Friday, April 18, 2008
movement toward CDS exchange
In particular, the banks are tying to develop a scheme that would only allow institutions with strong capital bases and credible trading histories to clear trades in the credit default swap markets with a central counterparty.
The aim is to ensure that members of this clearing house club would be more protected from the risk of a trader or investor failing to meet their obligations.
not exactly salvation for hedge funds -- more of a move to build a catbird's seat for intermediation (for a fee, thank you).
These discussions mark a striking new twist in the development of the credit derivatives industry that has lacked any central clearing mechanism and has fiercely resisted any suggestions that banks should move their current private or “over-the-counter” trading activity on to regulated exchanges.
The proposals to create this type of clearing house are set to be extremely controversial within the industry, not least because some bankers fear it could presage an eventual shift towards greater regulation of the CDS sector.
whatever the motivation, this must be regarded as a good step, particularly if the exchange is well regulated. (the recent american experience in lightly or essentially unregulated exchanges dominated by a small cabal is not so good -- though it's very interesting to revisit the zeitgeist of late 2001 just before the collapse of that corrupt entity, which is so much different than what came just weeks later.) hardly foolproof, mind you -- exchanges are so weakly regulated in the united states by an underfunded SEC that little impedes the suicidally reckless. but even a pretense of standardized reporting and a supported mechanism to determine counterparty exposure could be of some benefit in one of the most opaque of all marketplaces.
more from yves smith. as noted in the comments, a move to exchange will probably make CDS far less profitable and attractive -- the reasons they aren't cleared now -- though that may well not be a bad thing, is indeed perhaps quite the point.