Fifteen big banks that dominate worldwide trading of derivatives have committed to greater transparency in a $600 trillion market that regulators say needs stricter oversight to protect the global financial system.
Fifteen big banks that dominate worldwide trading of derivatives have committed to greater transparency in a $600 trillion market that regulators say needs stricter oversight to protect the global financial system.
The international group of banks — including Bank of America Corp., Citigroup Inc., Deutsche Bank AG, Goldman Sachs Group Inc. and JPMorgan Chase & Co. — made the commitment for targets in expanded central clearing systems to the Federal Reserve Bank of New York in a letter Tuesday. It is part of a series of voluntary steps by the banks to expand the use of clearinghouses for the over-the-counter market in derivatives.
The value of derivatives hinges on an underlying investment or commodity, such as currency rates, oil futures or interest rates; they are designed to reduce the risk of loss from the underlying asset.
Congress is weighing a legislative proposal by the Obama administration, part of its financial overhaul initiative, to subject the banks that trade derivatives to new capital requirements and other rules, and establish a new network of clearinghouses to provide transparency for trades.
The banks also agreed in Tuesday's letter to report a broader set of data so regulators can more easily monitor the use of clearinghouses. They said their commitment to increase the use of central clearinghouses "will significantly reduce the systemic risk profile" of the derivatives market.
"These targets will push major dealers to accelerate their progress," New York Fed President William Dudley said in a statement.
The Securities and Exchange Commission and the Commodity Futures Trading Commission have begun coordinating their rules to eliminate differences for derivatives and other investments.
SEC spokesman John Nester had no immediate comment Tuesday on the banks' commitments. CFTC spokesmen didn't immediately return a call seeking comment.
Credit default swaps, a form of insurance against loan defaults, account for an estimated $60 trillion of the global derivatives market. The collapse of the swaps brought the downfall a year ago of Wall Street banking house Lehman Brothers Holdings Inc. and nearly toppled American International Group Inc., prompting the government to support the insurance conglomerate with about $180 billion in aid.
