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"The Fed will respond by creating its own group to compel swaps dealers, hedge funds and clearinghouses to meet regulatory goals", said Dudley in a statement today. “The industry did not meet their prior commitment to provide a viable clearing solution for clients.” “To ensure that these discussions result in timely and material progress, the supervisors will establish a working group” that “will work through these issues to their resolution,” he added.
The industry group of banks said 13 months ago that “substantial work” remained before credit derivatives dealers and their biggest customers can regularly move trades into clearinghouses designed to curb risks to the financial system, according to a statement at the time. The money managers involved in the OTC Derivatives Supervisors Group refused to agree to specific goals because of concerns that cleared trades would be protected under bankruptcy laws and the cost of backing trades with collateral, people familiar with the matter said at the time. Last year, the New York Fed set a March 1 deadline requiring the group to outline the industry’s next steps to move swaps through clearinghouses.
Contain Losses
While the New York Fed prodded JPMorgan, Deutsche Bank AG (DBK), Goldman Sachs Group Inc. (GS) and other dealers into clearing more than 90 per cent of eligible trades between banks by the end of 2009, their clients are resisting on concern that the potential added costs would outweigh benefits. Clearinghouses are designed to contain losses if a major dealer or investor collapses.