U.S. and foreign regulators push for a clearinghouse to process the $2 trillion worth of credit-default swaps that trade annually underscores fears of lingering systemic risk tied to over-the-counter derivatives.
The objectives of regulatory policy should be to improve the capacity of the financial system to withstand the effects of failure and to reduce the overall vulnerability of the system to the type of funding runs and margin spirals we have seen in this crisis, Timothy Geithner, president of the Federal Reserve Bank of New York, told The Economic Club of New York on June 9.
Mr. Geithner spoke shortly before a meeting held at his bank to discuss the potential systemic risk related to the CDS market and solutions to prevent problems from spinning out of control.
The New York Fed last March spearheaded the hasty $40 billion rescue of Bear Stearns Cos. amid the OTC collateralized debt obligation markets debacle.
The attendees included representatives of 17 financial firms, accounting for 90% of credit derivatives trading, and, for the first time, institutional investors with a strong CDS presence AllianceBernstein LP, Blue Mountain Capital Management LLC, both in New York, and Citadel Investment Group LLC, Chicago as well as representatives of four major industry groups.
Thirteen U.S. regulators and three of their foreign peers from Frances Commission Bancaire, the Swiss Federal Banking Commission and the U.K.s Financial Industry Regulatory Authority also attended the meeting.
There is a sense among regulators that we cannot go through another Bear Stearns, a sense that they have to be more proactive in OTC derivatives markets. The firms welcome more transparency as well, said an executive at a clearing firm who asked not to be named. The New York Fed has slated another meeting for July 31, to assess the progress made toward implementing the agenda agreed upon at the initial meeting, which included, besides the development of a clearinghouse: further automation for same-day trade matching; increasing transparency with an auction-based settlement system; and reducing the volume of outstanding credit by terminating multilateral trades.