Detailed talks begin on credit derivatives clearing house
By Aline van Duyn and Joanna Chung in New York
Published: October 29 2008 02:00 | Last updated: October 29 2008 02:00
Regulators yesterday started a series of detailed meetings with potential providers of a clearing house for the thus-far unregulated credit derivatives market. The move is part of efforts to kickstart implementation of this crucial risk-reduction plan by next month.
The meetings, held in New York and likely to continue for several days, are being attended by representatives from the Federal Reserve, the Securities and Exchange Commission and the Commodity Futures Trading Commission. The regulators have decided to work closely together to ensure that a clearing house meets all of their requirements, according to people involved in the discussions.
This week will be a crucial one in the efforts to reduce risks in the credit derivatives market. The collapse of Lehman Brothers in September and continued concerns of further bank failures have created fears of counterparty risk, which have gummed up the workings of credit derivatives and the underlying credit markets.
Blythe Masters, the JPMorgan executive who has played a leading role in the credit derivatives markets, told a securities industry conference yesterday that the industry was "working flat-out to establish centralised clearing".
She stressed that such a move would quickly diminish the risks in credit derivatives from notional amounts worth trillions of dollars to a much smaller level of risk. "Centralised clearing and stronger regulation will reduce the systemic risks," she said. Already, dealers have been working round the clock to reduce the notional amounts of credit derivatives contracts outstanding. Credit derivatives, mostly in the form of credit default swaps, provide insurance against default of a company or a bank.
Yet even when two contracts offset each other, they continue to exist. Getting rid of these double-counted contracts has been a key focus in recent months.
The current value of credit derivatives outstanding is believed to be about $30,000bn, according to dealers, suggesting the nominal value of outstanding contracts has more than halved in recent months. Risk exposure is often estimated at about 4 per cent of the notional value outstanding.
On Friday, dealers will update the Fed on their efforts to improve the settlement and trading in the over-the-counter derivatives markets, which include credit derivatives.
Friday is also the deadline for clearers to submit detailed proposals, including addressing risk-management plans such as whether they have sufficient margins, sufficient guarantee funds and appropriate default management.
In the US, two groups are vying to set up a central counterparty: CME Group, a futures exchange, alongside Citadel, a Chicago-based hedge fund; and a group made up of The Clearing Corporation - a consortium of banks - and the Intercontinental Exchange.
In Europe, Liffe, the derivatives arm of NYSE Euronext, and Eurex, the derivatives arm of Deutsche Börse, are working on plans.
Copyright The Financial Times Limited 2008 |
