Thursday, November 20, 2008

U.S. to Approve Credit Swap Plans by Mid-December

(Bloomberg) U.S. regulators expect to approve plans to guarantee credit-default swaps trades by mid-December, according to Erik R. Sirri, director of trading and markets for the U.S. Securities Exchange Commission.

Futures exchanges CME Group Inc. and Intercontinental Exchange Inc. are among companies vying to back trades with clearinghouses in the $33 trillion credit-default swap market after the contracts caused losses at companies including American International Group Inc. and Lehman Brothers Holdings Inc.

The CME Group and Intercontinental Exchange are still waiting for regulatory approval. CME Group will be regulated by its current oversight agency, the Commodity Futures Trading Commission, while Intercontinental would be overseen by the Federal Reserve. Those two agencies and the Securities and Exchange Commission will share oversight of the clearinghouses under an agreement reached last week.

"It would be up to us to tell the CME they can go ahead and provide this service," said Ananda Radhakrishnan, director of the division of clearing and intermediary oversight of the CFTC.

This varies from the usual process for CME Group to offer new cleared products through its clearinghouse since that system has already been approved by the CFTC, Radhakrishnan said. That process is known as self-certification under the agency’s rules.

"Given the unique nature of this venture and the importance it has for the economy" CFTC and CME decided to share its clearing plan with the Fed, SEC and CFTC instead of self- certifying, he said.

OTC Trades
More broadly, Patrick Parkinson, deputy director of the division of research and statistics for the Fed, said all over- the-counter trades should be accounted for in depository systems so federal regulators can keep tabs on the market participants.

Most credit-default swaps are categorized in the Depository Trust Clearing Corp. now, while trades in OTC markets such as interest rate swaps and currencies aren’t accounted for.
The market for interest rate swaps is the largest in the world, estimated at $458 trillion, according to the Bank for International Settlements.

The Fed will not tell market users which credit-default swap clearinghouse to use, Parkinson said. The information sharing agreement reached last week ruled out choosing one system over another, he said.

"We’re committed to establishing a level playing field in the U.S" for CDS clearinghouses to operate, he said.

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