CME, CBOE win approval for trading credit derivatives
By James P. Miller
Tribune staff reporter
Published June 5, 2007
The U.S. Commodity Futures Trading Commission on Tuesday granted the Chicago Mercantile Exchange to begin trading the financial contracts known as credit derivatives.
The regulatory agency's approval clears the way for both exchanges to compete with the over-the-counter market in credit derivatives, which have grown increasingly popular with sophisticated investors such as hedge funds.
In a release this afternoon, the CFTC said exchange-traded credit derivative products "provide liquidity and transparency and allow parties to hedge counterparty credit risk."
The commission said it has "reviewed and approved" the CME's North American Investment Grade High Volatility Credit Index Event contract, a complex derivative instrument that is tied to a bundle of corporate credits.
If none of the debt instruments included in the bundle goes bankrupt or fails to make good on its debt, then the settlement price of the derivative is zero. But in the event that one of the debt instruments in the bundle defaults, the holder receives a specified payout; the payout is doubled if two such debtors covered by the contract default and so on.
Most trades of credit derivatives take place away from any exchange, in what is known as the "over-the-counter" market, and both the CBOE and the CME have been eager to enter the market for such financial instruments.
The CFTC also said Tuesday that the Options Clearing Corp. had recently asked the Commission to review the OCC's proposal to clear similar products, which will be traded on the CBOE. The Commission said it has issued an exemptive order that allows the OCC to clear such products, so the CBOE will be able to begin trading its Credit Default Options product once the SEC signs off on the contract.
The OCC, a derivatives clearing organization, operates under jurisdiction of both the CFTC and the SEC.
The derivatives that received the go-ahead today have drawn attention because their less-than-smooth path to approval has underscored the ambiguity as to whether the proper regulatory overseer of such contracts should be the Securities and Exchange Commission, which regulates securities-related matters, or the CFTC, which has authority over futures trading.
Both exchanges originally filed last October for regulatory approval to trade the new exchange-traded credit contracts. The CBOE, contending its credit derivative product is an option, sought approval from the SEC. But the CME sought CFTC clearance, contending its contract is a future.
CBOE objections that the CME contract doesn't technically qualify as a derivatives contract because it based on a basket of securities caused a delay in the CFTC's review period ,from late April until today.
jpmiller@tribune.com |
