20 Feb 2009, Alastair Marsh, Operational Risk & Regulation
In a letter addressed to European Commissioner Charlie McCreevy, Barclays Capital, Citigroup Global Markets, Credit Suisse, Deutsche Bank, Goldman Sachs, HSBC, JP Morgan, Morgan Stanley and UBS, along with the International Swaps and Derivatives Association (Isda), today committed to use an EU-based CCP for eligible EU contracts by the end of July.
The dealers also agreed to resolve the "outstanding technical, regulatory, legal and practical issues" of central clearing for credit derivatives.
The news resolves a months-long standoff between McCreevy and the banking industry. In October 2008, he gave them until the end of the year to devise a plan for central clearing of CDS trades, but they failed to do so; in response, he said earlier this month that the European Parliament should be prepared to compel banks to use central clearing unless the banks fell into line.
McCreevy welcomed today's news. "This meets the requests I made to the industry last October. I also take note of their commitment to engage immediately in a dialogue to resolve all outstanding technical issues," he said.
Meanwhile, Eraj Shirvani, Isda chairman and head of fixed income for Europe, the Middle East and Asia at Credit Suisse, said: "This commitment provides the basis for constructive dialogue with the European Commission, both on arrangements for central clearing and on related regulatory matters."
Under the new agreement, dealers will be able to choose which central clearing house or houses they wish to use and, with competition for market share in the eurozone clearing space likely to become fiercer over the course of the year as new CCPs enter the market, dealers will not be lacking in choice.
Frankfurt-based derivatives exchange Eurex plans to launch a CDS clearing service in March for trades linked to series 7, 8, 9, 10 and 11 of the iTraxx Europe, Hi-Vol and Crossover indexes, while London-based clearing house LCH.Clearnet announced this week that it will clear CDSs in the eurozone by the end of the year.
Ice Clear Europe, the European clearing business of Atlanta-based Intercontinental exchange, has also confirmed its intention to establish a European-based clearing house, Ice Trust Europe, in the first half of this year, to satisfy the demands of the European Commission.