Investment banks are reportedly giving their full backing to a mandatory central clearing house for over-the-counter credit derivatives in hopes of heading off a more heavy-handed attempt to regulate the market by creating an exchange. The Financial Times obtained a Morgan Stanley memo regarding an
initiative by dealer banks to present an alternative to an overhaul of the $54 trillion industry.
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"We have teamed up with a small group of dealers to put together a
legal and regulatory proposal for CDS which we will propose to Congress
and the Fed in an effort to address many of their concerns around CDS,"
said the e-mailed memo sent by James Hill, a managing director at
Morgan Stanley.
Regulators have consistently cited concerns that credit default swaps
in particular pose a systemic threat since the contracts are negotiated privately between parties, preventing a clear picture into the size of
the market or the exposure of any single party within. The Securities and Exchange Commission is pushing the
creation of a regulated exchange to trade credit default swaps and,
according to a document obtained by Reuters, has told the various
exchanges vying for that opportunity that they'll be exempt from
certain regulations.
The SEC's plan is aimed at
fast-tracking the creation of one or more central counterparties for
credit default swaps, which are used to insure against bond default
risk. Meanwhile, the Federal Reserve has been giving out guidelines for a clearinghouse for the industry to police itself and set up the entity amongst themselves.
However, default swaps carry high profit margins for their issuers,
prompting fears that the creation of an exchange will cut into the
issuers profits. Nine of the largest CDS traders -- including Morgan
Stanley, Goldman Sachs & Co., Credit Suisse Group and UBS -- have joined forced with
IntercontinentalExchange Inc. in a proposal to set up a New York-registered
bank that would act as a CDS clearer, according to the FT. -
George
White
See FT story
See Dealscape post on SEC plans for a CDS exchange
See Dealscape post on CDS clearinghouse
