Thursday, February 19, 2009

U.S., Europe May Jointly Regulate Credit Derivatives

By Matthew Leising (Bloomberg):

U.S., U.K., and European regulators are in talks to jointly regulate the $28 trillion credit-default swap market, the Federal Reserve said today.

Regulators including the Fed, U.K.’s Financial Services Authority, German Federal Financial Services Authority and European Central Bank met today to discuss a possible information sharing agreement, the Fed said in a statement on its Web site. The goal would be to apply consistent standards to the market and provide support across jurisdictions, the Fed said.

Dealers are under pressure to process credit-default swaps trades through a clearinghouse in the U.S. or Europe after last year’s failure of Lehman Brothers Holdings Inc., which was among the largest traders of the contracts. Earlier today, nine banks and brokers including Deutsche Bank AG, JPMorgan Chase & Co. and Barclays Plc committed to start using one or more clearinghouses within the 27-nation European region by the end of July.

“Central clearing of CDS is particularly urgent to restore market confidence,” European Union Financial Services Commissioner Charlie McCreevy said. “Given the size of derivatives markets I am looking whether other measures might be necessary to make sure they are adequately supervised and do not pose unnecessary risks to financial markets.”

Prices and Positions

Clearinghouses, capitalized by their members, add stability to markets by pooling the collateral of traders to share the risk of default. The practice also gives regulators access to prices and positions.

Other regulators in the international group include the U.S. Commodity Futures Trading Commission, the Securities and Exchange Commission, Deutsche Bundsbank and the New York State Banking Department. The group plans a meeting “in the near future” to discuss what is needed to share regulation activities over the market, according to the Fed.

The group had an initial meeting on Jan. 12 in New York, the Fed said in the statement. Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent if the borrower defaults.

Atlanta-based Intercontinental Exchange Inc., which has the support of nine dealers including Goldman Sachs Group Inc. and Morgan Stanley, said today that it will offer European-based clearing through its existing London clearinghouse.

“We’re working with all the appropriate European-based financial institutions to address their clearing needs,” said Sunil Hirani, chief operating officer of Creditex Inc., which Intercontinental bought last year. He declined to identify which banks the company is working with.

Intercontinental’s London operations, including the planned credit swap clearing, are regulated by the Financial Services Authority.

Intercontinental is competing with Chicago-based CME Group Inc., Eurex AG and NYSE Euronext’s Liffe derivatives market to clear credit-default swaps. LCH.Clearnet Ltd., Europe’s largest securities clearinghouse, said last week it will start offering clearing through a Paris-based unit to meet European regulators’ demands.

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