Derivatives Study Proposes Tighter Rules : Investments: Sources say GAO report due out in two weeks will recommend expanding the SEC’s role in the booming market.

A much-awaited study on the controversial derivatives business proposes significantly tighter regulation of the booming market, with an eye to minimizing the potential of a financial catastrophe, sources said Wednesday.

The report by the General Accounting Office, in the works for several months, has been much feared by Wall Street banks and securities firms.

They have privately voiced concerns that the study by the GAO, the investigative arm of Congress, would lead to excessive regulation of derivatives. That, in turn, would drive the lucrative business offshore.

A draft copy of the GAO report, according to people familiar with its contents, recommends broad expansion of the Securities and Exchange Commission’s role in the market. The sources spoke on condition of anonymity.

Derivatives are intricate financial contracts designed to limit a corporation’s risk from losses due to sharp fluctuations in the financial markets, particularly in interest rates and foreign currencies. They can also be used to speculate on market swings.

The instruments are a major concern for regulators and members of Congress, particularly given that a large corporation such as Procter & Gamble last month reported a $102-million accounting charge following a major loss from a derivatives deal.

The draft report’s recommendations could be changed before its scheduled May 18 release, sources said. But they said they doubt the report’s overall direction will change.

The draft report proposes that the SEC develop new regulations to ensure derivatives customers--known in the market as “end users”--understand the risks they take in such deals. The customers would have to meet the same risk management requirements imposed on derivatives dealers, major Wall Street titans such as Bankers Trust New York and J.P. Morgan.

This recommendation, one source said, was surprising because it represents “government intrusion into corporate financial management.” That recommendation could set the disturbing precedent of the SEC placing boundaries on the types of financial risks corporations could take, a source said.

The report also recommends expansion of the SEC’s powers to oversee now-unregulated derivatives dealers in private transactions, known as the over-the-counter market.