The Securities Industry and Financial Markets Association is proposing a framework for over the counter derivatives risk management and market structure.

In a letter to the Federal Reserve Bank of New York, SIFMA’s Asset Management Group reiterates its commitment to reducing systemic risk in the over the counter derivative markets through various measures, including: adopting mechanisms at central counterparties to assure segregation of customer collateral and account portability; implementing data repositories for non-cleared transactions; clearing for OTC standardized derivative products; enabling customer access to clearing through either direct or indirect access; delivering robust collateral and margining processes; updating industry governance to be more inclusive of buy-side participants; and, driving improvement in industry infrastructure.

The group commits to universal recording of trades in a trade repository, for all trades to which the group’s members are a party and which were not cleared through a CCP. For credit default swap trades, the implementation date is July 17, interest rate derivative trades will be recorded by December 31, and OTC equity derivative trades by July 31, 2010.

In addition, the group said that it is actively engaged in discussions with CCPs to broaden the range of cleared products and market participants. Products that will be added in 2009 include liquid single name CDS and overnight indexed swaps. Further products will be added in 2010, including tranche CDS.

The group said that these initiatives “offer a strong solution to the concerns raised by supervisors and legislators globally, notably the G20, the European Commission and the U.S. Department of Treasury.”

“The industry is working towards a constructive, substantive approach to the regulation of over the counter derivatives,” said SIFMA president and CEO Tim Ryan.

“A cornerstone of this plan is the creation of a CDS clearinghouse, one of which has already begun to clear and settle CDS transactions, limiting the risk to the larger financial system of any one dealer failing to meet its obligations. This approach also facilitates regulators’ ability to monitor firms’ exposure to over the counter derivative products while simultaneously ensuring each firm holds the necessary collateral,” Ryan said. “In addition, Congress should provide for regulatory oversight of every systemically significant participant in the derivatives market, appointing a systemic risk regulator to ensure all of these firms are operating in a prudent manner.”

IE