Financial Regulatory Forum

Banks to submit 95 pct of eligible CDS for clearing

September 2, 2009

ice   By Karen Brettell
   NEW YORK, Sept 1 (Reuters) – Large derivatives dealers will agree to submit 95 percent of eligible credit derivative trades to central clearinghouses beginning in October, according to a person familiar with a letter they will send the New York Federal Reserve Bank on Tuesday night or on Wednesday.
   Participants in the $450 trillion derivatives markets in June gave regulators a series of targets that included expanding central clearing to new products and market participants, and enhancing transparency in the contracts.
   In a letter expected to be sent to the Fed by Wednesday, 15 large dealers, including Goldman Sachs <GS.N>, JPMorgan <JPM.N> and Deutsche Bank <DBKGn.DE>, give new clearing targets for trades between the banks, said the source, who declined to be identified because contents of the letter have not been made public.
   The dealers agree to submit 95 percent of eligible credit derivative trades into central clearinghouses, with a group goal of 80 percent of these trades being ultimately cleared, said the source.
   Both parties need to submit a trade to central counterparty in order for it to be cleared.
   Dealers also agree in the letter to submit 90 percent of eligible interest rate derivatives to clearinghouses, the person added.
   Derivatives are valued by their underlying assets, such as debt, equity or commodities, or they can be tied to changes in interest rates. The contracts can be used to hedge or bet on changes in the value of the underlying assets.
   Regulators are pushing for “standardized” derivatives to be cleared with central counterparties to reduce risks associated with the collapse of a large trading counterparty.
   Fears over losses from derivatives helped spark a run on assets at Bear Stearns and Lehman Brothers <LEHMQ.PK> last year, which precipitated their collapse.
   American International Group <AIG.N> also needed a government bailout after it sold billions of dollars in protection on risky debt using credit default swaps, but had inadequate capital to back the trades.
  
   CLEARING COMPETITION
   IntercontinentalExchange Inc <ICE.N>, which clears trades through its ICE Clear units in the United States and Europe, has taken the lion’s share of clearing credit default swaps to date. But so far, the company has only cleared trades based on indexes.
   ICE has said it plans to expand clearing to new products, including credit default swaps protecting the debt of a single issuer. The company also plans to expand clearing access to buyside participants.
   Eurex Credit Clear, part of Deutsche Boerse <DB1Gn.DE>, said on Friday it cleared the first single-name credit default swap. The company has also cleared index trades.
   CME Group is considered ICE’s main competition to clear CDS trades in the United States. The company has a joint venture with hedge fund Citadel Investment Group for its clearing effort, but has yet to begin clearing trades.
   Some clearinghouses, including CME and LCH.Clearnet, Europe’s largest independent clearinghouse, have said they are wary of clearing some illiquid CDS products, such as some single name contracts.
   Market participants, however, say they expect central clearing will expand to include the most liquid single-name contracts, which is expected to include companies in the benchmark indexes and contracts on other frequently traded issuers. (Editing by Dan Grebler) ((karen.brettell@thomsonreuters.com; +1 646 223 6274; Reuters Messaging: karen.brettell.reuters.com@reuters.net )) Keywords: DERIVATIVES CLEARING/TARGETS 
  
Tuesday, 01 September 2009 23:30:27RTRS [nN01508144] {C}ENDS

Post Your Comment

We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/
  •