From Naked Capitalism… a little insight into the painful process of getting CDS onto an exchange or central counterparty clearing platform… so many powerful and competing interests in the mix… makes one think of all the other big, complex changes through time… hang there in guys… there is a solution that will increase market stability… you can do it…
Basel... 1930
~~~ “As keen as the authorities are to get the big, opaque CDS market on a safer platform, obstacles remain. For a host of reasons, outstanding CDS cannot be migrated onto an exchange, but newly written CDS designed to fit certain parameters could be (in theory, old contracts could be “novated” in favor of new ones). CDS suitable for exchange trading would have to be far more standardized. How to simplify the offerings has yet to be sorted out.
The most valuable element of moving CDS to an exchange, as far as lowering systemic risk is concerned, is centralized clearing, since if anyone defaults, the counterparty is the exchange, not an individual firm. Thus regulators have been moving forward as quickly as possible to set up a central clearinghouse. In particular, the CME Group proposed acting as a clearlinghouse, which means that its members would absorb the losses if any counterparty failed. Some rival proposals suggested setting up a new clearinghouse, which is a much sounder design, but would take longer to implement.
However, some savvy and influential and savvy CME members are now objecting to the idea, arguing that the additional risk of CDS clearing on top of their existing CME obligations is more than the members can realistically support. Moreover, they contend that putting together CDS and futures under the same umbrella is too much risk in one venue, and will increase, not reduce systemic risk…. ” ~~~~
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SEC’s Cox Backs Merger of Agency With CFTC
Securities and Exchange Commission Chairman Christopher Cox said he strongly supports merging his agency with the Commodity Futures Trading Commission.
Former SEC chiefs have promoted closer collaboration between the agencies, or an SEC takeover of the CFTC, which regulates the futures markets, but it was the first time that Mr. Cox has called for a merger.
Christopher Cox
His endorsement came during a tense House Oversight Committee hearing where lawmakers sought to hold Mr. Cox, former Federal Reserve Chairman Alan Greenspan and former Treasury Secretary John Snow accountable for lax regulation leading up to the financial crisis. Congressional leaders are aiming to overhaul oversight.
Some lawmakers who staunchly opposed past efforts to merge the agencies are now more open to the idea.
CFTC Commissioner Bart Chilton, a Democrat, said there is “logical strength” to Mr. Cox’s idea. But because the agencies have different mandates — the SEC, to protect investors, and the CFTC, to regulate the futures market — “the issue of merger is not so simple,” Mr. Chilton said.
The CFTC declined to comment on the proposal.
Both agencies recently urged regulation of credit default swaps, an unregulated insurance-like contract that has played a central role in the financial crisis. On Thursday, Mr. Cox reiterated that call and said Congress must act this year.
Appeals for merging the agencies haven’t led to substantive changes, partly because of jurisdictional battles on Capitol Hill. Agriculture committees oversee the CFTC, which began by regulating cattle and wheat futures, but whose mandate has grown to include financial futures. The Banking and Finance committees have oversight of the SEC, which oversees securities markets. Neither committee has wanted to cede jurisdiction.
Mr. Cox, who hasn’t pushed for tighter regulation since becoming SEC chairman in 2005, also suggested establishing a bipartisan task force to develop a future regulatory oversight structure.
“A select committee could address these urgent questions from a comprehensive standpoint. It could tackle the challenge of merging the SEC and the CFTC, which I strongly support,” he said.
Rep. Henry Waxman, chairman of the House Oversight panel, said the recommendations seemed reasonable. But he added: “The reality, Mr. Cox, is you weren’t doing that job of proposing these regulations beforehand. You either didn’t anticipate the problem or you agreed with the philosophy that we didn’t need regulation.”
http://online.wsj.com/article/SB122480710183665011.html?
Depository Trust to Release Credit-Default Swaps Data (Update1)
By Shannon D. Harrington
Oct. 31 (Bloomberg) — Depository Trust & Clearing Corp., the operator of a central registry for the more than $47 trillion credit-default swaps market, will start releasing weekly data on the amount of trades linked to the top 1,000 companies and benchmark indexes.
DTCC will begin publishing the data on its Web site starting Nov. 4, the New York-based company said in a statement today. The company will publish both the gross and net amount of contracts used to hedge against losses or to speculate on the creditworthiness of companies, governments and other borrowers.
“When there is panic or near-panic conditions, that’s especially the case where greater transparency could provide some reassurance so that people don’t conjure up the worst-case scenario,” said Henry Hu, a law professor at the University of Texas in Austin who has pressed the need for a data warehouse spanning all privately negotiated derivatives markets to offer a better understanding of the risks.
Credit-default swap traders have come under increased scrutiny since Lehman Brothers Holdings Inc. collapsed last month and the U.S. government was forced to rescue American International Group Inc., which faced bankruptcy after rating downgrades forced it to post more than $10 billion in collateral on credit swap trades that had plunged in value.
U.S. Securities and Exchange Commission Chairman Christopher Cox and New York Insurance Superintendent Eric Dinallo have called for increased regulation of the swaps. Dinallo, in an interview that aired Oct. 26 on the CBS news show “60 Minutes,” called the market “legalized gambling.”
Fear-Mongering
DTCC earlier this month began releasing some information on trades in the registry to clear “misconceptions” about credit- default swaps following the bankruptcy of Lehman, among the market’s largest dealers.
After estimates from analysts that as much as $400 billion in credit swaps may have been tied to Lehman, raising concerns that hedge funds and others may struggle to make good on the bets, DTCC said only $5.2 billion had to be paid out from among the $72 billion of total contracts in the registry.
“The market would benefit from the information that DTCC has,” said Brian Yelvington, a strategist at fixed-income research firm CreditSights Inc. in New York. Had data on Lehman been released sooner, “there would not have been as much fear- mongering,” he said.
About 90 percent of credit-default swap trades are electronically matched and confirmed through DTCC, according to the company’s annual report, suggesting that most trades since the end of 2006 are recorded in the registry. DTCC has said it has backloaded “the vast majority” of outstanding trades into the registry, known as the Trade Information Warehouse.
Misguided Criticisms
DTCC is controlled by a board of members, including JPMorgan Chase & Co., Goldman Sachs Group Inc. and other dealers that created and control trading in the credit-default swap market. Trading exploded the past decade as the market went from being largely a tool for banks to hedge loans to a place where hedge funds, insurance companies and other asset managers could speculate on the creditworthiness of companies, governments and other borrowers including homeowners.
Criticisms leveled at the market are misguided, according to Robert Pickel, head of the International Swaps and Derivatives Association in New York, the industry group that sets standards for traders. The contracts are an effective tool to hedge against losses, and the losses that toppled firms such as AIG were triggered by the underlying loans, not the derivatives, he said.
“We do need to look at how more information, certainly to regulators if not to the general public, can be distributed,” Pickel said in an interview this week. “We certainly understand the interest now in having that more widely available, and the Trade Information Warehouse is probably the best source of that.”
http://www.bloomberg.com/apps/news?pid=20601087&sid=aN.sW958uPCI&refer=home
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