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EU derivatives sector set to meet CDS clearing deadline

Published 07/15/2009, 10:58 AM
Updated 07/15/2009, 11:00 AM

By Huw Jones

LONDON, July 15 (Reuters) - Europe's derivatives industry is set to meet a key deadline for clearing credit default swap trades in what the industry describes as a slow build rather than big bang milestone.

The European Union's executive European Commission set a July 31 deadline as part of its plans to make the global $600 trillion over-the-counter (OTC) derivatives market less risky and more transparent for regulators and investors.

CDS trades were found at the heart of the credit crunch and regulators were alarmed how little they new about the size of exposures among banks to the sector.

The Commission insists that clearing of European trades should be done on EU soil so that regulators have direct access to data.

The G20 group of industrialised and emerging market countries has pledged to supervise all parts of the financial market and to promote central clearing of CDS trades.

"All the mood music at the moment is that for the firms that are signed up for CDS clearing to take place by the end of July, as far as I am aware, there are no problems," said Anthony Belchambers, chief executive of the Futures and Options Association.

There could be some small operational hitches and there was some doubt over clearing of single name CDS contracts, he said.

Clearing ensures there is a buyer for every seller and a seller for every buyer, backed by a fund in case one side of the trade defaults.

"The general feeling in the marketplace is that some CDS will be cleared from the deadline and this is likely to be the indices and, so far, an unspecified number of single names," said David Clark, chairman of the Wholesale Markets Brokers' Association.

Eurex Clearing, part of Deutsche Boerse , said it will be ready in time for the deadline.

"Our goal is to offer clearing in iTraxx indices and single names of iTraxx index constituents," a Eurex spokesman said.

ICE is also making preparations to launch clearing of CDS.

"We have not announced a launch date but we are working with the July 31 deadline in mind," an ICE spokeswoman said.

The EU also wants a trade information warehouse, similar to the one already being operated in the United States by the DTCC, to store "golden copies" of OTC transactions.

Clearing is also starting in the United States where the authorities want to go a step further and have OTC trades executed on a regulated exchange or platform where possible.

The European Commission says such a requirement needs further study, which has triggered unease among U.S. policymakers who fear business moving across the Atlantic to Europe.

Belchambers said forcing OTC trades onto an exchange could make hedging uneconomic and take away dealers' business model.

"The Commission's approach is much more sensible," Belchambers said.

(Reporting by Huw Jones, editing by Toby Chopra)

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