In prepared testimony for the House Financial Services Committee, U.S. Treasury Secretary Tim Geithner proposed sweeping new financial market regulations.

These new reforms seek to limit the amount of risk financial institutions take… Or at least provide government oversight for those risky decisions. The government hopes that in the wake of the AIG (AIG:NYSE) Bonus-gate scandal, the public will approve of more government control over financial markets.

“We need much stronger standards for openness, transparency, and plain, common sense language throughout the financial system. And we need strong and uniform supervision for all financial products marketed to consumers and investors, and tough enforcement of the rules to ensure full accountability for those who violate the public trust,” Geithner told the committee.

A stern statement. And new… “Geithner’s proposals would bring large hedge funds, private-equity firms and derivatives markets under federal supervision for the first time,” reports Bloomberg.

Here are just some of the reforms the U.S. Treasury Secretary is proposing.

• require large hedge funds, private-equity firms and venture-capital funds to register with the SEC
• require derivatives to be traded through central clearinghouses
• add new oversight for money-market mutual funds
• require banks to set aside extra reserves during boom times to build up a cushion for economic slumps

Geithner calls these proposals just “one plank of the Obama administration’s broader agenda for regulation.”

Now, some hedge fund advisors have strongly objected to these bold reforms.

But, Geithner says, “In the wake of the Madoff episode it is clear that, in order to protect investors, we must close gaps and weaknesses in regulation of investment advisors and the funds they manage.”

These moves smack of pseudo-nationalism. At least for now. Geithner was vague in his outline to the committee on just how the government would determine if an institution was a “systemically important firm.”

Nor did he define when it would be appropriate for the government to step in and take the reins.

He did say that there needed to be a single regulator to oversee the financial market’s biggest firms so that another Lehman Brothers doesn’t happen again.

This is a more assertive step than giving firms bailout money. It’s an ultimatum, of sorts. The government is essentially saying that if certain financial institutions don’t stay within the regulatory bounds, than the government will have the right to sweep in and take over.

But so far, most of the proposals are being supported by financial institutions.

International Swaps and Derivatives Association, the trade group representing the big banks that process most of over-the-counter derivatives trades, said it is already reforming market practices.

Robert Pickel, executive director of the group, told Fortune, “We look forward to working with the Obama administration and Congress to develop a regulatory regime which more accurately accommodates 21st century products and markets.”

So how are the markets taking the news of fresh and bold regulations? Very well, so far… In fact, the S&P 500 is in the best month’s rally since 1987.

Death Cross Trader Editor Zach Scheidt writes, “We’ve seen the initial sharp rally off the low, and now it’s time to figure out what to do with this rebound. From the metrics I am studying, it looks like there is a lot of cash on the sidelines that could push this market much higher. As we head into the end of the month, managers are already afraid they won’t have competitive returns for March or even for the quarter. So in order to keep up, these institutional investors are likely to put most of their cash to work.”

And with a lot of cash around, Zach thinks the market will reward stocks that are already performing well with an extended rally. That could also mean that stocks that aren’t performing well will get dumped, so there are opportunities on both sides of the market.

Other Related Topics: Economic Growth , Sara Nunnally , Taipan Insider , US Treasury

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