April 1 (Bloomberg) -- Federal Reserve Bank of New York officials will today urge Wall Street banks to offer hedge funds and other clients access to clearinghouses that protect against losses in the $28 trillion credit-default swaps market.

JPMorgan Chase & Co., Deutsche Bank AG and Goldman Sachs Group Inc. are among nine banks that last month began using Intercontinental Exchange Inc.’s New York-based clearinghouse for the credit derivatives. Bankers are meeting in New York with Fed officials today to discuss the timing of expanded market access, according to a person familiar with the agenda.

The push follows the collapse of Lehman Brothers Holdings Inc., one of the largest credit-swaps dealers, and the U.S. rescue of American International Group Inc. after it made bad bets using credit-default swaps. The privately traded, unregulated contracts complicated government efforts to assess systemic financial risk because no one knew how interconnected the banks had become.

“I support the Federal Reserve wholly in this,” New York Insurance Superintendent Eric Dinallo said in an interview yesterday. “When they urge it, it comes close to a requirement” because the Fed sets capital requirements for banks to get what it wants.

Since March 13, $50 billion of credit-default swaps have been cleared by Intercontinental in a system that is open only to the nine banks. Credit-default swap clearinghouses created by Intercontinental competitors CME Group Inc. and NYSE Euronext haven’t attracted any customers from the banks.

Buyer, Seller

Capitalized by its members, a clearinghouse acts as the buyer to every seller and seller to every buyer, reducing the default risk between parties to a trade. It also allows regulators to assess market positions and prices.

The Fed isn’t necessarily demanding that the clearinghouses grant broader access to funds to become full members. Dealers and Intercontinental Exchange already plan a framework in which funds would be granted protections against counterparty default, such as segregated collateral accounts. The lack of segregated accounts led to losses for funds that had posted excess collateral with Lehman after the securities firm filed for bankruptcy protection.

“Every credit-default swap should be on some clearinghouse or exchange or get an exemption so we know where all this is,” Dinallo said.

Fifth Meeting

Today marks the fifth meeting between the Fed and the banks since Timothy Geithner, then the New York Fed’s president and now the Treasury Secretary, almost four years ago started pushing dealers to clean up trading in the privately negotiated market, in which outstanding contracts ballooned about 100-fold to as much as $62 trillion at the end of 2007.

Fed officials want to promote a system for credit derivatives clearing modeled on how futures exchanges are organized. There, a bank acts on behalf of its client to make a trade backed by a clearinghouse so the hedge fund is exposed to the bank and the bank is exposed to the clearinghouse.

The system also has bankruptcy protections built in so that if the bank goes into default, its client funds, which are segregated, are protected and not lumped in with other creditors.

At this point, Fed officials aren’t convinced that bankruptcy protections are strong enough and will ask the banks to clarify their positions so regulators can map out how the clearinghouse structure develops.

To contact the reporters on this story: Matthew Leising in New York at mleising@bloomberg.net; Shannon D. Harrington in New York at sharrington6@bloomberg.net

Last Updated: April 1, 2009 00:00 EDT