Upon establishing a working group for derivatives last October, Charlie McCreevy, the European commissioner for internal markets and services, demanded that industry participants and their regulators come up with a formal plan to clear the majority of over-the-counter CDS trades through central counterparties (CCPs) by the end of last year.
According to a commission official, certain parties declined to back up verbal pledges to the project with a written commitment late last December. Other sources suggest talks stalled over the commission's insistence that trades either involving European protection sellers or reference entities must be cleared through a European-domiciled CCP.
Wherever the blame lies, the commission is looking at amending the Capital Requirements Directive (CRD) to include rules on central CDS clearing. To come into effect, revisions to the CRD must be passed by the European Parliament and the Council of Ministers.
In an address to the European Parliament on Economic and Monetary Affairs on February 3, McCreevy described the response of the industry as "disappointing", adding he could not "wait any longer" to find a solution by consensus. "The Committee of European Securities Regulators and the European Central Bank both consider clearing of CDSs on a CCP in the EU as essential for financial stability and oversight. I would urge the parliament to support an amendment to give effect to this," he added.
Isda has an altogether different take on the matter: it claims the EC has rejected industry commitments on central clearing (issued through the Operations Management Group) that were first made to regulators last June. Eraj Shirvani, Isda's chairman and head of European credit at Credit Suisse, wants discussions between the two sides to resume as soon as possible.
"The industry has been the first mover on this matter, pursuing industry agreement on central clearing as early as 2006 and making global regulatory commitments in mid-2008. We continue to urge co-ordinated global dialogue with all concerned regulators as a matter of priority. We respectfully urge the EC to resume its dialogue with the industry," he said.
However, while the commission is happy to discuss broader objectives for the derivatives market through the working group, it is not willing to concede ground on the CCP plan.
When asked whether formal regulation for clearing CDSs is the only option left, an EC official told Risk: "I think it is inevitable at this stage. The European Parliament, with our support, wants to amend the CRD, but that process has a certain legislative timeframe. There will be parliamentary elections in June: if this issue is not resolved before then, it could get lost.
"Although dialogue with the industry sounds good, they know precisely what the time constraints are. If we keep giving them more time, it's almost like saying we are doing nothing to push ahead with this objective," the official added.
Two of the four proposed CCPs - one established by Liffe, the London-based derivatives arm of NYSE Euronext, in partnership with LCH.Clearnet, and the other by Frankfurt-based exchange Eurex - would meet the EC's objective for a European-domiciled clearing facility.
"We're not planning to set up an institution ourselves to do this - it's more about the parties launching clearing services abiding by certain rules. Any clearing house, including those already confirmed, that adheres to our guidelines can do the job," the EC official confirmed.