By Karen Brettell and Kristina Cooke
NEW YORK, June 2 (Reuters) - Large banks, who have long controlled the $26 trillion credit default swap market, on Tuesday agreed to give investors more access to central clearing by year-end, amid pressure from funds and regulators.
Banks, including JP Morgan and Morgan Stanley , also agreed to give funds more say in market decisions, market participants said in a letter to regulators. Funds have complained that dealers have been slowing reforms to guard profits.
Participants in the opaque, privately traded credit, interest-rate and equity derivative markets have been working closely with regulators to reduce risks and increase transparency, as part of the Obama administration's regulatory reforms.
This is the first time that dealers have set a timeline to expand client access to central clearing of credit default swaps which are used to protect against borrowers defaulting on their debt or to speculate on their credit quality.
Credit default swaps have come under fire for their role in exacerbating the global credit crisis. This has prompted dealers to work with regulators rather than risk other, more stringent proposals from some lawmakers in Washington that want to significantly curtail the market.
Fifteen dealers, among them Barclays Capital, Goldman Sachs and Deutsche Bank, agreed to expand central clearing of credit default swaps to asset managers by Dec 15, 2009.
Banks also agreed to provide for the segregation of initial margins posted against client trades, market participants said in the letter, which was sent to 12 regulators.
Hedge funds are demanding dealers segregate their initial trade margins after some funds lost the assets in bankruptcy proceedings when Lehman Brothers failed in September.
Collateral is used to back payments on derivative contracts in the event a counterparty to the trade fails.
The move to central clearing is viewed as critical to removing the systemic risks from a Lehman-like collapse of a large dealer, though a battle to gain clearing business of the contracts has slowed its implementation.
CONFLICTS
Fund managers have been unable to clear trades through the clearing arm of IntercontinentalExchange Inc, in which dealers have a 50 percent revenue sharing agreement, because of stringent restrictions relating to members' credit ratings and capital levels.
Ted MacDonald, Treasurer at D.E. Shaw Group, said at a derivatives industry conference in April that the firm wanted to be able to directly clear trades through ICE, or have some form of sponsored access that would allow it to bypass dealer fees.
D.E. Shaw has been unable to achieve this, in spite of its willingness to invest time and capital to the project, MacDonald said at the annual general meeting of the International Swaps and Derivatives Association in Beijing.
'Its pretty safe to say that everybody except the dealers are trying to disintermediate the dealers,' said Kevin McPartland, senior analyst at research and advisory firm TABB Group in New York.
Asset managers also say dealers are refusing to back efforts by competing platform at the CME Group, which runs the Chicago Mercantile Exchange.
Samuel Cole, Chief Operating Officer at hedge fund BlueMountain Capital Management, sent an email on Monday criticising dealers as unwilling to back clearing solutions that they don't have a stake in, in order to protect their 'oligopoly' on the market.
The CME offering is a joint venture with hedge fund Citadel Investment Group and also has the backing of major investment firms including Pacific Investment Management Co, BlackRock Inc , D.E. Shaw, AllianceBernstein and BlueMountain.
TRADE REPORTING, DECISION MAKING
Dealers also agreed on Tuesday to incorporate the views of both dealers and fund managers, and not allow any one side to dominate decision making, the letter said.
The move comes in response to complaints that banks have dominated industry panels at the expense of investment managers' input.
Derivatives participants also committed to booking non-standard trades, which aren't centrally cleared, into central trade repositories, the letter said.
This will help regulators determine the exposures of large players and help avoid a repeat scenario of American International Group, which collapsed as investors fretted the insurer had inadequate capital to support the massive exposures it had taken to risky assets using credit default swaps.
In addition, dealers said they would perform daily checks on their trades with counterparties, known as portfolio reconciliation, which will protect against risks arising from unknown disagreements over the terms, size, value or even existence of trades. Keywords: DERIVATIVES REGULATION/ (karen.brettell@thomsonreuters.com; Tel: +1 646 223 6274; Reuters Messaging: karen.brettell.reuters.com@reuters.net) COPYRIGHT Copyright Thomson Reuters 2009. All rights reserved. The copying, republication or redistribution of Reuters News Content, including by framing or similar means, is expressly prohibited without the prior written consent of Thomson Reuters.
