CDS trades ‘likely to shift to exchanges’
By Jeremy Grant and Martin Dickson
Published: November 25 2008 21:01 | Last updated: November 25 2008 21:01
Trading of key credit default swaps contracts is likely to be shifted on to exchanges under pressure from watchdogs as the new US administration grapples with a regulatory response to the financial crisis, Duncan Niederauer, chief executive of NYSE Euronext, said on Tuesday.
“I think there’s going to be a lot of pressure to trade more of these OTC [over-the-counter] products on regulated and transparent exchanges,” he said, referring to CDS contracts on indices.
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In an interview with the Financial Times, Mr Niederauer underlined the tensions between the exchange and the OTC dealer community as regulators and lawmakers considered how far solutions should go in reducing the counterparty risk associated with OTC credit derivatives.
While the OTC dealer community has embraced shifting credit default swaps to a clearing house to cut counterparty risk, dealers oppose such products being traded on-exchange.
Icap, the inter-dealer broker, argued in a study this month against the temptation “to mandate the transfer of OTC trading on to exchanges”, saying an exchange solution “needlessly grants the exchange a monopoly on trade execution”, leading to restricted access to clearing.
Asked how the shifting of some CDS on to exchanges would come about, Mr Niederauer said: “I think a lot of it is going to be [done] by regulatory fiat.” He said that as CDS index products become standardised they would be easier to trade.
Tom Harkin, chairman of the Senate agriculture committee, has introduced a bill requiring OTC derivatives to be traded only on exchanges – a move opposed by the Securities Industry and Financial Markets Association.
NYSE Euronext is working through its Liffe derivatives subsidiary on offering a CDS clearing mechanism, in tandem with LCH.Clearnet, the London-based clearer.
Mr Niederauer said the group was “a little bit behind” other exchanges and their partners in finding a CDS clearing solution in the US. But he said NYSE Euronext was “very well positioned” to provide a global solution. He added he did not believe the European Central Bank wanted a “Fed-regulated CDS market”.
Mr Niederauer said a “blueprint” for reform of financial regulation, floated more than a year ago by outgoing Treasury secretary Hank Paulson, would likely be “dusted off”.
? SecFinex, a NYSE Euronext subsidiary that operates a European electronic trading platform for equity finance, on Tuesday agreed with SIX x-clear, the Swiss clearer, to launch clearing services for stock borrowing and lending covering transactions in Austria, Denmark, Finland, Germany, Norway, Sweden and Switzerland. |
