Credit Swap Clearinghouse: Soon

A credit swap clearinghouse could be ready as early as this November.

This would go a long way towards adding desperately needed and sought transparency to the derivatives market. This would also almost completely eliminate counterparty risk, which has now become the number one problem.

The downside risk of course is that these products and positions will then see the light of day, where they very well may turn out to be quite ugly.

I still expect Credit Default Swaps (CDS) to blaze a wide, unpredictable path of destruction thru both the financial system and the real economy. (Like the guy in the picture.) But in the meantime, this is progress. This is good.

Credit Swap Clearinghouse May Start By November, Barclays Says: “A central clearinghouse for credit-default swap trading may open by next month after pressure from the U.S. Federal Reserve for a means to absorb losses should a market maker fail, according to Barclays Capital strategists.

Fed officials and New York's insurance regulator have been pressing the $55 trillion market to create a central counterparty after Lehman Brothers Holdings Inc.'s bankruptcy last month. Because swap contracts are traded bilaterally between banks, hedge funds, insurers and other institutional investors, default by a major dealer threatens market stability by risking losses at everybody they've traded with.

While “progress has occurred at a slower-than-desirable pace, recent events have accelerated the rollout,” New York- based Barclays credit strategists Bradley Rogoff and Gautam Kakodkar wrote in a note to clients dated Oct. 17. “Expected go- live date is late October or early November.”

Four groups have been vying to operate clearing operations, including a partnership between Chicago-based CME Group Inc. and Citadel Investment Group LLC and a group that includes dealer- owned Clearing Corp., Intercontinental Exchange Inc. and credit swap index owner Markit Group Ltd. Eurex and NYSE Euronext have also submitted proposals.”