The talks come amid growing concerns about the amounts that will have to be paid out on credit default swaps (CDS) linked to Lehman Brothers, which filed for bankruptcy three weeks ago. Estimates of their value range from $350bn to $400bn. CDS, a form of insurance against bond defaults, is the most common type of credit derivative.
Although big dealers had committed to setting up a central counterparty by the end of the year, the issue has taken on increased urgency in light of the collapse of numerous banks around the world and as company bankruptcies loom.
“The NY Fed will hold a meeting Tuesday with a small number of banks and buyside firms to discuss the progress being made toward the creation of a central counterparty for credit default swaps,” said a Fed official, adding that a central counterparty “will help reduce systemic risk associated with counterparty credit exposure and improve how the failure of a major participant would be addressed”.