Fifth Industry Meeting Hosted by the Federal Reserve Bank of New York
The Federal Reserve Bank of New York hosted a meeting today of major market participants and their domestic and international supervisors to discuss ongoing efforts to improve the infrastructure supporting the over-the-counter (OTC) derivatives market.
"Recent events underscore the need for more progress in reducing risk in the OTC derivatives market. Collective international efforts have increased operational efficiency and created greater transparency. But banks and buy-side firms still need to make considerable improvements to both risk management and the design of the OTC derivatives markets," said William C. Dudley, president of the Federal Reserve Bank of New York.
Participants outlined their next steps to strengthen the OTC derivatives market infrastructure and enhance risk management practices, consistent with the priorities of the President’s Working Group on Financial Markets and the U.S. Treasury’s framework for regulatory reform.
Since the previous meeting with regulators in June 2008, industry participants have taken a number of steps to improve the OTC derivatives market infrastructure, including:
- Establishing CDS central counterparties (CCP): Multiple CDS CCP platforms have been developed and have started or are close to starting operations. This marks a major step in establishing a centralized infrastructure to reduce counterparty credit and operational risk.
- Increasing market transparency: Market participants have taken several steps to expand the information publicly available about the CDS markets. The Depository Trust & Clearing Corporation began releasing weekly aggregate volume data on the CDS market in November. Dealers have begun to provide a range of pricing information to the public via a vendor portal. And, CCPs will be releasing information about their activity as they go live.
- Reducing the size of CDS portfolios: Market participants have significantly reduced levels of outstanding CDS trades via multilateral trade terminations (tear-ups) to lower outstanding notional amounts, reducing counterparty credit exposures and operational risk. To date in 2009, tear-ups have eliminated approximately $7 trillion of CDS trade notional amounts, in addition to the $32 trillion eliminated in 2008.
Market participants and regulators agreed on the following agenda for further improvements in the OTC derivatives market infrastructure:
- Complete “hardwiring” the auction-based settlement mechanism for CDS: Market participants at the meeting agreed to complete incorporating the auction-based settlement mechanism into standard CDS documentation by ISDA’s April 7 deadline. Regulators strongly encourage all other market participants to adopt the new documentation by the same date.
- Expand operational performance targets: Market participants agreed to strengthen the operational improvement roadmap presented to regulators in October 2008 with additional aggressive benchmarks for moving to an automated processing environment that can handle both volume spikes and future growth across all OTC asset classes.
- Expand use of CDS CCPs and trade repositories: Market participants supported broadening the use of CDS CCPs to include a wider set of firms and CDS products. They also agreed to report all CDS trades not cleared through a CCP to a central trade repository.
- Support broad-based market governance and decision making processes: Market participants agreed to strengthen industry governance structures and decision making processes to encompass a wide set of viewpoints, including both buy-side and sell-side participants.
Market participants agreed to detail their next steps for addressing these priorities in a letter to regulators by May 29.
The New York Fed will continue to work with domestic and international industry supervisors to monitor progress and encourage further efforts to improve the OTC derivatives infrastructure.
(Invited participants are active members of the industry Operations Management Group, which has been organizing industry efforts and working with regulators on these initiatives.)
List of attending institutions