Big players in the $450 trillion derivatives markets agreed to increase transparency and expand the volume and type of contracts they route to central counterparties, the New York Federal Reserve said on Thursday.
Derivatives, which are based on underlying assets including bonds and commodities or can be tied to currency and interest rate moves, were blamed for exacerbating the credit crisis and contributed to a run on assets that helped fell banks including Lehman Brothers.
The latest effort is a bid by the industry to reduce risks in the privately traded markets.
The industry has been under heavy pressure to become safer after the government bailed out American International Group because the insurer had a massive exposure to risky assets using credit default swaps, which are used to insure against a debt default.
Large market participants — including banks like JPMorgan Chase investment companies such as Pacific Investment Management and industry groups — met with regulators on Thursday at a meeting hosted by the New York Fed.
They agreed to provide regulators with additional information on trades in an effort to enhance efforts to move more of the market to central counterparties.
"The industry must undertake a major transformation to bring significantly greater levels of transparency to these markets. Increasing the amount and quality of market information available to participants, regulators and the public is critical to the work of shoring up the stability and efficiency of the financial system," William Dudley, president of the New York Fed, said in the release.
Greater use of central counterparties, which stand between trading partners and guarantee trades, is expected to help reduce the risks of a bank run, which would improve the stability of the financial sector.
Banks and fund managers also agreed to expand the volume and range of contracts that are currently deemed eligible for central clearing.
Debate over what contracts are eligible for central clearing, however, remains lively as banks and clearinghouses fear that taking on the risks of hard-to-value contracts will only succeed in shifting risks from banks to the central counterparties.
Details over what trading information will be provided to regulators, and how much may be made available to the public, also remain unresolved, said a person with knowledge of Thursday's meeting.
Large derivatives participants will detail new commitments in a letter due to be sent to regulators by March 1.
Derivatives dealers and users also reaffirmed commitments to formalize best practices, including margining requirements, for derivatives that are not centrally cleared.
IntercontinentalExchange and CME Group are the only clearinghouses in the U.S. that have begun clearing CDSs.
Banks in September agreed to submit 95 percent of eligible credit derivatives, and 90 percent of eligible interest rate derivatives, to central counterparties.
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