NYSE Euronext Liffe to Guarantee Credit-Default Swaps
By Nandini Sukumar and Abigail Moses
July 7 (Bloomberg) -- NYSE Euronext's Liffe derivatives market will offer to guarantee credit-default swaps traded outside of exchanges, as the industry responds to demands from regulators to reduce the risk of market failure.
Liffe in London will begin clearing contracts based on the European benchmark iTraxx indexes of credit default swaps, contracts used to speculate on bonds, through its Bclear administration service in the fourth quarter, NYSE Euronext said in an e-mailed statement today.
New York Federal Reserve President Timothy Geithner is pushing the industry to improve processing in the $62 trillion global market for credit-default swaps after the collapse of Bear Stearns Cos. triggered concern that companies may be unable to meet their obligations. The New York Fed, banks and industry groups agreed last month to create a central clearinghouse that will start with contracts on the U.S. CDX credit indexes.
``This should reduce uncertainty regarding systemic risks due to huge counterparty exposure,'' said Jochen Felsenheimer, the Munich-based head of credit strategy at UniCredit SpA, Italy's biggest bank. ``It makes 100 percent sense.''
Bear Stearns was one of the top 12 counterparties in credit- default swap trades, according to Fitch Ratings. The collapse of a credit derivatives market-maker could trigger ``several hundred million dollars'' in losses for the banks and investors on the other side of trades with that firm, Moody's Investors Service analysts wrote in May.
`Heavy Hand'
``Participants are seeing the potentially heavy hand of the regulator and could see the Liffe option as a potential middle ground,'' said Bruce Weber, a professor at the London Business School specializing in exchanges and trading systems.
Banks, hedge funds and other investors negotiate credit- default swaps privately through the so-called over-the-counter, or OTC, market. Liffe's Bclear service will allow banks to agree trades in the OTC market and then use London-based clearinghouse LCH.Clearnet Ltd. to guarantee the trades by taking the opposite side of every trade.
Liffe may offer its Bclear credit derivatives service to contracts outside of Europe, according to John O'Neill, a senior market analyst at Liffe's fixed income unit in London.
Clearing Corp., CME
The Clearing Corp., the Chicago-based OTC clearinghouse, has said it will start guaranteeing credit-default swaps on the benchmark CDX indexes, starting in September. The clearer plans to extend its service to European indexes and contracts based on individual companies.
The Intercontinental Exchange Inc. in Atlanta, which already clears energy products, and Chicago-based CME Group Inc. have said they plan to guarantee credit-default swaps.
``We think there is room for a number of solutions in the market,'' Liffe's O'Neill said. ``We are open to the whole community. Some of the other proposals are restrictive to interdealer trading only.''
NYSE Euronext rose as much as 2.4 percent to $47.75 in New York composite trading today. The shares have dropped 46 percent this year, reaching a record low of $46.51 on July 3.
Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a company fail to adhere to its debt agreements. The contracts are the fastest-growing part of the market for derivatives, financial instruments derived from stocks, bonds, loans, currencies and commodities, or linked to specific events like changes in interest rates.
Futures, Options
Liffe, Europe's second-largest derivatives market, is taking a different approach than other exchanges seeking to expand into credit-default swaps. Deutsche Boerse AG's Eurex and CME offered futures and options based on credit-default swaps a year ago.
``Liffe is the first exchange to work with the market by launching CDS contracts rather than credit futures or options,'' Garry Jones, executive director of business development and strategy at Liffe, said in the statement. Liffe will allow ``business to be pre-negotiated and booked into a secure exchange and clearinghouse environment.''
Liffe's Bclear processes trades through LCH.Clearnet, which also guarantees transactions for the London Stock Exchange, the MTS Group bond trading platform and the London Metal Exchange.
Liffe is finalizing contract specifications and will publish them after an ``internal due diligence processes,'' the exchange said in the statement. |
