New attempt to set up swaps initiative

The New York Federal Reserve will on Friday hold its second meeting this week with three groups vying to set up a central clearing counterparty for the credit default swaps market in an attempt to breathe fresh life into the initiative.

The first meeting ended without agreement on how to set up a central clearing counterparty (CCP) for the $54,000bn market. It was attended by CME and Citadel, a hedge fund; Intercontinental Exchange and The Clearing Corporation, a consortium of investment banks and broker-dealers and others.

Efforts to get the project off the ground have been complicated by intense rivalry between CME/Citadel and TCC, whose bank shareholders are wary of exchange-led efforts to provide a solution because of exchanges' historical focus on on-exchange derivatives.

The CME is convinced an exchange-led effort is more likely to win favour from regulators since they have a strong record of managing counterparty risk in on-exchange derivatives through their clearing houses.

The New York Fed is spearheading the regulatory drive to cut trading and settlement risks in OTC derivatives markets. Credit default swaps are used to protect or insure against the risk that a borrower will default on debt or to speculate on a borrower's credit quality.

Asked the purpose of the second meeting at the New York Fed, Andrew Williams, a spokesman, said: "It's a continuation, mainly focused on accelerating getting a central counterparty up and running."

NYSE Euronext is also planning to enter the fray. Duncan Niederauer, chief executive, told the Financial Times on Thursday: "In terms of the CDS market and looking at establishing a central platform we are very much at the table and involved in those discussions."

"The CDS market is now such an important part of what goes on at the moment that I doubt it will go away. Exchanges can clearly deliver part of the solution and dealers cannot do it without exchanges."

Regulators are anxious to have a mechanism set up as soon as possible to reduce the risks of systemic failure in the opaque CDS market.

On Wednesday, Christopher Cox, chairman of the US Securities and Exchange Commission, urged Congress to "act now" by providing oversight of the market.

© The Financial Times Limited 2008. All rights reserved.
FT and Financial Times are trademarks of the Financial Times Ltd.
Not to be redistributed, copied or modified in any way.
Euro2day.gr is solely responsible for providing this translation and the Financial Times Limited does not accept any liability for the accuracy or quality of the translation