The European Union’s deadline of today for banks to start using clearinghouses to guarantee credit-default swaps has been met, ending a threat by regulators to legislate the privately traded market.
The European Commission said it anticipates dealers will live up to their commitment and “will start using all available clearinghouses for all eligible trades,” according to a statement issued by the regulator in Brussels today.
EU Financial Services Commissioner Charlie McCreevy had said he would push for a law forcing dealers to conduct clearing in the EU, under the supervision of regulators, if the banks didn’t do it voluntarily by July 31.
“I am pleased that the extraordinary efforts by the industry and service providers have made it possible that two European CCPs are starting to clear these products now,” McCreevy said in today’s statement, referring to central counterparties.
The EU and regulators in the U.S. have sought to increase oversight of the market amid claims that bets made with the contracts amplified the credit crisis. Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent if the borrower defaults. The financial crisis was triggered when credit markets froze in August 2007 after banks such as Bear Stearns Cos. found they couldn’t determine the value of trades linked to mortgage bonds.
Eurex AG, Europe’s largest futures exchange, said on July 24 that it will offer to guarantee trades in the $26 trillion credit-default swap market beginning today, the fourth company trying to back the transactions with a clearinghouse. Intercontinental Exchange Inc. (ICE:US), owner of the ICE Trust clearinghouse, has also offered to back credit swaps, which are used to hedge the risk of or speculate on the possibility of a debt default. The two have already obtained the necessary regulatory approvals, the commission said. LCH.Clearnet SA may follow suit by year end.
Eurex said it guaranteed 25 million euros ($35 million) of trades on its first day of operations yesterday.
ICE Trust, which has a profit-sharing arrangement with the largest banks trading credit-default swaps beginning next year, has cleared almost $1.6 trillion of the trades since March.
Capitalized by its members, a clearinghouse reduces the default risk between parties to a trade. It also allows regulators to assess market positions and prices.
The commission said it will monitor the migration of the credit swaps onto clearinghouses and will “take account of the progress made by market participants” when it finishes proposals for over-the-counter derivatives in general.
The regulator said on July 3 that it is studying shifting more trades to exchanges. It also is considering the creation of a data warehouse to boost the transparency of trades and looking at ways to promote the standardization of contracts.
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