Treasury Secretary Timothy Geithner said Friday said over-the-counter derivative contracts must be tracked by regulatory authorities and be traded on an exchange similar to the New York Stock Exchange or the Chicago Board Options Exchange.

In a hearing with the House Financial Services Committee, Geithner said he believes all derivatives need to be regulated and traded on an exchange in order to lower the potential future risk these products may poise to the economy.

“Our plan will help prevent the OTC derivative markets from threatening the stability of the overall financial system,” Geithner said.

This push from Treasury is part of a larger effort to prevent a recurrence of the massive problems with the financial system that nearly led to a global meltdown last fall, and of which derivatives were a major contributing factor.

Derivatives are contracts that “derive” their value from an underlying asset. Crude oil futures are probably one of the most prominent derivatives traded on Wall St. today.

However, there are what are known as financial asset-related derivatives -- credit default swaps, collateralized mortgage obligations and others -- which are not regulated by the Securities and Exchange Commission or Commodity Futures Trading Commission.

According to the Treasury Department, the outstanding face value of all OTC derivatives was $700 trillion in 2008.

The financial mess at American International Group (AIG), which resulted in billions of dollars in aid being given by taxpayers and the Federal Reserve to the insurer to stave off a financial catastrophe, was caused primarily by AIG’s underwriting CDO and CDS products without enough capital to back those products.

“This country has a long history of using derivative contracts, and they have provided economic benefits,” Geithner said. “We need to, however, appropriately regulate them in order to provide those benefits.”

According to Geithner’s proposal, all “standardized” derivative contracts would have to be cleared through an exchange or electronic trading system. The contracts would have to trade in a transparent manner, with exchanges posting open positions and trading volume similar to what is provided by exchanges for stocks or commodities.

In response to a question, Geithner said he believes that the underlying laws regarding the trading of OTC derivative contracts have to be modified first before there are any changes made on an institutional side. There has been much talk about merging the responsibilities of the SEC and CFTC, but Geithner said without the appropriate regulation a merger of the two agencies would be not be useful.

“We need to bring the laws into convergences before we tackle institutional reforms in the future,” Geithner said.