Fed, Dealers to Meet on Default Swaps Clearinghouse
By Shannon D. Harrington and Scott Lanman
Oct. 6 (Bloomberg) -- The Federal Reserve Bank of New York will meet tomorrow with banks and investors in credit-default swaps to gauge progress on an initiative to create a clearinghouse to curb risks in the market, a spokesman said.
The group in July set an end-of-year deadline to have a central system in place to absorb a failure in the $54.6 trillion market in which banks and investors privately negotiate contracts that protect against losses on fixed-income securities.
The Fed will hold a meeting with ``a small number of banks and buy-side firms'' to discuss progress being made on creating a central counterparty, said a New York Fed spokesman who declined to be identified.
New York Fed President Timothy Geithner has stepped up pressure to create a central counterparty since the near-collapse of Bear Stearns Cos. in March raised concern the market could fail if a major market-maker couldn't make good on its trades. The bankruptcy last month of Lehman Brothers Holdings Inc., among the top 10 counterparties to credit swap trades, intensified concern that market stability is in jeopardy amid the worst financial crisis since the Great Depression.
The Clearing Corp., a Chicago clearinghouse owned by some of the biggest credit-default swap market-makers, has faced delays in setting up a system for guaranteeing trades as the Fed pushed it to obtain a banking license that would place it under the central bank's watch.
`Moving Aggressively'
The company and the banks are ``moving aggressively to launch the CDS clearing platform by the end of this year,'' Clearing Corp. said in a Sept. 29 statement. Testing and validation of the system was nearing completion, the company said.
U.S. Securities and Exchange Commission Chairman Christopher Cox last month asked Congress for the authority to regulate the market and New York Governor David Paterson said state insurance regulators would start overseeing a part of the market, which he blamed for fueling the crisis.
CNBC reported earlier that the Fed was meeting with officials from Chicago-based futures exchange operator CME Group and the Intercontinental Exchange Inc., the second-largest U.S. futures market, to create a marketplace for credit-default swaps.
Kelly Loeffler, a spokeswoman for Intercontinental Exchange, and CME spokeswoman Mary Haffenberg declined to comment on the meeting. Both companies have announced plans to offer clearing services for the market and ICE earlier this year bought credit swap broker Creditex Group Inc., which is one of the owners of Clearing Corp.
CME last year started offering futures contracts that were similar to credit-default swaps in an effort to tap into the over-the-counter market, which had swelled more than 100-fold the past seven years. The market shrunk for the first time this year in its decade-long history amid efforts to scale down the size of outstanding contracts and reduce risks.
To contact the reporters on this story: Shannon D. Harrington in New York at sharrington6@bloomberg.net; Scott Lanman in Washington at slanman@bloomberg.net |
