The European Commission's initiative to move the majority of over-the-counter credit default swaps (CDS) onto central clearing facilities has stalled after failing to get written commitments from certain parties.At an October 22 meeting attended by regulators, industry bodies and derivatives exchanges, the European commissioner for internal markets and services, Charlie McCreevy, outlined his intention to bring the credit derivatives market under regulatory control.
A working group for derivatives - chaired by Martin Power, McCreevy's head of cabinet - was established with two clear objectives. The first was to produce a concrete proposal by the end of 2008 on centrally clearing CDSs; the other goal was to systematically look at the wider derivatives market and come up with a formal plan to improve it by April 2009.
The most recent meeting of the working group on December 10 resulted in a verbal commitment from regulators and industry groups for central clearing of CDSs within the first half of 2009. However, after the Christmas break it appears certain parties were unwilling to formally commit to the initiative.
"Commissioner McCreevy expected the firm engagement from industry participants and regulators by the end of 2008," an EC official told Risk. "There had been verbal agreement from participants and regulators at the last meeting of the working group, but this subsequently has not been backed up by written commitments. In other words, not all parties want to commit, so on that basis the original objective has failed."
As to specific reasons on why talks broke down, there have been suggestions of resistance among industry representatives over the need for a European-domiciled clearing house. With central clearing solutions close to fruition in the United States, global banks would rather use a single platform of their own choosing rather than have to provide collateral for clearing houses on both sides of the Atlantic.
The EC official acknowledged this was a concern for some. "However, if we want to ensure our objectives are met, we have to some control over the process. And we can only achieve that with a clearing house domiciled within the European Union," he said.
The official added that the commission is considering how best to revive the central clearing goal. Previously, McCreevy has stated that if a voluntary agreement was not forthcoming, he would consider the option of mandatory regulation. "We're not backtracking on that - currently, our conclusion is that the voluntary approach has failed. But we need a few days to discuss how to organise the appropriate follow-up measures," he remarked.
While discussions on the primary objective have broken down, the official added that the working group would not be disbanded. "It was set up with broader goals on the derivatives market - that work is far from finished."
Meanwhile, in an effort to show the clearing initiative is still very much alive, the International Swaps and Derivatives Association hosted a workshop in London on Thursday. The Chicago Mercantile Exchange (CME), the Intercontinental Exchange (Ice) and Liffe made presentations to industry executives, trade associations and policy makers on how their efforts to establish CDS clearing houses are progressing.
"Isda hosted the meeting to facilitate a transparent dialogue in the interests of an informed view among members and potential customers of the central clearing parties as to the relative merits of those offerings. We continue to pursue constructive dialogue with regulators toward globally coherent solutions for centralised clearing," said Robert Pickel, Isda's chief executive.
Private sector moves towards central clearing were in the works even it became the focus of regulators. The first clearing platform for CDS index trades - established jointly by Liffe, the derivatives arm of NYSE Euronext, and London-based clearing house LCH.Clearnet, started clearing Market iTraxx Europe, Crossover and Hi-Vol index trades on December 22.
Also in Europe, Frankfurt-based exchange Eurex plans to begin clearing European index trades in March, followed by North American index trades and single-name CDSs in the second quarter.
In the US, the CME and Citidel Investment Group have secured approval from the Commodity Futures Trading Commission and Federal Reserve Bank of New York for their joint clearing initiative, and now await the green light from the Securities and Exchange Commission.
Additionally, the Atlanta-based IntercontinentalExchange and the Clearing Corporation have established a new entity, Ice Trust, to clear CDSs and are also waiting on regulatory approval.
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