NYSE Euronext (NYX:US)'s Liffe derivatives market said it plans to start guaranteeing credit-default swaps traded outside exchanges from December, as bourses respond to demands from regulators to reduce the risk of market failure.
London-based Liffe plans to start clearing contracts based on the European benchmark Markit iTraxx indexes of credit-default swaps, financial instruments used to speculate on bonds, through its Bclear administration service. The service will start Dec. 22, said Liffe spokesman James Dunseath.
The Federal Reserve Bank of New York said last week it's ``hopeful'' that at least one credit-default swap clearinghouse will begin guaranteeing trades as soon as this month as it pushes for more oversight of the unregulated $55 trillion credit derivatives market. Intercontinental Exchange Inc. (ICE:US) and CME Group Inc. (CME:US) are among companies vying to create clearinghouses to back trades and absorb losses in the event of a dealer default.
Criticism of the part default swaps played in the failures of Lehman Brothers Holdings Inc. and American International Group Inc. prompted lawmakers and regulators to call for controls on credit derivatives. If well-managed, a clearinghouse ``will reduce the systemic risk associated with counterparty credit exposures,'' the New York Fed said in an Oct. 31 statement.
Banks, hedge funds and other investors negotiate credit- default swaps privately through the so-called over-the-counter, or OTC, market. Liffe's Bclear service will allow banks to agree OTC trades and then use London-based clearinghouse LCH.Clearnet Ltd. to guarantee the transactions by taking the opposite side of every transaction.
Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a company fail to adhere to its debt agreements. The contracts are part of the market for derivatives, financial instruments derived from stocks, bonds, loans, currencies and commodities, or linked to specific events like changes in interest rates.
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