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FSA talks tough on credit derivatives

The UK's Financial Services Authority (FSA) has told the chief executives of major participants in the UK OTC credit derivatives market that it is their responsibility to ensure that their firm has back office systems and controls capable of keeping pace with the growth in their OTC credit derivatives business.

The FSA has recently become concerned at the high level of unsigned confirmations outstanding between counterparties for OTC credit derivatives with, in certain cases, transactions remaining unconfirmed for months.

Gay Huey Evans, FSA's capital markets sector leader, said: "The FSA requires all regulated firms to have in place appropriate systems and controls to enable them to ensure the smooth running of their businesses and maintain efficient, orderly and fair markets.

"Recent supervisory work has found that a number of firms in the fast-developing OTC credit derivatives market are failing to resource their back office functions adequately to allow them to keep pace with the growth of their front office business.

"The FSA believes that credit derivatives continue to be an important tool for diversifying risk and as a method for bringing increased liquidity to all segments of the credit market. However with benefits come risks and if simple operational procedures are unable to keep up with the pace of market development, the risk that misunderstandings and uncertainty will negatively impact market confidence increases.

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