Thursday, June 24, 2010

Last-minute derivative amendment will restrict competition

Reuters reports that "a last-minute addition to U.S. legislation designed to reduce risks in the $450 trillion derivatives markets is prompting an outcry over its potential to limit competition."

The proposal, one of 110 put forward by the House of Representatives team negotiating derivatives reforms, would prevent clearinghouses from being forced to accept contracts from other clearinghouses. The proposal was offered "in order to minimize systemic risk..."

CME Group Inc, the futures giant that runs one of the world's biggest clearinghouses, says the language keeps it from having to take on unwanted risk.

But allowing clearinghouses to reject contracts from rivals could crimp competition and make it harder for clients seeking the best prices when trading the contracts, argues the Swaps and Derivatives Market Association, which comprises more than 20 U.S.-based broker-dealers and futures commission merchants...

The provision "could be used by one clearing house, associated with one exchange or swap execution facility, to refuse acceptance of a trade initially executed on a competitor exchange or swap execution facility and cleared by a competitor clearing house," the SDMA said.

"This would have the practical impact of restricting access to the best prices on identical derivatives contracts traded on different exchanges," it added...

"CME Group supports lawmakers' efforts to reduce systemic risk in financial markets," a CME spokesman said on Thursday. "As markets become increasingly interconnected, CME Group believes that central counterparties must carefully manage and not be forced to assume the significant counterparty credit risks of other clearinghouses."

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