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Tuesday, October 21, 2008

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.”


Anonymous said...

Creating the central clearing-house will be difficult in proportion to the "non-standardization" (sic) of the underlying contracts; insofar as these instruments follow a standard form, so much the better.
Good luck to them, I say. Seriously.
The sooner this gets done the better, IMO.

Anonymous said...

A note to dougiefreshh and others constrained by the constraints of 401K "jump in/jump out" rules.

The end of Karl's Tuesday Oct 21 "Oh My, Its (Lack Of) Earnings!" blog I think helps me understand these bounces. I can get into Ben's comments easier.

Dougiefreshh, the way I read it was there is a difference between the best way you and me can get back into the market long with our 401Ks and Ben and the more nimble people on this site and their longs on the order of days/weeks.

Karl mentions the 01 to 03 bounces (I think that includes those two 2001 false bounces and then the two 2002 real bounces until the last successful one). Also he mentions long core capital, I read you and me and long speculative, I read Ben and others.

As low knowledge I have of all this, I still don't think the market will return to the top of the top and since I got out at the top last year, I think I can still wait a bit.

Brant, Atlanta, GA

SoldAtTheTop said...

What the heck is with that picture!!

I tried several times to reason out its possibilities but I'm left completely clueless!

What the heck is going on there?!?!

Ben Bittrolff said...


Thats what a Credit Default Swap looks like.

Anonymous said...

Hi Ben,

So that is how investors see their counterparties these days?

Anyway, I don't really understand what is a swap clearing house. Is it like netting trades? Forgive me if I sound a little uninformed, but I am just an economist.

Best, Rebecca

Anonymous said...

I dont know how a project of this side could possibly be pulled off, and I would not want to be anywhere near long trades going into this uncharted discovery process. Look at the LIBOR. The banks setting these rates every day are keeping rates at this level to avoid counter party exposure to bad CDS's. Someone seems to be in trouble and this swap market if successfully implemented may give everyone an early Christmas present when the truth comes out.

gamingthemarket said...

Using Crisis To Monopolize Fed Control

The New York Fed pushed forward on July 31, 2008 with the next leg of a master plan. They are working to completely reform global OTC derivatives markets into a single central counterparty (CCP). This will put market control in the hands of 17 banks. Two prime brokers in the US market are Morgan Stanley and Goldman Sachs. Both are firms tightly linked to Washington.

Read more:

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