In a statement following a second meeting with the 14 major credit derivatives dealers, Fed officials say they are "encouraged by the progress made to date".

The regulator originally met with the banks in September 2005 to voice concerns about risk management practices in the rapidly growing credit derivatives market. Banks' back offices have struggled to keep up with the booming market, which according to ISDA figures surged at an annual growth rate of 128% to $12.43 trillion in mid-2005. In particular, the Fed was concerned by the high level of unsigned confirmations outstanding between counterparties.

In October the banks pledged to cut the number of confirmations outstanding more than 30 days by 30% by January 2006. The Fed says that all 14 major dealers have met this commitment and, as a group, a 54% reduction was achieved by the end of January.

The watchdog says industry participants have been able to increase the use of electronic processing of confirmations, reduce the backlog of trades that are unconfirmed and work towards improving the credit default settlement process.

Firms have also signed up to ISDA's new electronic messaging protocol for the novation of trades. ISDA said in November that 1500 firms had signed up to use the protocol, which is designed to streamline the transfer of existing trades to third parties via the exchange of electronic assignment messages rather than written consent. The record number of firms that signed up to the terms of the protocol set a new record for adherence to a voluntary initiative.

The Fed says virtually all active clients have been added to the industry-accepted electronic confirmation platform, and this has "facilitated an increase of total trade volume that is electronically confirmed from 46% in September to 62% in the month of January".

Following the second meeting the dealers are expected to submit a new set of plans to improve confirmation processing times for credit derivatives over the next few months. The industry will outline a set of conditions that would define acceptable market practices for post-trade processing of OTC derivatives, says the Fed.

Earlier this week The Depository Trust and Clearing Corporation (DTCC) said it would create a central industry trade information warehouse for OTC derivatives processing. The service, which is expected to launch in June with the backing of leading dealers and asset managers, will consist of a database containing the 'golden copy' of each trade and a central support infrastructure to standardise and automate 'downstream' processes throughout the life of each contract.