Timothy Geithner, the US Treasury Secretary, told lawmakers derivative contracts would be subject to increased regulation and supervision trading on Friday.

Timothy Geithner said that the sheer complexity of derivative transactions and inability of regulators to understand them, encouraged investors to take on too much risk and enabled investors to evade regulation, contributing to the financial meltdown that has crippled world economies. He added that they have to be traded through regulated clearing houses, with tighter capital standards and stricter reporting requirements.

"We propose to require all OTC (over-the-counter) derivatives dealers ... to be subject to substantial supervision and regulation, including conservative capital requirements, conservative margin requirements and strong business conduct standards," Mr Geithner told a joint meeting of the House Financial Services and Agriculture committees.

But he did not explain in detail what criteria would be used to distinguish standard derivatives from customized derivatives, providing only what he described as a "broad’ definition. Nor did he specify which regulatory authority would enforce the new rules.He suggested that governments in other countries would need to implement similarly strict regulations for derivatives trading to prevent US investors shifting their trade overseas.

Derivatives are financial instruments whose value derives from something else, such as a mortgage-backed security. Over-the-counter derivatives grew explosively in decade leading to the credit crash, with the face value of outstanding transactions rising to almost $700 trillion in 2008.

"The complexity of the instruments overwhelmed the checks and balances of risk management and supervision," Mr Geithner said. His proposed reforms are part of a much wider proposed overhaul of the U.S. financial regulatory system.

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