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Derivatives

Fed Seeks Input On Restructuring Debate

The Federal Reserve Bank of New York invited more than 60 representatives from the largest credit derivatives houses in the U.S., including Ambac Assurance Corp, Bank of America, Citibank and JPMorgan, to its Liberty Street offices for the first time on Oct. 24 as part of a review of whether banks need restructuring protection to get regulatory capital relief. Darryll Hendricks, senior v.p. at the Fed in New York, said the regulator has to take account of market implications in developing policy and is actively considering its stance on restructuring and capital relief, including its position on what should be included in the proposed Basel capital adequacy accord. However, he added that the main purpose of the meeting was to understand what is going on in credit derivatives, rather than to discuss regulatory proposals.

Joyce Hansen, senior v.p., deputy general council at the Fed, aided Hendricks in moderating the meeting, while Norah Barger, deputy assistant director at the Fed in Washington and chair of the credit risk mitigation subgroup on the Basel Committee, also attended. Barger and Hansen did not return calls.

Bankers and insurers made up the majority of the audience and most argued credit derivatives should not require restructuring protection in order to get capital relief, adding the requirement impedes liquidity. However, portfolio managers, including Citibank, said default swap contracts that include restructuring as a credit event should continue to be offered, even if they are not required by the regulator.

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