2nd UPDATE:NY Fed Calls For More Progress In OTC Derivatives
April 01 2009 - 6:27PM
Dow Jones News
The New York Federal Reserve said Wednesday that major dealer
banks and buy-side firms need to do more to reduce risk in
over-the-counter derivatives markets.
Representatives of fifteen major banks met with regulators in
New York to discuss progress in bringing central clearing to OTC
derivatives markets, particularly for credit default swaps.
"Recent events underscore the need for more progress in reducing
risk in the OTC derivatives market," said William C. Dudley, New
York Fed President.
While strides have been made, Dudley said, "Banks and buy-side
firms still need to make considerable improvements to both risk
management and the design of the OTC derivatives markets."
The meeting follows the launch earlier this month of the first
U.S.-based clearinghouse for credit derivatives, at the behest of
regulators and market participants seeking better transparency and
reduced risk in the $28 trillion CDS market.
The development of central clearing facilities for credit
derivatives, along with market participants' efforts to reduce the
level of outstanding CDS trades, represent important steps forward,
according to a statement from the New York Fed.
The size of the CDS market has halved over the last six months
as participants net down the notional value of outstanding
trades.
But regulators see more to be done, and at the Wednesday meeting
dealers, buy-side participants and global banking authorities
agreed to broaden the use of clearinghouses for credit default
swaps, opening up the facilities to a wider range of firms and
products.
All credit derivatives trades not cleared through a central
counterparty will also be reported to a central trade
repository.
A bank-backed clearinghouse operated by Atlanta-based
IntercontinentalExchange Inc. (ICE) remains the only operational
facility for credit derivatives in the U.S.
At issue is when membership in that clearinghouse, called ICE US
Trust, will be opened up to buy-side participants and other
institutions.
Since launching March 9, membership in ICE US Trust has been
limited to the nine biggest U.S. banks, including JPMorgan Chase
& Co. (JPM), Goldman Sachs (GS) and Bank of America (BAC).
The dealers collectively are seen to represent the majority of
credit default swap trading activity; ICE officials have said they
plan to revisit membership requirements in the near future.
A competing CDS clearing platform developed by CME Group Inc.
(CME) and Citadel Investment Group aims to have a broader
membership, incorporating buy-side firms from the start, according
to Kim Taylor, president of CME's clearinghouse.
CME's platform, dubbed CMDX, also aims to clear a wider range of
credit derivative instruments at the outset than the ICE Trust
platform currently handles, though ICE's product range is expected
to grow.
Though CMDX secured regulatory approval in mid-March, Taylor
said Wednesday it was not expected to launch before late April.
Volume on the ICE Trust platform has grown since its March 9
roll-out, with a notional value of about $45 billion in credit
derivatives trades guaranteed as of March 27.
However, the platform has yet to handle any new business, with
activity so far limited to back-loading of existing CDS
positions.
Attendees at Wednesday's meeting agreed to update regulators as
to their progress by May 29, according to the New York Fed. Other
goals set out at the meeting included incorporating an
auction-based settlement process into standard documentation for
credit default swaps by April 7, and setting new benchmarks for
automated processing of over-the-counter trades.
-By Jacob Bunge, Dow Jones Newswires; (312) 750 4117; jacob.bunge@dowjones.com