SourceNEW YORK, Sept 15 (Reuters) - Fourteen credit derivative dealers met with the New York Federal Reserve Bank on Thursday and vowed to police the booming market themselves to keep regulators from doing it, a meeting participant said.This will entail dealers eventually refusing to do business with clients, namely hedge funds, that do not adopt standard systems and practices that stop delays in trade confirmations and lax disclosure of contract transfers, according to the meeting participant, who is a dealer.
"Dealers have the resolve and unity to do whatever it takes to resolve these issues," the dealer said. "We will be firm with the hedge funds. We are willing to do it."
The dealers also agreed to produce a standard set of statistics that will be supplied to regulators to show whether back office operations are improving, the dealer said.
The dealers also agreed to set up special desks to deal with lags in trade confirmations and disclosure of contract transfers, the dealer said.
All 14 dealers endorsed new protocol announced earlier this week to reduce confusion regarding contract transfers, the dealer said. Dealers will "unquestionably" be able to comply with the new protocol by its target date of Oct. 24, the dealer said.
"We will enforce the protocol with hedge funds," he added.
The U.S. credit derivatives market has grown more than eight-fold over the last three years to $8.42 trillion at the end of 2004, according to industry groups.
At issue were lags in the processing of trades and delays in informing involved parties when contracts change hands, which regulators believe has the potential to throw the market into confusion if it comes under stress.
Delays in processing trades could lead to disputes over payments in the event of a default, as well as confusion over the amount of exposure banks have to counterparties.
The Fed is concerned that delays in communicating to involved parties when contracts change hands could spill into systemic problems in the global financial system.
"Industry participants outlined a number of concrete steps," to address the back office issues, the Fed said after the meeting. "The Federal Reserve and other members of the supervisory community will continue to monitor developments in this market very closely."
Investors use credit default swaps, the most common credit derivative, to protect against borrowers defaulting on their debt. They are also used to speculate on the future direction of a debt issuer's credit quality.
U.K. regulator Financial Services Authority, which was expected to attend the meeting along with regulators from Switzerland and Germany, as well as other U.S. regulators, first raised concerns about operational risk in the credit derivatives market in February.
The 14 banks invited to the meeting, which started at 4 p.m. EDT at the New York Fed's offices, were Bank of America Corp. , Barclays Capital , Bear Stearns , Citigroup , Credit Suisse's Credit Suisse First Boston, Deutsche Bank , Goldman Sachs , HSBC , JPMorgan Chase & Co. , Lehman Brothers , Merrill Lynch , Morgan Stanley , UBS and Wachovia Corp. .
(Additional reporting by Chris Sanders, Victoria Thieberger and Andrea Ricci)
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