Minister backs 'careful use' of derivatives | FT

The government has for the first time spoken out clearly in support of derivatives, in spite of them having been described last year by Warren Buffett, the influential US investor, as "financial weapons of mass destruction".

Ruth Kelly, financial secretary to the Treasury, told the International Derivatives Conference in London that many government activities would not be possible without them. Derivatives include futures, options and other more complex financial instruments.

......Her remarks come at a time when use of derivatives has been growing rapidly in financial markets. The derivatives sector provides as many as 10,000 jobs in London, which is the biggest centre in the world for trading (over-the-counter) derivatives.

Ms Kelly pointed out that the UK's share of world turnover rose from 27 per cent to 36 per cent between 1995 and 2001. "The UK's share of cross-border derivatives is even higher - 41 per cent in 2001," she said.

......In her speech Ms Kelly referred to the "Buffett versus Greenspan" debate. Shortly after Mr Buffett's comments, Alan Greenspan, chairman of the US Federal Reserve, countered some of its effect by saying derivatives had helped to disperse risk in financial markets.

......she said last year's collapse of Parmalat, the Italian dairy foods company, had "passed with relatively few repercussions, at least in part due to the increasingly widespread use of default swaps".

She added: "If used carefully they have the power to spread risk. More has been lost from bad real estate investments than from derivatives."

Ms Kelly's speech represents a big change from previous political scepticism. In 1995 the Conservative MP Sir Peter Tapsell, a member of the London Stock Exchange, told the House of Commons that financial futures dealing "perhaps should be banned by international law".

However, international accounting regulators have been locked in debate with banks for many months over the issue of how best to reflect the true risk of derivatives on balance sheets.

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