The world's three most powerful financial regulators want to tighten up derivatives markets, where explosive growth in recent times has sparked fears of a potential financial disaster.
Officials from Britain's Financial Services Authority (FSA), the Federal Reserve Bank of New York (New York Fed) and the US Securities and Exchange Commission (SEC) warn that countries must join forces to help contain risks posed by the rapid global expansion of derivatives.
Derivatives are financial instruments the value of which is determined by the price of one or more underlying financial assets, such as stocks, bonds, commodities, currencies and debt.
Derivatives are bought or sold to tackle risk linked to the underlying security -- and guard against sudden price movements.
In the Financial Times on Thursday, Timothy Geithner, president of the New York Fed, Callum McCarthy, chairman of the FSA, and Annette Nazareth, a commissioner at the SEC wrote in a joint letter: "Often it takes a crisis to generate the will and energy needed to solve a problem. Here, the industry deserves credit for acting in advance of a crisis."
Progress has been made during the past year, but "there is still work to do" regarding regulation of derivatives, the letter added.
"In a more integrated global market, we will increasingly find ourselves compelled to pursue borderless solutions," the letter said.
It continued: "Weaknesses remain and, apart from operational risk, the market faces formidable challenges in measuring and managing financial risks."
Derivatives are no longer the domain of specialized hedge-funds, but are also used by traditional investors such as investment banks -- Goldman Sachs, Morgan Stanley and Deutsche Bank -- and pension funds.
The letter came after leading global investment banks, institutional investors and international regulators met in New York on Wednesday to discuss industry initiatives to improve back-office systems for derivatives trading.
The move followed concerns last year that back-office backlogs were so serious they could create systemic problems if not addressed, according to the Financial Times.
At the meeting, regulators said a process of cooperation between US and European regulators last year had cut credit derivatives backlogs.