UPDATE:Regulators, Derivatives Indus Sets Safety Measure Deadlines
June 02 2009 - 2:49PM
Dow Jones News
Leading financial market players have reached formal agreement
with regulators on measures for safer handling of the $684 trillion
global derivatives market.
These are the most explicit commitments yet from an industry
widely accused of exacerbating the financial markets crisis.
They're laid out in a letter, alongside an official acknowledgment
from the New York Federal Reserve, posted on the central bank's Web
site Tuesday. Signatories, known collectively as the Operations
Management Group, comprised 27 of the derivatives market's most
prominent participants, including leading dealer banks such as
JPMorgan Chase (JPM) and Deutsche Bank (DB) and money managers
AllianceBernstein (AB), Citadel Investment Group and BlueMountain
Capital Management.
The letter, which addresses issues discussed at an April 1
meeting between major market participants and banking supervisors,
lists several deadlines to be met this year.
Prominent among them is the commitment to register all credit
derivatives trades, in either a central clearinghouse or a trade
warehouse, by July 17. All equity derivative trades will be
similarly logged by July 31, and interest-rate deals by the end of
the year.
Clearing facilities must be available to all market participants
by Dec. 15, and that service - which guarantees both sides of each
trade - is to be extended to other over-the-counter products.
Industry participants also agreed to work with supervisors on
specific goals to be released Aug. 31.
The dealer community pledged to starting carrying out daily
electronic synching of their portfolios by June 30. That will mean
frequent reconciliation of around 70% of all outstanding
derivatives transactions, according to the industry letter.
The consensus represented in the letter wasn't easy to reach, in
part because it involved closer collaboration than ever before
between the dealer banks that have long dominated the marketplace,
and money managers looking to expand their influence.
In a gesture toward better cooperation among market
participants, signatories also promised more democratic
representation of buyers and sellers in trade groups, including
leading decision-making bodies such as SIFMA and the MFA.
But that's not the only skirmish in a battle for market reform
on many fronts. Wall Street banks with large derivative-trading
businesses have been outwardly supportive of greater regulatory
oversight of their highly lucrative market. But behind the scenes
there has been hand-wringing over the details of certain proposals
and discussions about how the industry can help shape the
rules.
Most recently, market participants were taken aback by the
Treasury Dept.'s proposal to grant the Securities and Exchanges
Commission and the Commodity Futures Trading Commission authority
to mandate centralized clearing of certain derivatives, and force
trade of "standardized" contracts onto exchanges or electronic
platforms that would make pricing more transparent. Tuesday's
letter represents another stage in the convergence between the
industry's wishes and the ambitions of regulators to bring to heel
a privately conducted marketplace that's escaped formal oversight
for decades.
"We will continue to demand further improvements until our
objectives are achieved," said William Dudley, President of the
Federal Reserve Bank of New York, in the central bank's responding
release.
Copies were sent to 11 regulatory bodies, including the Office
of the Comptroller of the Currency, the Securities and Exchanges
Commission and the United Kingdom Financial Services Authority.
Missing from that list, however, were two bodies that have been
closely involved in discussions of tighter oversight for
derivatives, but do not have formal responsibilities for monitoring
the banking sector - the Commodity and Futures Trading Commission,
and the European Central Bank.
For more information, see
http://www.newyorkfed.org/newsevents/news/markets/2009/ma090602.html
-By Emily Barrett, Dow Jones Newswires; 201-938-2248;
emily.barrett@dowjones.com
(Serena Ng contributed to this report.)