Fed Seeks Exchanges' CDS Clearing Plans By Friday - Source 20 minutes ago - Dow Jones News
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By Jacob Bunge Of DOW JONES NEWSWIRES
CHICAGO -(Dow Jones)- The Federal Reserve has given exchange operators until Friday to detail how they can improve the efficiency of the $55 trillion credit default swap market, according to a source close to the discussions. Fed officials have held a series of meetings with participants in the CDS market, a focus for lawmakers concerned about possibly lax regulation of the over-the-counter derivatives market. The Friday deadline, first reported by Bloomberg, highlights the Fed's urgency in pushing for one or more central clearinghouses for the CDS market, a stance shared by European regulators. Exchanges have long eyed the profit potential from clearing CDS products, a market dominated by bilateral deals between investment banks. The Fed wants exchanges to flesh out their potential for standardized products, process trades and prevent systemic problems from rippling through the financial system. CME Group Inc. (CME), Deutsche Boerse AG's (DBOEF) Eurex unit, NYSE Euronext (NYX) and IntercontinentalExchange Inc. (ICE) in partnership with the Clearing Corp. have all pushed clearing solutions for the market. U.S. financial regulators, including the Fed, the Treasury, the Securities and Exchange Commission, and the Commodity Futures Trading Commission, have held discussions with the exchanges in recent months to evaluate their plans. The swaps serve as insurance against a company defaulting on debt. The parties have met at least three times this month, though all involved have declined to comment on the discussions. Exchange officials insist that bringing CDS onto a transparent, centrally cleared platform will eliminate the counterparty risk that has exposed major users of CDS to huge losses and helped foster widespread mistrust in credit markets. Some observers have cast doubt on whether CDS traders, who favor the flexible nature of the instruments, will migrate to exchange platforms. To this end ICE has joined with the Clearing Corp., backed by an array of CDS-dealing banks, counting on the affiliation to bolster support for its own clearing effort. CME, meanwhile, has partnered with Chicago-based hedge fund Citadel Investment Group, with both firms holding an equity stake in a CDS-clearing platform that's slated to launch in the first week of November. Equity stakes will also be offered to firms who join the platform as market makers. Regulators are not expected to award CDS clearing to one particular exchange, preferring that the market decide on the best venue. It also has yet to be determined which regulatory body will gain authority over the CDS market. Both the SEC and CFTC have argued that it should fall under their respective jurisdictions, though last week SEC Chairman Christopher Cox publicly backed the long-discussed merger of the two authorities. Treasury Secretary Henry Paulson last spring published a blueprint for regulatory reform that would see the SEC, which oversees U.S. securities markets, merged with the CFTC, which supervises futures trading. -By Jacob Bunge, Dow Jones Newswires; 312-750-4117; jacob.bunge@dowjones.com (Deborah Lynn Blumberg contributed to this article.)
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(END) Dow Jones Newswires 10-28-08 1415ET Copyright (c) 2008 Dow Jones & Company, Inc.
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