Banks Prefer Mandatory CDS Clearing Over Exchange-Based Model
LONDON, Nov 20 - Some of the world's top banks are backing a proposal to develop a mandatory central clearing system for the $55 trillion credit default swap (CDS) market, a report in the Financial Times said on Thursday. Dealer banks are stepping up efforts to back CDS clearing to head off a more radical overhaul, which includes a proposal to move trading of over-the-counter CDS on to an exchange, the report said, citing an internal Morgan Stanley email.
Credit default swaps, which protect against a debt issuer's default, have been blamed for the worsening financial crisis, and banks fear that they might lose business if regulators insist on an exchange model for trading, the FT said.
"We have teamed up with a small group of dealers to put together a legal and regulatory proposal for CDS which we will propose to Congress and the Fed in an effort to address many of their concerns around CDS," said the internal email, sent by James Hill, a managing director at Morgan Stanley, according to the FT.
"This proposal will include mandatory clearing of CDS, margin rules, oversight of dealers and large market participants and SEC jurisdiction over anti-fraud and market manipulation activities," the email said.
Morgan Stanley could not immediately be reached for comment.
Publish Date:November 20, 2008
Source URL: http://www.wallstreetandtech.com/showArticle.jhtml?articleID=212101000
Showing posts with label CDS Clearing House. Show all posts
Showing posts with label CDS Clearing House. Show all posts
Thursday, November 20, 2008
Friday, October 17, 2008
Europe to Crack Down on Derivatives Risk
The European Commission said on Friday it intends to make proposals to control risks in the $60 trillion credit derivatives market, seen as one of the causes of the worst financial crisis in 80 years.
"Regulators need to have a much better view of where the real risks in these instruments lie," EU Internal Market Commissioner Charlie McCreevy said in a statement.
"I would like to have by the end of this year concrete proposals as to how the risks from credit derivatives can be mitigated," McCreevy said.
The contracts are traded over-the-counter or off an exchange, and are therefore more lightly regulated with risks less controlled.
Contracts could be standardised more, McCreevy said.
"But there is a far more pressing need and that is to have a central clearing counterparty for these derivatives," he said.
Standardised derivatives are already traded and cleared on exchanges such as Eurex, Liffe and the CME. But the off-exchange market, with its bespoke contracts, is far bigger.
One sector, credit default swaps (CDS) are "insurance" against a company defaulting and have been widely traded, with poor records of where these contracts have ended up or whether the owners have the capital to honour them if needed.
Central clearing for credit derivatives such as CDS contracts was particularly urgent, McCreevy said.
"No one is able to say how these swaps will unwind. Regulators have little sight of potential liabilities that could be building up for individual participants," he added.
McCreevy's moves mirror those in the United States where the Securities and Exchange Commission and Federal Reserve Chairman Ben Bernanke have said there should be more oversight of credit derivatives.
The Commodity and Futures Trading Commission, which oversees derivatives in the United States, has said centralised clearing of contracts is an "immediate" step that could be taken to cut risk.
Liffe said on Thursday it has struck a deal with Markit Group, a financial information provider, to launch exchange-traded credit default swaps that are cleared centrally.
Publish Date: October 17, 2008
Source URL: http://www.wallstreetandtech.com/showArticle.jhtml?articleID=211201590
The European Commission said on Friday it intends to make proposals to control risks in the $60 trillion credit derivatives market, seen as one of the causes of the worst financial crisis in 80 years.
"Regulators need to have a much better view of where the real risks in these instruments lie," EU Internal Market Commissioner Charlie McCreevy said in a statement.
"I would like to have by the end of this year concrete proposals as to how the risks from credit derivatives can be mitigated," McCreevy said.
The contracts are traded over-the-counter or off an exchange, and are therefore more lightly regulated with risks less controlled.
Contracts could be standardised more, McCreevy said.
"But there is a far more pressing need and that is to have a central clearing counterparty for these derivatives," he said.
Standardised derivatives are already traded and cleared on exchanges such as Eurex, Liffe and the CME. But the off-exchange market, with its bespoke contracts, is far bigger.
One sector, credit default swaps (CDS) are "insurance" against a company defaulting and have been widely traded, with poor records of where these contracts have ended up or whether the owners have the capital to honour them if needed.
Central clearing for credit derivatives such as CDS contracts was particularly urgent, McCreevy said.
"No one is able to say how these swaps will unwind. Regulators have little sight of potential liabilities that could be building up for individual participants," he added.
McCreevy's moves mirror those in the United States where the Securities and Exchange Commission and Federal Reserve Chairman Ben Bernanke have said there should be more oversight of credit derivatives.
The Commodity and Futures Trading Commission, which oversees derivatives in the United States, has said centralised clearing of contracts is an "immediate" step that could be taken to cut risk.
Liffe said on Thursday it has struck a deal with Markit Group, a financial information provider, to launch exchange-traded credit default swaps that are cleared centrally.
Publish Date: October 17, 2008
Source URL: http://www.wallstreetandtech.com/showArticle.jhtml?articleID=211201590
Tuesday, October 14, 2008
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
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
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