THE BASIS POINT

Move Toward Better Credit Default Swap Regulation Continues

 

Latest news from Bloomberg on bringing more transparency to the credit default swaps market:

Wall Street banks including JPMorgan Chase & Co., Goldman Sachs Group Inc. and UBS AG will for the first time offer hedge-fund customers protection by backing credit-default swap trades with clearinghouses by Dec. 15.

The dealers also committed to report all trades that aren’t cleared in the credit swap market to a trade repository by July 17; for interest-rate swap trades by Dec. 31; and for equity derivatives by July 31, 2010, the banks said in a letter sent today to the Federal Reserve Bank of New York.

U.S. regulators are pushing for tighter regulation of the $592 trillion over-the-counter derivatives market, which includes credit-default swaps, to reduce risk to the financial system. Derivatives contributed to the failures last year of Lehman Brothers Holdings Inc. and American International Group Inc., and a broader seizure that caused more than $1.4 trillion in writedowns and credit losses.

Trades in the $29 trillion credit-default swap market are now cleared by ICE Trust, a clearinghouse owned by Intercontinental Exchange Inc. ICE Trust only clears trades made between its bank members and doesn’t allow pension funds, hedge funds or other investors to guarantee their trades with banks.

Credit-default swaps are financial instruments based on bonds and loans that are used to speculate on a company’s ability to repay debt.

A total of 27 banks, hedge funds, industry groups and money managers signed the letter, including Citadel Investment Group LLC, D.E. Shaw & Co., Barclays Capital and The Royal Bank of Scotland Group.

Capitalized by its members, a clearinghouse acts as the buyer to every seller and seller to every buyer, reducing the default risk between parties to a trade. Also known as a central counterparty clearing service, or CCP, a clearinghouse allows regulators to assess market positions and prices.

 
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