Greenspan on Risks, Regulation

Federal Reserve Chairman Alan Greenspan said Friday that financial institutions should be given more incentives to better assess the risk of derivatives, but suggested that greater government oversight is not necessary.

Greenspan’s remarks were in contrast to those of the outgoing chairwoman of the Commodity Futures Trading Commission, Brooksley Born, who argued a day earlier that more regulation is necessary to prevent a systemic collapse that could affect the U.S. and world economies. Both addressed a commodities industry conference in Boca Raton, Fla.

Derivatives are often-complex investments that are linked--or derived from--an underlying asset such as a currency, bond or commodity. For example, banks and investors might trade a derivative linked to the interest earned on a $100-million bond without trading the bond.

Greenspan, speaking via satellite, said the free-market approach appears most adequate in determining exposure in the rapidly growing market, despite heavy volatility in the second half of last year that shook world financial markets.