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WASHINGTON (Reuters) - The New York Federal Reserve's closed-door rule making with top players in the massive $60 trillion credit default swaps market came under legal fire on Sunday, as a fair finance activist filed a complaint questioning why it was done in the dark.
"The Federal Reserve seems to think it can engage in rule making in secret only with the industry," said Matthew Lee, executive director of the New York-based non-profit group Inner City Press/Community on the Move.
Lee filed the administrative complaint on Sunday with both the New York Fed and the Federal Reserve Board in Washington. In the complaint, he demanded that the central bankers explain why the meetings earlier this month were private and requested copies of all communications and details about the New York Fed-sponsored talks.
Officials at the Federal Reserve could not immediately be reached for comment.
The meetings were held with more than a dozen companies led by investment bank Goldman Sachs Group Inc. The companies -- which account for the bulk of business in the $60 trillion market -- met to help set new rules for credit default swaps trading, including the establishment of a clearinghouse.
Credit default swaps are privately negotiated transactions used by companies to hedge against default risks. Over the past decade, the market has grown exponentially, from about $1 trillion to $60 trillion.
Lee, referring to the Fed-led rescue of investment bank Bear Stearns by JPMorgan Chase & Co, said, "It was one thing to bail out Bear Stearns without any comments from the public. Now the Fed is trying to bail out or benefit 17 of the largest financial institutions behind closed doors."
Citing the federal Administrative Procedures Act, he said it was illegal to have conducted the meetings.
"We aim to stop it," said Lee, a fair finance and housing activist whose group has been instrumental in shaping how the Federal Reserve approves bank mergers for more than a decade.
Also present at the meetings were representatives from derivatives and securities industry trade groups who were directed to make no public statements or disclosures about the talks, according to information obtained by Reuters.
"This close-down, top-heavy process is unacceptable and, Inner City Press hereby timely contends, is contrary to law," Lee wrote in the complaint.
The complaint comes a week after New York Federal Reserve Bank President Tim Geithner announced the initiatives being developed with the companies, including the central bank's endorsement of the use of a clearinghouse for trading the instruments. The companies that attended the meeting own a centralized clearinghouse called Clearing Corp.
Among those present at the private meetings with the New York Fed were: Goldman Sachs, Merrill Lynch & Co Inc, Morgan Stanley, the Royal Bank of Scotland Group PLC, Societe Generale, UBS AG and Wachovia Corp, Bank of America Corp, JPMorgan Chase & Co and Citigroup, according to the New York Fed.
Also attending were representatives from the buy-side firms and hedge funds AllianceBernstein , BlueMountain Capital Management LLC and Citadel Investment Group LLC.
Lee's complaint comes as key lawmakers including House Financial Services Committee Chairman Barney Frank, a Massachusetts Democrat, are beginning to probe whether an overhaul of financial markets regulation is needed.
Next month, Frank's committee is expected to hold a series of hearings with regulators, including the New York Fed's Geithner, and industry leaders.
There is also concern in the Senate. The Senate Banking Committee this week will hold a hearing with top financial market regulators during which the oversight of off-exchange derivatives is expected to come up.
Committee members have raised concerns about the role of credit default swaps in the credit crisis.
"While I do not question that the creation of these structured products has delivered measurable benefit to the American consumer by lowering borrowing costs, it is becoming clear that a lack of transparency in the pricing and trading of these instruments has contributed to the credit crisis," committee member Sen. Elizabeth Dole, a Republican from North Carolina, said earlier this month.
Dole is not alone in her concerns, Joint Economic Committee Chairman Charles Schumer, a New York Democrat and also a member of the Senate Banking Committee, has urged the Fed and other key regulators to weigh the benefits of an electronic trading system for these complex, privately negotiated markets, in an effort to increase transparency.
Reporting By Joanne Morrison; Editing by Jonathan Oatis