The New York Federal Reserve plans to closely monitor the progress of 14 credit derivatives dealers who pledged this week to reform their practices, mainly to ease the level of their confirmation backlogs.
Credit derivatives are bought by investors as protection against a possible default on an underlying bond. The popularity of a particular credit derivative, called a credit default swap, has surged over the last four years from under $1 trillion in contracts in 2001 to $8.4 trillion in 2004, according to the independent International Swaps and Derivatives Association.
The spiking growth in credit derivatives contracts spurred more scrutiny of the industry by federal regulators, and called for major industry players to respond.
The 14 dealers teamed up in September to draft the solution amid mounting predictions that credit derivatives back office problems could slow the market. The dealers pledged to reduce confirmation backlogs of more than 30 days by 30 percent by Jan. 31, 2006, a benchmark the proposal described as “aggressive commitment.”
“We will be working closely with other US and international industry supervisors to monitor progress in all of these areas in the coming weeks and months on the basis of common metrics and take stock of the effectiveness of the measures taken to meet these commitments,” the Fed said.
Other proposals included the adoption of a standardized system for regulators to monitor progress, a minimum requirement of clients to subscribe to DTCC, and increased disclosure of contract transfers.
The 14 drafters of the proposal include Bank of America, Barclays Capital, Bear, Stearns, & Co., Citigroup, Credit Suisse First Boston, Deutsche Bank AG, Goldman, Sachs & Co., HSBC Group, JP Morgan Chase, Lehman Brothers, Merrill Lynch & Co., Morgan Stanley, UBS AG, and Wachovia Bank.