Corrigan: progress made on credit derivatives, more work to be done

Speaking after a symposium organised by the Counterparty Risk Management Policy Group II (CRMPG II) yesterday in New York, Gerald Corrigan, a New York-based co-chairman of Goldman Sachs's firm-wide risk committee and chairman of the industry group, said that real progress was being made on the issue of the unconfirmed credit derivatives trade backlog.

A total of 14 banks have decided to provide “a cross-section of hard, statistical data” to an independent organisation that will compile the data for use by regulators, said the former president of the Federal Reserve Bank of New York.

"This is the best recent example of effective framework of cooperation and coordination between the private sector and the public sector, which we think will have broader application in the future,” said Corrigan. The preceding symposium focused on the implementation of the recommendations of the CPRMG II report, which was released last July and covered how best practice can help ensure financial stability.

Corrigan also pointed to significant progress made in addressing unassigned trades. For example, the share of credit default swap (CDS) trades that are being confirmed electronically was only 20% in early 2005; the proportion is now around two-thirds.

The next issue on the CRMPG II's hit list is settlement procedures for CDS after a default of a referenced entity; the CRMPG II will work with the International Swaps and Derivatives Association (Isda) on this issue, Corrigan said.

Michael Alix, New York-based chief risk officer at Bear Stearns, added that there needs to be agreement on a basic building block – vocabulary. “Once the vocabulary is set, then [other financial participants] can understand their performance relative to what major dealers are providing,” he said.

The symposium took place at Bear Stearns' headquarters in Manhattan and included senior representatives from banks, hedge funds, money managers and regulatory bodies, and involved almost 90 people - no journalists were permitted to attend.

A written summary of the meeting said the three most important issues in terms of risk management are: strengthening the valuation process for complex or illiquid instruments; the need for more sophisticated tools to evaluate the relationship between risk, capital, liquidity and margin; and an increased focus on comprehensive forms of stress testing and scenario analysis that take account of multiple layers of financial and reputational risk factors.

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