Under pressure from regulators, 15 of Wall Street's biggest banks have committed to significantly increase the use of central counterparties to clear over-the-counter (OTC) derivatives.
In a joint letter to the Federal Reserve Bank of New York, the "G15" group - which includes Citi, JP Morgan Chase and Goldman Sachs - have agreed to targets that will see more than 90% of interest rate derivative and credit default swaps trades centrally cleared by the end of the year.
Regulators have been pushing the use of CCPs for OTC trades in a bid to improve transparency and reduce risk in the market, which is estimated to be worth more than $500 trillion.
The Obama administration has sent a legislative proposal to Congress that would subject the banks that trade derivatives to new capital requirements and mandate clearing for OTC derivatives.
The 15 banks have now committed to individually clear 95% of new credit default swap trades from October. Collectively they will clear 80% of all eligible CDS trades. They have also individually committed to clearing 90% of new interest rate derivative trades from December. Collectively they will clear 70%.
The targets will be increased over time as dealers improve their capacity to clear trades.
In addition, the dealers will issue monthly reports on new transactions and outstanding trades in the OTC markets to help regulators to better monitor CCP usage.
William Dudley, president, New York Fed, says: "These targets will push major dealers to accelerate their progress. We also expect them to work with central counterparties to rapidly expand the universe of eligible products and to continue to increase clearing levels beyond these initial targets."
The 15 banks are Bank of America-Merrill Lynch, Barclays Capital, BNP Paribas, Citi, Commerzbank, Credit Suisse, Deutsche Bank, Goldman Sachs, HSBC, JP Morgan Chase, Morgan Stanley, Royal Bank of Scotland, Société Générale, UBS and Wachovia.
In Europe, a group of nine banks began clearing CDS trades centrally earlier this year after the EC threatened legislative action.