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Trade confirmations: CDS dealers threaten to drop hedge funds

The credit derivatives market has expanded fast in recent months. But the growing backlog of unconfirmed trades has caused concern.

A meeting between the Federal Reserve Bank of New York, regulators and 14 credit derivatives dealers has unnerved hedge funds. The New York Fed called in the market participants to discuss credit derivatives and the risk management and control issues surrounding them. The credit derivatives market has expanded fast in recent months. The notional amount outstanding of credit default swaps grew by almost 55% in the second half of 2004 from $5.44 trillion to $8.42 trillion. But the growing backlog of unconfirmed trades has caused concern. Karel Engelen, policy director at the International Swaps and Derivatives Association (Isda), says: "The message is that the Fed and the regulators see the CDS market as an important market and want to make sure operational concerns will not be the reason for it not evolving."

According to some of those who attended the meeting, the dealers agreed to be more stringent in ensuring that clients adopt practices that eliminate delays in trade confirmation. At present, consent for assignments of trades is given orally in most cases, which creates confusion for back-office staff trying to track transfer contracts. The dealers present reportedly supported the protocol put forward by Isda whereby members would agree to help standardize the process by ensuring that consents to the transfers are communicated by email, or Bloomberg, for example.

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