August 25, 2005
By RIVA D. ATLAS
SourceThe Federal Reserve Bank of New York has called a meeting of top Wall Street firms to discuss practices in the booming, if opaque, credit derivatives market.
Credit derivatives, which are linked to the probability of a company's paying its debts, represent one of Wall Street's fastest-growing businesses, with $8.4 trillion of these contracts outstanding at the end of last year, up from $919 billion just three years earlier, according to the International Swaps and Derivatives Association, a trade group.
The meeting, which will be held on Sept. 15, is being called three months after global stock and bond markets were rattled by fears that some of the largest banks were caught wrong-footed on some credit derivatives bets.
The worries, which surfaced in May after the credit rating of General Motors was cut to junk status and the prices of G.M. bonds fell sharply, turned out to be overblown. Still, the tumult drew attention to the rapid growth of the credit derivatives market, and raised concerns that participants did not fully understand the risks.
A letter went out this month from Timothy Geithner, the president of the New York Fed, to executives at 14 dealers inviting them to discuss "a range of issues in the credit derivatives market," said Peter Bakstansky, a spokesman for the New York Fed. The meeting will focus in particular on issues tied to the processing of these trades, he said.
Mr. Bakstansky declined to list the banks invited to the meeting, but the largest participants in the market include J. P. Morgan, Deutsche Bank, Goldman Sachs and Morgan Stanley.
Representatives of the Securities and Exchange Commission, the Office of the Comptroller of the Currency and the New York State banking department will attend the meeting, Mr. Bakstansky said. Banking regulators from Britain, Switzerland and Germany have also been invited.
The rapid growth of the credit derivatives market was a major focus of a report in July by the Counterparty Risk Management Group, a team of top bankers originally formed at the request of the New York Fed to assess market risk. The group was first established in 1999, after the near-collapse of Long-Term Capital Management, the giant hedge fund that suffered large losses on other varieties of derivative bets.
In its report, the group noted that the financial services industry "has had very limited experience with settling large numbers of transactions following a credit event," like a corporate default or bankruptcy. Such events set off payments from one party in the trade to the other.
In a speech last April, Mr. Geithner also expressed concerns about the ability of the banks to handle derivatives trades efficiently.
Some aspects of processing credit derivatives trades are done manually, which slows their completion. There is a backlog of 11.6 days before such trades are confirmed, according to a June survey by the International Swaps and Derivatives Association. That was an improvement over 17.8 days last year, the organization said.
Copyright 2005 The New York Times Company