Fed, 17 Banks Agree on Credit-Default Swaps Changes
By Shannon D. Harrington
June 9 (Bloomberg) -- Regulators and 17 banks that handle about 90 percent of the trading in credit-default swaps agreed to changes aimed at easing the risk of a collapse of the $62 trillion market, the Federal Reserve Bank of New York said.
Morgan Stanley, Deutsche Bank AG and Goldman Sachs Group Inc. are among the banks creating a system to move trades through a clearinghouse that would absorb a failure by one of the market- makers, the New York Fed said today in a statement following a meeting with the firms.
The central counterparty, more automated trading and settlement and other fixes ``will help improve the system's ability to manage the consequence of failure by a major institution, and we expect to make meaningful progress over the next six months,'' New York Fed President Timothy Geithner said in a speech to the Economic Club of New York.
Concerns that the market could fail erupted in March when Bear Stearns Cos., then the fifth-biggest U.S. securities firm, faced a cash squeeze. The central bank agreed to back an emergency sale of Bear to JPMorgan Chase & Co. in part because of the systemic losses that would have resulted if the firm had filed for bankruptcy, Geithner said today.
The Fed has conferred with banks since September 2005 to improve processing and settlement in the market. Ten of the 17 banks at the meeting today were owners of Chicago-based Clearing Corp., which has said it will start guaranteeing credit-default swap trades by September. Investment firms AllianceBernstein LP, Citadel Investment Group LLC and BlueMountain Capital Management LLC joined the meetings today for the first time.
Cash Settlement
In addition to a central clearing mechanism, the group agreed to include in standard trading documents a mechanism for settling trades with cash instead of having to physically deliver the underlying securities.
The group will reduce the volume of outstanding contracts through multilateral trade terminations. They also agreed to extend the changes in credit-default swaps to other derivatives contracts backed by equities, interest rates, currencies and commodities.
The group will provide details on its next steps by July 31, the Fed said in its statement.
Credit-default swaps are financial instruments based on bonds and loans that are used to speculate on a company's ability to repay debt. They pay the buyer face value should the company fail to adhere to its debt agreements.
By Shannon D. Harrington
June 9 (Bloomberg) -- Regulators and 17 banks that handle about 90 percent of the trading in credit-default swaps agreed to changes aimed at easing the risk of a collapse of the $62 trillion market, the Federal Reserve Bank of New York said.
Morgan Stanley, Deutsche Bank AG and Goldman Sachs Group Inc. are among the banks creating a system to move trades through a clearinghouse that would absorb a failure by one of the market- makers, the New York Fed said today in a statement following a meeting with the firms.
The central counterparty, more automated trading and settlement and other fixes ``will help improve the system's ability to manage the consequence of failure by a major institution, and we expect to make meaningful progress over the next six months,'' New York Fed President Timothy Geithner said in a speech to the Economic Club of New York.
Concerns that the market could fail erupted in March when Bear Stearns Cos., then the fifth-biggest U.S. securities firm, faced a cash squeeze. The central bank agreed to back an emergency sale of Bear to JPMorgan Chase & Co. in part because of the systemic losses that would have resulted if the firm had filed for bankruptcy, Geithner said today.
The Fed has conferred with banks since September 2005 to improve processing and settlement in the market. Ten of the 17 banks at the meeting today were owners of Chicago-based Clearing Corp., which has said it will start guaranteeing credit-default swap trades by September. Investment firms AllianceBernstein LP, Citadel Investment Group LLC and BlueMountain Capital Management LLC joined the meetings today for the first time.
Cash Settlement
In addition to a central clearing mechanism, the group agreed to include in standard trading documents a mechanism for settling trades with cash instead of having to physically deliver the underlying securities.
The group will reduce the volume of outstanding contracts through multilateral trade terminations. They also agreed to extend the changes in credit-default swaps to other derivatives contracts backed by equities, interest rates, currencies and commodities.
The group will provide details on its next steps by July 31, the Fed said in its statement.
Credit-default swaps are financial instruments based on bonds and loans that are used to speculate on a company's ability to repay debt. They pay the buyer face value should the company fail to adhere to its debt agreements.
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