PrefBlog

The Federal Reserve Bank of New York has released a package of material with a statement that it “welcomes further industry commitments on Over-the-Counter Derivatives”:

The Federal Reserve Bank of New York welcomes the letter released today by major market participants to further strengthen the operational infrastructure for over-the-counter (OTC) derivatives. Consistent with the objectives of the March 2008 Policy Statement of the President’s Working Group on Financial Market Developments, market participants outline in this letter concrete plans for building a stronger integrated operational infrastructure capable of supporting the important and rapidly growing OTC derivatives market.

The commitments presented in this letter will help address weaknesses in the OTC derivatives market. Although efforts by the Federal Reserve and other U.S. and European regulators over the past three years have led market participants to significantly improve many operational elements of the OTC derivatives infrastructure, financial market events have demonstrated that broader action is warranted to address additional market design elements.

They state that they have the following central priorities:

• Institute a Central Counterparty (CCP) for Credit Default Swaps (CDS).
• Reduce Levels of Outstanding Trades via Portfolio Compression
• Enhance Market Transparency.
• Continue Operational Improvements.

Three documents were released together with the press release.

Participants October 31 Letter. This doesn’t look like just another set of soothing words. Not only is the Fed endorsing it, but the signatories have, shall we say, a certain amount of clout:

Bank of America,
N.A. HSBC Group
Barclays Capital
JP Morgan Chase
BNP Paribas
Merrill Lynch & Co.
Citigroup
Morgan Stanley
Credit Suisse
The Royal Bank of Scotland Group
Deutsche Bank AG
Société Générale
Dresdner Kleinwort
UBS AG
Goldman, Sachs & Co.
Wachovia Bank, N.A.
International Swaps and Derivatives Association, Inc. (ISDA)
Managed Funds Association (MFA)
Asset Management Group of the Securities Industry and Financial Markets Association (SIFMA)

After a certain amount of self-congratulatory bumpf, the letter states seven priorities for the near future:

• Global use of central counterparty processing and clearing to significantly reduce counterparty credit risk and outstanding net notional positions.
• Continued elimination of economically redundant trades through trade compression.
• Electronic processing of eligible trades to enhance T+0 confirmation issuance and execution.
• Elimination of material confirmation backlogs.
• Risk mitigation for paper trades.
• Streamlined trade life cycle management to process events (e.g. Credit Events, Succession Events) between upstream trading and confirmation platforms and downstream settlement and clearing systems.
• Central settlement for eligible transactions to reduce manual payment processing and reconciliation.

It’s going to start soon:

Each Major Dealer in the OMG commits to (i) support a clearing platform and (ii) utilize such platform to clear all eligible products where practicable. Pending regulatory approval, index clearing will begin by Nov 30, 2008 with single names
to follow within the first quarter of 2009.

The Participants’ letter isn’t just about CDSs, many types of OTC derivative are addressed. Most of the plans are along the lines of … ‘Well, we’re going to try to do things a lot more like the way they’d be done if anybody had ever, you know, thought about it’. But the OTC derivatives was never planned … it just growed.

But have no fear – the Fed is here! Another document is a Summary Table of Committments, providing a comparison of the commitments made in July with those currently made and an explanation for each item. This type of thing has an unfortunate propensity to degenerate into a regulatory box-ticking exercise, but we can always hope for the best!

Of most interest to PrefBlog’s Assiduous Readers will be the DTCC Announcement that:

it will begin to publish aggregate market data from its Trade Information Warehouse (Warehouse), the worldwide central trade registry it maintains on credit derivatives. Starting Tuesday, November 4 and continuing weekly, DTCC will post on its website www.dtcc.com/derivserv the outstanding gross and net notional values (“stock” values) of credit default swap (CDS) contracts registered in the Warehouse for the top 1,000 underlying single-name reference entities and all indices, as well as certain aggregates of this data on a gross notional basis only. The data is intended to address market concerns about transparency.

The link has been added to the right-hand sidebar, under “US Fixed Income”.

All very encouraging … it doesn’t look like Accrued Interest will get the public Exchange he wants so badly!

This entry was posted on Friday, October 31st, 2008 at 7:23 pm and is filed under Banking Crisis 2008. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.