Tuesday, November 4, 2008

SEC plan would help create CDS clearinghouse

(Reuters) -U.S. securities regulators may temporarily exempt entities from certain laws to help establish a central clearinghouse for the $55 trillion credit default swap market, according to a document obtained by Reuters on Tuesday.

The Securities and Exchange Commission has informed major exchanges IntercontinentalExchange Inc , CME Group Inc , NYSE Euronext and Eurex of its plan to provide relief, the SEC document said.

The SEC's plan is aimed at speeding the creation of one or more central counterparties for credit default swaps (CDS), which are used to insure against bond default risk.

A central counterparty would give regulators and the public a glimpse into an opaque and complex part of the derivatives market, blamed for contributing to the financial crisis. It would also help standardize the criteria to evaluate risk exposure and free collateral.

According to the SEC document, central counterparties or central clearinghouses will be eligible for exemption from registration requirements if they meet certain conditions.

Those conditions include giving the SEC access to conduct on-site inspections of all facilities and systems as well as the central counterparty's books and records.

Raymond James analyst Patrick O'Shaughnessy said the move would likely streamline the lengthy application process exchanges now face in setting up new venues.

"It's probably a necessary step to make sure we have a platform up and running in the timeline that the government is hoping for," he said, adding that exchanges should have the infrastructure in place for CDS by the end of the year.

U.S. and European regulators want one or more central counterparties set up to avoid such crises, and exchange operators have been quick to propose answers.

The front runners for the U.S. market are ICE, which is seen to have the support of big CDS dealers, and CME, the world's biggest derivatives exchange, which with hedge fund Citadel Investment Group said it can launch a CDS exchange as early as this month.

Proposals from both Deutsche Boerse AG's (DB1Gn.DE: Quote, Profile, Research, Stock Buzz) derivatives arm, Eurex, and NYSE Euronext's derivatives arm, Liffe, are seen as the front runners in Europe.

The four exchanges had no immediate comment about the SEC document.

Last week, the New York Federal Reserve said it hoped that one or more central counterparties would be operating by the end of 2008. The European Commission and the European Central Bank also back the creation of a central counterparty for CDS.

"A few years from now we may see that the speed was not necessary, but there certainly is that desire to get things done," O'Shaughnessy said.

It is unclear whether U.S. and European regulators will agree on a transatlantic solution for CDS, and whether they will allow exchanges to compete for market share.

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