US banking fears over backlog in derivatives
Banks and brokers in the US$8.4 trillion (HK$65.52 trillion) credit derivatives market need to establish an industry standard to clear a backlog of unconfirmed trades that threaten the stability of the banking system, the US Office of the Comptroller of the Currency said.
Wednesday, September 21, 2005
Banks and brokers in the US$8.4 trillion (HK$65.52 trillion) credit derivatives market need to establish an industry standard to clear a backlog of unconfirmed trades that threaten the stability of the banking system, the US Office of the Comptroller of the Currency said.
"Electronic processing should be the standard they're all moving toward," said Kathryn Dick, the agency's deputy comptroller for risk evaluation, in Washington Monday.
"Dealers need to agree on the system they're going to use and be sure that processing delays aren't occurring because electronic systems aren't compatible," she said without elaborating.
Credit-default swaps, which are used to bet on a company's creditworthiness or insure bond payments, are the fastest growing segment of the US$248 trillion market for derivatives.
An unspecified number of the trades have yet to be confirmed, raising concern among regulators, such as the Federal Reserve Bank of New York and the Comptroller of the Currency, about potential risks to the banking system.
The New York Fed summoned 14 of the world's largest banks to a meeting in New York last Thursday to discuss the backlog.
Dick attended the meeting as a representative of the Comptroller of the Currency, which regulates banks. US banks earned US$4.4 billion of revenue from trading derivatives and other contracts in the first quarter, double the previous quarter's amount, as they took on more risk at the start of the year, the regulator said on June 24.
Senior executives and risk managers from banks such as JPMorgan Chase, Deutsche Bank, Goldman Sachs Group, Morgan Stanley and Merrill Lynch were among those invited by the New York Fed. The five banks are the most cited trading partners in credit derivatives, according to Fitch Ratings.
At the meeting, New York Fed president Timothy Geithner gave banks until early next month to produce a plan to improve trade processing.
The global credit-derivatives market more than doubled last year, mostly on demand for credit-default swaps, according to data from the International Swaps and Derivatives Association. The market wasn't tracked until 1997.
Buyers of credit-default swaps pay an annual fee similar to an insurance premium to protect a certain amount of debt against default for a specified number of years. In the event of a default, they are paid the face value of the bonds or loans.
A derivative is a financial obligation whose value is derived from interest rates, the outcome of specific events, or the price of underlying assets such as debt, equities and commodities.
Banks and securities firms are struggling to keep up with administration of their derivatives positions as the market grows for credit-default swaps. They risk being overwhelmed by investors seeking settlement if there is a corporate default, an industry group led by E Gerald Corrigan, managing director at Goldman Sachs and a former New York Fed president, said in a report in July. BLOOMBERG
thestandard.com.hk |
