Wall Street Agrees to Clear Customer Credit Swaps by December
By Matthew Leising
June 2 (Bloomberg) -- Wall Street banks including JPMorgan Chase & Co., Goldman Sachs Group Inc. and UBS AG will for the first time offer hedge-fund customers protection by backing credit-default swap trades with clearinghouses by December.
The dealers also committed to report all trades that aren’t cleared in the credit swap market to a trade repository by July 17; for interest-rate swap trades by Dec. 31; and for equity derivatives by July 31, 2010, the banks said in a letter sent today to the Federal Reserve Bank of New York.
“The OTC derivatives market has been exposed as a source of excessive risk. Achieving these commitments is an important step toward managing that risk,” William Dudley, president of the New York Fed, said in a statement accompanying the letter. “We will continue to demand further improvements until our objectives are achieved.”
U.S. regulators are pushing for tighter regulation of the $592 trillion over-the-counter derivatives market, which includes credit-default swaps, to reduce risk to the financial system. Derivatives contributed to the failures last year of Lehman Brothers Holdings Inc. and American International Group Inc., and a broader seizure of credit markets that caused more than $1.4 trillion in writedowns and credit losses.
Trades in the $29 trillion credit-default swap market are now cleared by ICE Trust, a clearinghouse owned by Intercontinental Exchange Inc. ICE Trust only clears trades made between its bank members and doesn’t now allow for pension funds, hedge funds or other investors to guarantee their trades with banks.
‘Absorb Market Shocks’
“We fully understand and support that CCPs will be regulated with particular emphasis on financial strength to absorb market shocks including bankruptcy of a major market participant,” the banks said in their letter, referring to central counterparty clearing services, or CCPs.
The push by the Fed and other regulators for greater regulation of the OTC markets follows the collapse of Lehman, one of the largest credit-swaps dealers, and the U.S. rescue of AIG after it made bad bets using credit-default swaps. Both are based in New York.
The privately traded, unregulated contracts complicated government efforts to assess systemic financial risk because no one knew how interconnected the banks had become.
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