NY Fed Calls Friday Meeting for CDS Players to Determine Clearing House

The Federal Reserve Bank of New York said Wednesday it has summoned participants in the $55 trillion credit derivatives market to a meeting on Friday, which sources say will focus on determining which clearing house the market will support.

Calls for regulation and centralized clearing of credit default swap trades have gathered steam in the wake of Lehman Brothers' failure last month.

Critics charge that credit default swaps are central to the spreading fears in the markets and pose systemic risks, as the market's private nature makes it impossible to know the size of a counterparty's exposures and where they are distributed.

A central clearinghouse will remove the risk of a large counterparty failure.

There are several competing plans to launch a clearinghouse under way. But the Fed wants one clearing house to win widespread support, sources familiar with the meeting said.

The Fed hosted a meeting Tuesday to discuss the matter, but found no clear winner, sources said. The meeting on Friday will continue the discussions.

The Chicago Mercantile Exchange, or CME Group Inc , and Citadel Investment Group unveiled plans on Tuesday for an electronic exchange for credit default swaps, which they said would be integrated with a central clearinghouse.

The initiative is competing against dealer-owned Clearing Corp, which will act as a central counterparty to the market and is expected to launch by year-end.

Dealers have been hesitant to support exchange trading in the past as the private market is more profitable, and the liquidity they provide may be key to the success of exchange trading.
CME and Citadel are offering equity stakes in their joint venture to major market participants to encourage their support for the exchange.

Meanwhile, NYSE Euronext's Liffe unit has also said it will launch its BClear OTC clearing house facility in the fourth quarter.

U.S. business television channel CNBC also reported on Monday the Fed was planning talks with the CME and the Intercontinental Exchange, or ICE, on the creation of a credit default swaps exchange.

Publish Date:October 09, 2008
Source URL:http://www.financetech.com/showArticle.jhtml?articleID=210800639