Treasury Secretary Timothy Geithner told lawmakers that the changes are needed to fix the flaws exposed by the current financial crisis, the worst to hit America in seven decades.

The goal is to repair a system that has proven "too unstable and fragile," he said.

"Over the past 18 months, we have faced the most severe global financial crisis in generations," Geithner said in testimony to the House Financial Services Committee. "To address this will require comprehensive reform. Not modest repairs at the margin, but new rules of the game."

The administration's proposal, which will require congressional approval, would represent a major expansion of federal authority over the financial system.

Tougher standards

It would impose tougher standards on financial institutions judged to be so big that their failure would represent a risk to the entire system.

It also would extend federal regulations for the first time to all trading in financial derivatives, exotic financial instruments such as credit default swaps that were blamed for much of the damage in the meltdown.

The administration also wants larger hedge funds to be required to register with the Securities and Exchange Commission, which would open their books to inspection by regulators.

Hedge funds have grown explosively in recent years while operating secretively. They have lured an increasing number of ordinary investors, pension funds and university endowments - meaning millions of Americans now unwittingly invest in hedge funds indirectly.

In addition, the administration proposed the creation of a systemic risk regulator to monitor the biggest institutions.

Geithner did not designate where such authority should reside, but the administration is expected to support awarding this power to the Federal Reserve.

Expanded powers

The plan also includes a measure that Geithner and Fed Chairman Ben Bernanke discussed before the committee on Tuesday to give the administration expanded powers to take over major nonbank financial institutions, such as insurance companies and hedge funds that were teetering on the brink of collapse.

That power was aimed at preventing a repeat of the problems surrounding insurance giant American International Group Inc, whose financial products unit specialised in trading credit default swaps, the instruments that drove the company to near-collapse last fall.

The administration, pushing for quick action on its reform agenda, sent Congress a 61-page bill dealing with the expanded powers to seize control of nonbank institutions late Wednesday.

Geithner's plan is silent on whether any consolidation of regulators is needed. It provided only a broad outline on many of the initiatives, leaving many thorny details to be worked out in Congress.

Administration officials promised that the remaining issues would be hammered out in consultation with Congress with the goal of getting legislation approved as quickly as possible.

The administration wants hedge funds and other private pools of capital, including private equity funds and venture capital funds, to be required to register with the SEC if their assets exceed a certain size. The threshold amount has yet to be determined.

REGULATING MARKETS

The proposal on credit default swaps and other derivatives would require the markets on which they are traded to be regulated for the first time, and for the buying and selling of these instruments to be conducted in ways that will foster greater oversight.

Credit default swaps, which trade in a US$60 trillion global market without government oversight, are contracts to insure against the default of financial instruments like bonds and corporate debt.

Hedge funds, vast pools of capital holding an estimated US$1.5 trillion in assets, operate mostly outside of government supervision.

As the market crisis deepened last fall, hedge fund selling was widely cited as one of the reasons for increased volatility that pounded stocks and bonds.

Hedge funds also suffered huge losses last year, notably from investments in securities tied to subprime mortgages.

The outline of the regulatory reform was unveiled a week before President Barack Obama is scheduled to meet for discussions among the Group of 20 major industrialised and developing countries in London to assess what needs to be done to deal with the global financial crisis.

AP

Chief target: US$60 trillion credit swap, derivatives market