THE BASIS POINT

Unregulated $55t Credit Default Swap Market Moving Toward Transparency

The utterly unregulated $55 trillion market for credit default swaps is getting closer to transparency as regulators are expected to approve a clearing house for the securities during November. The CME and Citadel Investment Group have played a key role in this process by creating an exchange for CDSs, which is a topic we covered earlier this month. CNBC reported this latest news that the newly created CME/Citadel exchange would be integrated with a central clearinghouse:

Creating a clearing house would remove the risk posed by a counterparty failure, provide price transparency and offer simpler, more standardized settlement of contracts when an issuer defaults, proponents argue.

Calls for regulation and centralized clearing of credit default swap trades has gathered steam in the wake of Lehman Brothers’ failure last month. The New York Federal Reserve Bank Friday said it “welcomes” progress in clearing credit default swaps and urged “broader action.”

Clearing operations will be in place for CDS indexes in November and for single-name CDS in January. Depository Trust & Clearing Corp. will begin releasing total stock and trade data on Nov. 4.

About $24 trillion has recently been netted of the gross exposure in the CDS market, almost a third of the total.