When central banks stop selling gold, it goes up

Section:

Dealers Vow to Enforce
Tougher Rules in CDS Market

By Karen Brettell and Dean Patterson
Reuters
Thursday, September 15, 2005

http://today.reuters.com/investing/financeArticle.aspx?
type=governmentFilingsNews&storyID=URI:urn:newsml:reuters.com:2005091
5:MTFH45645_2005-09-15_23-39-29_N13368238:1

NEW YORK -- 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.

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