Dealers expand CDS clearing amid fund complaints

By Karen Brettell and Kristina Cooke

NEW YORK (Reuters) - Large banks, who have long controlled the $26 trillion credit default swap market, on Tuesday agreed to give investors more access to central clearing by year-end, amid pressure from funds and regulators.

Banks, including JP Morgan and Morgan Stanley, also agreed to give funds more say in market decisions, market participants said in a letter to regulators. Funds have complained that dealers have been slowing reforms to guard profits.

Participants in the opaque, privately traded credit, interest-rate and equity derivative markets have been working closely with regulators to reduce risks and increase transparency, as part of the Obama administration's regulatory reforms.

This is the first time that dealers have set a timeline to expand client access to central clearing of credit default swaps which are used to protect against borrowers defaulting on their debt or to speculate on their credit quality.

Credit default swaps have come under fire for their role in exacerbating the global credit crisis. This has prompted dealers to work with regulators rather than risk other, more stringent proposals from some lawmakers in Washington that want to significantly curtail the market.

Fifteen dealers, among them Barclays Capital, Goldman Sachs and Deutsche Bank, agreed to expand central clearing of credit default swaps to asset managers by Dec 15, 2009.

Banks also agreed to provide for the segregation of initial margins posted against client trades, market participants said in the letter, which was sent to 12 regulators.

Hedge funds are demanding dealers segregate their initial trade margins after some funds lost the assets in bankruptcy proceedings when Lehman Brothers failed in September.