NEW YORK, June 2 (Reuters) - Large banks, who have long controlled the $26 trillion credit default swap market, on Tuesday agreed to give investors more access to central clearing by year-end, amid pressure from funds and regulators.
Banks, including JP Morgan and Morgan Stanley , also agreed to give funds more say in market decisions, market participants said in a letter to regulators. Funds have complained that dealers have been slowing reforms to guard profits.
Participants in the opaque, privately traded credit, interest-rate and equity derivative markets have been working closely with regulators to reduce risks and increase transparency, as part of the Obama administration's regulatory reforms.
This is the first time that dealers have set a timeline to expand client access to central clearing of credit default swaps which are used to protect against borrowers defaulting on their debt or to speculate on their credit quality.
Credit default swaps have come under fire for their role in exacerbating the global credit crisis. This has prompted dealers to work with regulators rather than risk other, more stringent proposals from some lawmakers in Washington that want to significantly curtail the market.
Fifteen dealers, among them Barclays Capital, Goldman Sachs and Deutsche Bank, agreed to expand central clearing of credit default swaps to asset managers by Dec 15, 2009.
Banks also agreed to provide for the segregation of initial margins posted against client trades, market participants said in the letter, which was sent to 12 regulators.
Hedge funds are demanding dealers segregate their initial trade margins after some funds lost the assets in bankruptcy proceedings when Lehman Brothers failed in September.
Collateral is used to back payments on derivative contracts in the event a counterparty to the trade fails.
The move to central clearing is viewed as critical to removing the systemic risks from a Lehman-like collapse of a large dealer, though a battle to gain clearing business of the contracts has slowed its implementation.
CONFLICTS
Fund managers have been unable to clear trades through the clearing arm of IntercontinentalExchange Inc, in which dealers have a 50 percent revenue sharing agreement, because of stringent restrictions relating to members' credit ratings and capital levels.
Ted MacDonald, Treasurer at D.E. Shaw Group, said at a derivatives industry conference in April that the firm wanted to be able to directly clear trades through ICE, or have some form of sponsored access that would allow it to bypass dealer fees.
D.E. Shaw has been unable to achieve this, in spite of its willingness to invest time and capital to the project, MacDonald said at the annual general meeting of the International Swaps and Derivatives Association in Beijing.
'Its pretty safe to say that everybody except the dealers are trying to disintermediate the dealers,' said Kevin McPartland, senior analyst at research and advisory firm TABB Group in New York.
Asset managers also say dealers are refusing to back efforts by competing platform at the CME Group, which runs the Chicago Mercantile Exchange.
Samuel Cole, Chief Operating Officer at hedge fund BlueMountain Capital Management, sent an email on Monday criticising dealers as unwilling to back clearing solutions that they don't have a stake in, in order to protect their 'oligopoly' on the market.
The CME offering is a joint venture with hedge fund Citadel Investment Group and also has the backing of major investment firms including Pacific Investment Management Co, BlackRock Inc , D.E. Shaw, AllianceBernstein and BlueMountain.
TRADE REPORTING, DECISION MAKING
Dealers also agreed on Tuesday to incorporate the views of both dealers and fund managers, and not allow any one side to dominate decision making, the letter said.
The move comes in response to complaints that banks have dominated industry panels at the expense of investment managers' input.
Derivatives participants also committed to booking non-standard trades, which aren't centrally cleared, into central trade repositories, the letter said.
This will help regulators determine the exposures of large players and help avoid a repeat scenario of American International Group, which collapsed as investors fretted the insurer had inadequate capital to support the massive exposures it had taken to risky assets using credit default swaps.
In addition, dealers said they would perform daily checks on their trades with counterparties, known as portfolio reconciliation, which will protect against risks arising from unknown disagreements over the terms, size, value or even existence of trades. Keywords: DERIVATIVES REGULATION/ (karen.brettell@thomsonreuters.com; Tel: +1 646 223 6274; Reuters Messaging: karen.brettell.reuters.com@reuters.net) COPYRIGHT Copyright Thomson Reuters 2009. All rights reserved. The copying, republication or redistribution of Reuters News Content, including by framing or similar means, is expressly prohibited without the prior written consent of Thomson Reuters.