume of physical trades.

The potential US move, aired last week by Eugene Ludwig, the Comptroller of the Currency, one of the three main bank regulators in the US, may foreshadow more generalised international limits on the use of derivatives.

Earlier this year, central banks decided against controls, but new curbs are under review at the Bank for International Settlements, the central bankers' bank. No firm decision on a crackdown will come out of today's meetings, but detailed work on regulation of derivatives is expected to be taken up by central banks.

G7 finance ministers and their central bankers are worried that rising long rates could hamper world growth at a critical juncture. Japan and continental Europe have yet to emerge from recession, and US officials are privately worried that America's robust expansion could run out of steam if the climb in both long and short rates is not halted. Kenneth Clarke, the Chancellor, also harbours doubts about the pace of the UK recovery without a further cut in base rates.

In an attempt to moderate the Federal Reserve's drive to raise short-term rates, the Clinton administration this weekend nominated two inflation doves, economists Alan Blinder and Janet Yellen, to the Fed's board.