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President’s Working Group to strengthen infrastructure for OTC derivatives

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The President’s Working Group on Financial Markets has announced a series of initiatives to strengthen oversight and the infrastructure of the over-the-counter derivatives market.<

The President’s Working Group on Financial Markets has announced a series of initiatives to strengthen oversight and the infrastructure of the over-the-counter derivatives market.

They include the development of credit default swap central counterparties, some of which will commence operations before the end of 2008, and the establishment of a memorandum of understanding regarding CDS central counterparties among the Federal Reserve Board of Governors, the Securities and Exchange Commission and the Commodity Futures Trading Commission.

The group also announced a broad set of policy objectives to help address the full range of challenges associated with OTC derivatives and issued a progress summary to provide an overview of the results of ongoing efforts to strengthen the infrastructure of OTC derivatives markets.

The group’s top near-term OTC derivatives priority is to oversee the successful implementation of central counterparty services for credit default swaps.

It says a well-regulated and prudently managed CDS central counterparty can provide immediate benefits to the market by reducing the systemic risk associated with counterparty credit exposures. It also can help facilitate greater market transparency and be a catalyst for a more competitive trading environment that includes exchange trading of CDS.

At the prompting of the PWG, several potential central counterparty providers have accelerated the development of their efforts. The relevant regulatory authorities are assessing these central counterparty proposals by conducting detailed on-site reviews of risk management and other key design elements.

After completing the on-site reviews, regulators expect to proceed toward regulatory approvals and/or exemptions and anticipate that one or more CDS central counterparties will commence operations before the end of 2008.

To facilitate the regulatory approval process and to promote more consistent regulatory oversight, the board of governors of the Federal Reserve System, the Securities and Exchange Commission and the Commodity Futures Trading Commission have signed a memorandum of understanding, which establishes a framework for consultation and information sharing on issues related to CDS central counterparties.

The PWG has established the following policy objectives: improve the transparency and integrity of the credit default swaps market; enhance risk management of OTC derivatives; further strengthen the OTC derivatives market infrastructure; and strengthen cooperation among regulatory authorities.

 

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