Timothy Geithner of the Federal Reserve Bank of New York has delivered a fine speech, Reducing Systemic Risk in a Dynamic Financial System. He notes:

This afternoon, 17 firms that represent more than 90 percent of credit derivatives trading, meet at the Federal Reserve Bank of New York with their primary U.S. and international supervisors to outline a comprehensive set of changes to the derivatives infrastructure. This agenda includes:

• the establishment of a central clearing house for credit default swaps,
• a program to reduce the level of outstanding contracts through bilateral and multilateral netting,
• the incorporation of a protocol for managing defaults into existing and future creditderivatives contracts, and
• concrete targets for achieving substantially greater automation of trading and settlement.

Establishment of this clearing-house has been reported on Bloomberg; a later press release from the FRBNY gave further details.

Geithner nails the essential point:

supervision will have to focus more attention on the extent of maturity transformation taking place outside the banking system.

And goes further, to make the point I have been making for a while:

I do not believe it would be desirable or feasible to extend capital requirements to institutions such as hedge funds or private equity firms. But supervision has to ensure that counterparty-credit risk management in the regulated institutions contains the level of overall exposure of the regulated to the unregulated. Prudent counterparty risk management, in turn, will work to limit the risk of a rise in overall leverage outside the regulated institutions that could threaten the stability of the financial system.

To the extent that this reflects Official Thinking, I’m very relieved. We should not be concerned that Joe’s Hot Dog Stand and Mortgages is levered 40:1 … we should only be concerned with the amount of counterparty risk taken by the banks who lend to him.

I’m not entirely certain as to what I should make of the section:

The most fundamental reform that is necessary is for all institutions that play a central role in money and funding markets—including the major globally active banks and investment banks—to operate under a unified framework that provides a stronger form of consolidated supervision, with appropriate requirements for capital and liquidity.

To complement this, we need to put in place a stronger framework of oversight authority over the critical parts of the payments system, not just the centralized payments, clearing and settlements systems but the infrastructure that underpins the decentralized over-the-counter markets.

The Federal Reserve should play a central role in this framework, working closely with supervisors here and in other countries. At present the Federal Reserve has broad responsibility for financial stability not matched by direct authority, and the consequences of the actions we have taken in this crisis make it more important that we close that gap.

I will assert that brokerages are fundamentally different from banks and should have not just different rules, but a different supervisor … in the US, the SEC is doing as well as any other regulator and should not lose any authority. I worry about how much the Bear Stearns fiasco will be used a lever in a silly bureaucratic turf fight that might, ultimately, lead to a blurring of the distinction between the two components of the financial system. He does mention Bear Stearns, by the way, but doesn’t add anything new.

Carnage on the preferred share market today, with the TXPR Index down 0.61% and Claymore’s CPD about the same. Sunlife, comprising a little over 6% of CPD, got hammered.y.