Containing Systemic Risk: The Road to Reform

The Counterparty Risk Management Policy Group III has released its report entitled "Containing Systemic Risk: The Road to Reform." Here's the link (pdf) to the full report, which should end this post right here. :) But since you asked, here's the highlights.

The Report is a forward-looking, integrated framework of private initiatives that will complement official oversight to help contain systemic risk. The Policy Group focused on four key areas including a reconsideration of the standards for consolidation under US GAAP of entities currently off-balance sheet coming on-balance sheet; measures to better understand and manage high-risk financial instruments; significant enhancements to risk monitoring and management; and, a series of sweeping measures to enhance the resiliency of financial markets generally and the credit markets in particular, with a special emphasis on OTC derivatives and credit default swaps.

In a press statement, Gerald E. Corrigan, Managing Director, Goldman Sachs & Co., and co-Chairman of the CRMPG III, said: "The achievement of the Policy Group and its Working Groups in completing such a vast and complex undertaking in three and one-half months is nothing short of remarkable. It is both necessary and urgent that the private sector, in collaboration with the official sector, begin immediately to implement these reforms, some of which will take well over a year to be fully accomplished."

The report has a certain amount of importance, considering the report is a response to the President's Working Group on Financial Markets. And because of the Who's Who list that makes up this advisory group - Other than Corrigan, who is a former Head of the New York Federal Reserve, and the other Co-Chair Douglas J. Flint, Group Finance Director Deputy Head of Global Markets HSBC Holdings plc, the group members are:
Madelyn Antoncic - Managing Director Global Head of Financial Market Policy Relations Lehman Brothers
Gary G. Lynch - Executive Vice President Chief Legal Officer Morgan Stanley
Craig W. Broderick - Managing Director Chief Risk Officer Goldman, Sachs & Co.
J. Chandler Martin - Executive Vice President Bank of America
Ken deRegt - Managing Director Chief Risk Officer Morgan Stanley
Edmond Moriarty - Senior Vice President Co-Chief Risk Officer Merrill Lynch & Co.
Andrew Feldstein - Chief Executive Officer Chief Investment Officer Blue Mountain Capital Management
Gavin G. O’Connor - Managing Director Goldman, Sachs & Co.
Peter Fisher - Managing Director Co-head of Fixed Income BlackRock, Inc.
Edward J. Rosen, Esq. - Partner Cleary Gottlieb Steen & Hamilton LLP
Adam Gilbert - Managing Director JPMorgan Chase & Co.
Zion Shohet - Treasurer Head of Corporate Finance Citigroup
Christian Lajoie - Head of Group Supervision Issues BNP Paribas
Barry L. Zubrow - Chief Risk Officer JPMorgan Chase & Co.

Heck, if this bunch took back the recommendations in the report to their own companies and started pushing for implementation, it would be as good as a done deal.

Another factor which bodes well for the implementation of at least some parts of the report is that it virtually mirrors the reforms recently sought out by the NY Fed's Timothy Geithner with regards to derivatives trading reform, when he hosted a meeting of 17 major financial institutions who represent 90% of trading in credit derivatives.

And here's what the Policy Group report says (Reuters excerpt) - Corrigan offered detailed recommendations for reducing the risks that have been made bare by the credit crunch. These included wider adoption of electronic platforms for derivatives trades, and more frequent revisions of financial firms' exposure to risky assets. Firms should also take steps clarifying the closing out of credit default swaps contracts after a default and set up a central clearinghouse for over-the-counter derivatives, particularly for the CDS sector, the group said.