Wednesday, February 18, 2009

France calls for eurozone CDS clearing house

By Jeremy Grant (Financial Times):

The French central bank has called on eurozone countries to rally to create a clearing house for the credit default swaps (CDS) market to “face down” the risk of the business going to London or the US, raising alarm bells over financial protectionism.

In the war for control of the $28,000bn market, the confidential report prepared by the Banque de France looks at establishing a clearing mechanism for over-the-counter CDS.

It is likely to trigger a reaction from the UK Treasury and Bank of England, already concerned at the damage done to the City of London’s future prospects by the financial crisis.

Credit default swaps offer a form of insurance against corporate defaults. They are the focus of a push by regulators on both sides of the Atlantic for wider use of safeguards such as clearing in the use of lightly regulated, off-exchange products.

Efforts to come up with a clearing house for the CDS market are advanced in the US, where four exchange-led groups have proposed solutions.

The European Commission and European Central Bank insist that Europe have a clearer based in the region as well. But matters became complicated after suggestions last month by French finance minister, Christine Lagarde, that such a solution should apply to the eurozone.

The only clearer to offer CDS clearing in Europe is LCH.Clearnet, which is based outside the eurozone in London. It is in talks about a possible takeover by The Depository Trust & Clearing Corporation, the large US clearer.

In the 26-page report, obtained by the Financial Times, the Banque de France warned that LCH.Clearnet’s “decision-making structure” was based in London and that this could lead to “an increase in the weight of the London financial market or the relocation of governance to the US, if the Paris financial markets do not recommend a solution”.

“The strategic nature of this business sector means that it is important to create a pan-European clearing house for the eurozone with sufficient critical size to face down these challenges,” the report said.

Banque de France called for the creation of a “consortium of eurozone banks and shareholders of major infrastructures with the objective of developing a common strategy for the integration of several of the eurozone’s principle clearing houses”.

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