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