Deep in the shadows of all the extreme events that have happened in the financial markets since Bear Stearns passed away is a quiet presence… the ghost of America’s most powerful banker… John Pierpont Morgan… oh how slowly the shades of great men pass on…
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From the WSJ.com ~~~~ “The Federal Reserve Bank of New York has summoned participants in the credit-default-swap market to another meeting Friday amid jostling by dealers, exchanges and regulators for a bigger role in this $55 trillion market.
The meeting would be the second this week as regulators wrestle with rival solutions to streamline and reduce counterparty risk in the market through the creation of one or more central clearinghouses.
Futures-exchange giant CME Group Inc. and Citadel Investment Group this week unveiled plans for a CDS trading platform tied to a clearinghouse, inviting banks and other users to take equity in a project slated to start in early November.
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Last spring on one of my passes through the halls of Congress I encouraged Senate staffers to focus on moving CDS to an exchange (CME) … I knew that the guys at the CME were anxious to attract liquidity related to CDS or index trading from the dealer-controlled OTC market … Craig Donohue, CEO of the CME, testified before the Senate Banking Committee on July 9th… prescient…
~~~~ ” If a major dealer were to default, it would inject enormous instability into the credit markets and in turn the markets for other products, potentially triggering a cascading series of failures across the global financial markets. As you know, the Federal Reserve Bank of New York and other interested parties are actively seeking solutions to these risks. While some progress is being made, much more work remains….
… As I will discuss, such an integrated multilateral trading and clearing model will offer the best route to improved risk management and enhanced efficiency for all participants in the credit derivatives market and also for the underlying companies on which credit derivatives are based.
At the same time, it will offer regulators the immediate information and transparency they need to prevent fraud, manipulation and market abuse. In both cases, we believe this model will greatly reduce significant information asymmetries in the credit markets and protect the broader financial markets against systemic risk.” ~~~~
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You don’t find any smarter guys than Craig Donohue and his colleagues at the CME (except maybe the guys at ICAP)… so how come he never was able to get any CDS liquidity at the CME?
It’s that the lingering ghost… that shade that just can’t seem to depart… it’s JPM…
Yes… JP Morgan is a central player in the CDS space… they helped originate this market and are a central axe… from the JP Morgan website…
Market Leadership
- Derivatives House of the Year (Risk, 2008)
- Best Credit Derivatives House of the Year (Credit, 2008)
- Financial Derivatives House of the Year (FOW, 2008)
- Equity Derivatives House of the Year (Asia Risk, 2007)
- Credit Derivatives House of the Year (IFR, 2007)
- Best Derivatives and Credit Derivatives House over the past twenty years (Risk, 2007)
JPM wrote the book on CDS… JPM stepped in to save Bear because as their clearing broker they would have had to stand behind all the CDS trades… it’s alleged that JPM withheld substantial collateral from Lehman several days before bankruptcy… this quiet giant is the silent partner to the Federal Reserve and its attempted rescue and stabilization of the world’s financial system…
It may be all these things and more…
But whatever it is it must transition itself from the dominant OTC CDS market maker to the dominant exchange CDS market maker… it must do this to help stabilize the global financial system…
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“The House of Morgan” can serve as a proxy for the history of the American financial system before the establishment of the Federal Reserve.
Morgan’s influence on the world financial system was demonstrated by the raising of loans for the English, French and German governments.
Morgan was also well known as the sponsor of many railroad bonds at the turn of the last century. As such the bank was instrumental in building the infrastructure which allowed the industrial revolution to bloom with enormous strenth here in America.
It is said that at the turn of the century JP Morgan had underwritten half of the securities traded on the NYSE.
Morgan’s great strength was a function of the American/British arms of the bank and their ability to transfer capital and wealth between between the two nations.
Each nation has had economic dominance in different periods of history.
Yet many view JP Morgan as a villian or a greedy banker with dollar signs in his eyes.
Ron Chernow’s five star treatise on Morgan reveals him to be a deeply religious man who was intent on bringing orderly rationalization to the capital markets and restraining competition which he believed to be counter-productive in capitalist economy.
He and his bank were deeply private and this work does a wonderful job of gently pulling back the curtain at 23 Wall Street. For those interested in the capital markets a must read!
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New York Fed to Host Meeting Regarding Central Counterparty for CDS
October 10, 2008
The Federal Reserve Bank of New York today will host a second meeting to discuss industry progress toward the creation of a central counterparty for credit default swaps (CDS).
Today’s discussion will include representation from four potential CDS central counterparties: Eurex, NYSE Euronext, CME Group/Citadel and IntercontinentalExchange/The Clearing Corporation. The Federal Reserve does not endorse any of these specific proposals but is seeking to accelerate market adoption of central counterparty services. Also participating in the meeting are representatives of major dealers, buyside firms, the U.S. Securities and Exchange Commission, the Commodity Futures Trading Commission and the European Central Bank.
The Federal Reserve expects any central counterparty for credit default swaps to satisfy the CPSS-IOSCO Recommendations for Central Counterparties, as articulated in the Federal Reserve Policy on Payments System Risk, in addition to any other statutory and regulatory provisions that may apply to it.
http://www.newyorkfed.org/newsevents/news/markets/2008/an081010.html
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