Global scene

Fed, Banks agree on Credit-Swap Changes to cut risk of collapse

Regulators and banks agreed to changes aimed at easing the risk of a collapse in the $62 trillion market for credit-default swaps.

Morgan Stanley, Deutsche Bank AG and Goldman Sachs Group Inc. are among the 17 banks creating a system to move trades through a clearinghouse that would absorb a failure by one of the market-makers, the Federal Reserve Bank of New York said yesterday in a statement following a meeting with the firms. A guarantee may encourage more trading of default swaps, said Nana Otsuki of UBS AG, one of the banks involved in the agreement.

"Increasing liquidity as a result of the settlement house would be the key,'' said Otsuki, head of debt and equity research for Japanese financial institutions at UBS in Tokyo. "Larger trading volume means higher efficiency.''

The central counterparty, more automated trading and settlement and other fixes "will help improve the system's ability to manage the consequence of failure by a major institution, and we expect to make meaningful progress over the next six months,'' New York Fed President Timothy Geithner said in a speech to the Economic Club of New York yesterday.

Concerns that the market could fail erupted in March when Bear Stearns Cos., then the fifth-biggest U.S. securities firm, faced a cash squeeze. The central bank agreed to back an emergency sale of Bear to JPMorgan Chase & Co. in part because of the systemic losses that would have resulted if the firm had filed for bankruptcy, Geithner said.

The Fed has conferred with banks since September 2005 to improve processing and settlement in the market. Ten of the 17 banks at the meeting yesterday were owners of Chicago-based Clearing Corp., which has said it will start guaranteeing credit-default swap trades by September.

Investment firms AllianceBernstein LP, Citadel Investment Group LLC and BlueMountain Capital Management LLC joined the meetings yesterday for the first time.

In addition to a central clearing mechanism, the group agreed to include in standard trading documents a mechanism for settling trades with cash instead of having to physically deliver the underlying securities.

The group will reduce the volume of outstanding contracts through multilateral trade terminations. They also agreed to extend the changes in credit-default swaps to other derivatives contracts backed by equities, interest rates, currencies and commodities.

The group will provide details on its next steps by July 31, the Fed said in its statement. Credit-default swaps are financial instruments based on bonds and loans that are used to speculate on a company's ability to repay debt. They pay the buyer face value should the company fail to adhere to its debt agreements.

Bloomberg

China's May inflation slows

China's inflation rate slowed to 7.7 percent in May, according to two government officials who said they saw statistics bureau data.

That's less than the 8 per cent median estimate in a Bloomberg News survey of 19 economists. The officials wouldn't be identified ahead of the official release of the number on June 12.

The slowdown from April's 8.5 per cent pace, close to the fastest in 12 years, eases pressure for interest rates to rise and the yuan to strengthen more rapidly.

Soaring commodity costs may prevent the central bank from achieving its 4.8 percent inflation target for the year.

"It is much, much too soon to break open the champagne,'' said Head of China research at Standard Chartered Bank Plc in Shanghai Stephen Green.

"There are lots of other inflationary pressure points in the economy such as rising prices of fuel and raw materials.'' Bloomberg

Bush Seeks $275 Million More to Improve U.S. Food, Drug Safety

The Bush administration increased its budget request for the U.S. Food and Drug Administration by $275 million after the agency's commissioner told Congress that more funding was needed to protect against unsafe products.

The money would augment $2.4 billion previously sought by President George W. Bush for the fiscal year starting Oct. 1, said U.S. Health and Human Services Secretary Michael Leavitt in a conference call with reporters yesterday. More resources are needed to police food, drugs and medical devices, Leavitt said.

Lawmakers have criticised the FDA's performance after the blood thinner heparin was found to have a contaminated ingredient from China. The FDA commissioner, Andrew von Eschenbach, wrote a letter last month to Senator Arlen Specter, Republican of Pennsylvania, saying the agency needed $275 million to beef up inspections of manufacturers.

The products regulated by the FDA "are essential and critical to the welfare of every single American," said Von Eschenbach during the same conference call.

The extra funding will allow the FDA to conduct at least 1,000 additional overseas inspections of plants producing food and medical products imported into the U.S., and 1,000 more domestic plant reviews than are carried out now, according to a statement from Leavitt's department.

Money also will be used to station FDA employees in China and elsewhere, and to improve the agency's computer tracking systems.

"This increase will allow FDA to continue to transform its regulatory strategies to meet the challenges of the evolving global marketplace," Leavitt said in a statement announcing the finding increase.

The value of imported medicine and drug compounds reached $48.9 billion last year, up more than 30-fold from $1.57 billion in 1990, according to the Census Bureau. In February, Bush proposed increasing the FDA's budget for next year by 5.7 percent to $2.4 billion. Congress must approve the FDA budget.

Dingell pointed his finger at von Eschenbach and repeatedly asked the FDA chief how much it would cost to do more inspections. Dingell objected when the commissioner didn't provide specifics.

The funds requested yesterday include $125 million to protect the food supply, $100 million for the safety of drugs and medical devices and $50 million to prepare the FDA's workforce and laboratories for "areas of emerging science" such as nano technology and gene therapies, according to the statement.

Bloomberg