2nd UPDATE: NY Fed: Banks To Clear Over 90% Of Swap Trades

Fifteen dealer banks on Tuesday told the Federal Reserve Bank of New York that they plan to centrally clear more than 90% of their interest rate and credit derivatives trades by the end of the year.

Banks will also begin submitting monthly reports to the New York Fed detailing new transactions and outstanding trades in over-the-counter markets, representatives of the so-called G15 firms wrote in a Tuesday letter.

"These targets will push major dealers to accelerate their progress," New York Fed President William Dudley said. "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."

Members of the G15 banks include Goldman Sachs & Co. (GS), JP Morgan Chase (JPM), Credit Suisse (CS) and Deutsche Bank (DB1.XE). Clearinghouse operators are also working to include buy-side market participants like hedge funds.

Clearing, in which a central counterparty serves as the buyer to every seller and seller to every buyer, has been pushed by regulators and exchanges as a way to reduce risk in over-the-counter markets, which came under scrutiny as the financial crisis spread.

Lawmakers in Washington are weighing an Obama administration proposal that would mandate clearing of all standardized OTC derivatives, while dealers have voluntarily sought to clear more credit default swap and interest rate swap trades.

While much of regulators' focus in the past year has been on clearing credit derivatives, the letter highlights the push by dealer banks to clear more trades in the much larger interest rate swaps market.

Each G15 member agreed to submit 90% of new interest rate derivatives trades for clearing by December 2009. Banks will submit at least 60% of existing interest rate swap trades to central counterparties. Interest rate swap clearing is dominated by London-based LCH.Clearnet. In the U.S., a Nasdaq OMX-owned facility called the International Derivatives Clearing Group is targeting the market, with about $450 billion in transactions test-cleared as of early August.

Chicago-based CME Group Inc. (CME), which operates the largest interest rate futures market in the world, is prepping its own swaps clearinghouse and is expected to launch before the end of the year.

In credit default swaps, G15 member banks said they expect to clear 95% of new credit default swap trades by October.

So far, banks have cleared more than $2.2 trillion worth of credit derivatives transactions via ICE Trust, a clearinghouse set up in March by Atlanta-based IntercontinentalExchange Inc. (ICE) for the purpose of clearing credit derivative transactions.

ICE, which last week announced BNP Paribas (BNP.PA) as the 13th clearing member of ICE Trust, said Tuesday that it plans to facilitate same-day clearing of credit default swap trades as it rolls out buy-side access for hedge funds and other institutions in October.

The ability to clear credit derivative trades the same day that trades occur will reduce the time that buy-side participants have counterparty exposure to dealers, and will reduce both parties' operational costs, according to ICE.

CME is preparing a rival credit derivatives clearing service, though there remains no launch date.

-By Jacob Bunge, Dow Jones Newswires; [phone]; [e-mail]

(Michael S. Derby contributed to this article.)