The letter, which addresses issues discussed at an April 1 meeting between major market participants and banking supervisors, continues supervisory efforts to reduce systemic risks in the OTC derivatives market. The objectives include expanding use of central counterparties, strengthening risk management and operations, significantly improving transparency and ensuring strong coordination within the regulatory community. Key elements of the letter include establishing, for the first time, deadlines for recording all credit, interest rate and equity derivatives transactions in trade repositories and expanding credit default swap (CDS) central clearing to buy-side firms.
"As has been widely recognized, the OTC derivatives market has been exposed as a source of excessive risk. Achieving these commitments is an important step toward managing that risk, making the financial system more resilient and robust. We will continue to demand further improvements until our objectives are achieved," said William C. Dudley, president of the New York Fed.
The commitments supporting these objectives include:
- Recording all OTC derivatives transactions in trade repositories: Registering the complete universe of OTC derivatives trades in either central counterparties or trade repositories will improve the ability of regulators to monitor the OTC derivatives market and will increase transparency to the public. The signatories have committed to record all of their credit derivatives trades by mid-July and to establish centralized reporting infrastructures for interest rate and equity derivatives.
- Expanding CDS central clearing to customers by mid-December 2009: A key regulatory priority is to extend the risk reduction benefits of CDS Central Counterparties (CCPs) to all market participants. Dealer clearinghouse participants have committed to provide their clients with access to any viable CDS CCP solution no later than December 15, 2009.
- Expanding central clearing to a wider range of OTC derivative products: Market participants have set near-term targets to expand central clearing support for credit and interest rate derivative products. Expanding central clearing support for standardized OTC derivatives instruments will maximize the credit risk reduction and operational efficiency benefits provided through use of prudently managed, financially strong and regulated CCPs.
- Strengthening counterparty risk management: Major dealers have committed to implement daily reconciliation of portfolios, a requisite practice for robust counterparty credit risk management, by June 30, 2009. In addition, by September 30, 2009, market participants will publish a standard mechanism for timely and fair resolution of valuation disputes.
- Establishing broad-based and transparent industry governance: The industry commits to enhance its newly-established governance structure to ensure that a broad range of market participants will be included in open, transparent decision-making processes that fairly balance the interests of dealers and their customers.
- Continuing to drive operational performance improvements: Market participants have committed to improve operations in four key areas: matching trades on trade date, increased automation, increased standardization and continued reduction of trade confirmation backlogs.
The New York Fed will continue to work with domestic and international banking supervisors to monitor market progress on these objectives and encourage rapid action to improve the OTC derivatives infrastructure further.