Dealers set to eliminate most unconfirmed trades by mid-2006

Dealers plan to eliminate the majority of unconfirmed credit derivatives trades by mid-2006, Mark Davies, head of global credit derivatives trading at Bear Stearns, told delegates at an International Swaps and Derivatives Association conference in New York on Wednesday.

“The intention is to have all of the worst backlog cleared by June 2006, and virtually all of the rest definitely by December 2006,” said New York-based Davies, who is also a member of the derivatives trade association’s board of directors. He defined “worst” as trades that were more than 100 days outstanding on June 30 of this year.

Earlier this month, the Federal Reserve Bank of New York summoned 14 of the world’s top dealers to question them over the efficiency of their back-office practices. Regulators present viewed confirmation as a significant risk management issue. Davies said dealers’ view confirmation as a purely operational issue, as the trades - confirmed or not - exist and are legally binding.

Isda has drafted a proposal for release today where trades will be confirmed on trade day or the day after through an electronic communication system, said Davies. Credit derivatives dealers will also be encouraged to sign up with the New York-based Depository Trust & Clearing Corporation. And Isda will ask dealers that have already signed up to its new protocol to send a list of all counterparties that have executed at least five trades a week for the past three months.

New York-based Isda will propose a step-wise trade confirmation clean-up process, where there will be percentage goals for reductions by year-end, March 2006, and June 2006.