U.S. regulators are pushing banks to clear more over-the-counter derivatives trades from clients such as hedge funds, according to people familiar with the matter.
But officials may run into resistance from so-called buy-side participants, as many of the hedge funds involved in trading swap products currently have limited oversight from regulators.
At a meeting at the Federal Reserve Bank of New York last week, dealer-bank executives were asked to step up efforts to route client swap transactions through clearing houses. The banks plan to detail their plans by March 1.
The push by regulators builds on banks' existing commitment to clear dealer-to-dealer business.
The New York Fed, which hosted the meeting alongside overseas regulators, was not immediately available for comment.
The Fed push to clear more over-the-counter derivatives transactions is part of a broad initiative to reduce risk in the previously opaque OTC markets.
The exchange operators IntercontinentalExchange Inc. and CME Group Inc. have launched clearing services for credit derivatives, and banks have committed to clear more than 90% of interest rate and credit derivatives trades by December. By Dec. 31 banks had met that target, people familiar with the matter said.
Now Fed officials are turning their attention to client-to-dealer swap deals, to ensure as many transactions as possible get cleared.
Clearing, in which a central counterparty stands as the buyer to every seller and the seller to every buyer, mitigates the risk of one party defaulting on a transaction. But the process also significantly increases the cost of doing business, and there has not been a groundswell of demand from buy-side participants, a diverse group that constitutes a much smaller portion of the swaps market than the dealers.