Wednesday, March 17, 2010

FSB Will Designate Derivatives for Central Clearing

Original posted on Bloomberg by Ben Moshinsky and Joseph Heaven:

Financial Stability Board Chairman Mario Draghi said the global regulatory body plans to designate which over-the-counter derivatives should be standardized for central clearing “in the coming weeks.”

This is “probably the most important part of our work,” he said at a debate at the European Parliament in Brussels today. Draghi also called for “fully harmonized trading platforms” for over-the-counter derivatives, otherwise “regulatory arbitrage” will be “instantaneous.”

Regulators are pushing for tighter regulation of the $605 trillion over-the-counter derivatives market, which includes credit-default swaps. More than 2,000 firms last year agreed to use standardized default swap contracts, making it easier to move them through central clearing houses that are designed to limit losses from default by a major counterparty.

Draghi said there are “very powerful vested interests that don’t want” central clearing of over-the-counter derivatives including credit-default swaps. “It is not an easy feat to centralize the trading of these derivatives.”

Responding to questions from EU lawmakers on the regulation of credit-default-swaps, Dominique Strauss-Kahn, head of the International Monetary Fund, said the sovereign swaps market “is not that big” compared with corporate swaps.

Barroso, Merkel

Jose Barroso, the European Commission’s president, said March 9 that the 27-nation bloc will consider banning “purely speculative naked” credit-default swaps after German Chancellor Angela Merkel and French President Nicolas Sarkozy called for a crackdown on derivatives trading to prevent a rerun of the Greek credit crisis.

Gary Gensler, chairman of the Commodity Futures Trading Commission, yesterday called on European lawmakers to coordinate efforts to monitor the over-the-counter derivatives market with the U.S. Regulators have been critical of so-called naked credit-default swap trading, where investors don’t hold the underlying bonds.

“The big challenge of a ban is to decide who is hedging and who is speculating,” Gensler said at the European Parliament in Brussels yesterday. “When is something naked? We know it in people but do we know it in CDS?”

The reforms to the credit-swaps market were part of an overhaul of the $25 trillion privately negotiated market demanded by regulators and policy makers including the Federal Reserve and European Commission.

Credit-default swaps are derivatives that pay the buyer face value if a borrower -- a country or a company -- defaults. In exchange, the swap seller gets the underlying securities or the cash equivalent. Traders in naked credit-default swaps buy insurance on bonds they don’t own.

No comments: