The New York Fed on Friday announced its priorities for improvements for the over-the-counter (OTC) markets in credit default swap (CDS) contracts. This came in response to a letter to the New York Fed from the Operations Management Group (OMG), a working group of the major dealers in OTC derivatives and a number of major buy-side firms, outlining the recent improvements they have made in, and undertaking to further improve operation of, the OTC markets. This review of recent improvements and the commitment by the major dealers to make further operational improvements comes amid hearings into regulation of the OTC markets both in the House of Representatives and in the Senate.
The OMG outlined seven goals to enhance operations, improve transparency and reduce systemic risk. These include among others, global use of central counterparty processing and clearing; reduce outstanding trades through “tear-ups;” increase electronic trade confirmation; eliminate processing backlogs; and other steps to streamline trading, confirmation and settlement of trades.
The New York Fed announced that its top priority was to see instituted a central counterpary (CCP) for CDS contracts. The New York Fed noted that, along with the Commodity Futures Trading Commission and the Securities and Exchange Commission, it has “strongly encouraged” the acceleration of efforts to establish CCP clearing for CDS contracts. In its press release, the New York Fed specifically noted that all three regulators were cooperatively reviewing the risk management designs of the U.S. CDS CCP proposals. Proposals to establish a CCP were required to be filed with the Fed by October 31. Proposals were submitted by several groups, including Chicago Mercantile Exchange and Citadel Investment Group, LLC and IntercontinentalExchange and The Clearing Corporation, among others.
The New York Fed announced that its other priorities included reducing the number of outstanding trades through the increased use of tear ups in order to reduce operational risk and counterparty credit exposures, greater transparency for the OTC market and continued operational improvements, such as those outlined in the OMG letter.
On the same day as the New York Fed’s announcement, the Depository Trust & Clearing Corporation (DTCC) also announced that on November 4th, it will begin to publish weekly aggregate market data on the gross and net notional CDS contracts traded on the 1,000 largest CDS reference entities. This responds to the New York Fed’s call by, for the first time, bringing a degree of transparency to the market in CDS contracts. The New York Fed lauded DTCC’s announcement, emphasizing that regulators will continue to work directly with market participants and service providers to further increase the public release of market data.