CME wins approval to trade credit derivatives
By Shannon D. Harrington
Bloomberg News
Published February 6, 2007, 11:25 AM CST
The Chicago Mercantile Exchange, the biggest U.S. futures market, can move forward with plans to offer the first exchange-traded credit derivative contracts, after the Commodity Futures Trading Commission gave approval.
Regulators will allow the CME to trade so-called credit event futures contracts that are modeled after credit-default swaps, the privately negotiated contracts that have surged to $26 trillion in global value since they were created about a decade ago, according to a statement on the CFTC's Web site.
Credit-default swaps, the fastest growing derivatives market, are financial instruments based on bonds and loans that are used to speculate on a company's ability to repay debt. The CFTC's approval allows the CME to offer contracts that let investors bet on the creditworthiness of Tribune Corp., publisher of the Los Angeles Times and Chicago Tribune, clothing retailer Jones Apparel Group Inc. and homebuilder Centex Corp.
CME spokeswoman Mary Haffenberg said the exchange hasn't set a date to begin trading. The exchange's parent company, Chicago Mercantile Exchange Holdings Inc., said last month it was seeking to begin trading this quarter.
Credit-default swaps were conceived to protect bondholders against default and pay the buyer face value in exchange for the underlying securities should the company fail to adhere to its debt agreements.
The Chicago Board Options Exchange, which had opposed the CME's plans because it said the CME contracts are actually securities that fall outside the CFTC's jurisdiction, plans to trade credit-event options next quarter tied to five to 10 companies. Those companies may include General Motors Corp., the world's biggest automaker as well as auto-parts supplier Visteon Corp., Vice Chairman Bradley Griffith said last month.
Credit-default swaps have become the best gauge of shifts in credit quality. The market doubled to $26 trillion in the 12 months ending in June, the International Swaps and Derivatives Association said in September. Derivatives are financial instruments derived from stocks, bonds, loans, currencies and commodities, or linked to specific events like changes in the weather or interest rates.
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