The November 30 target for central clearing of index credit default swap (CDS) trades set by a consortium of industry associations and investment banks is unlikely to be met, sources within the Federal Reserve Bank of New York have said.
The Operations Management Group (OMG), a collective of 16 banks and industry bodies including the International Swaps and Derivatives Association, the Managed Fund Association, and the Securities Industry and Financial Markets Association, stated in a letter to New York Fed president Timothy Geithner on October 31 that it anticipated "the implementation of a central counterparty in credit derivatives to be in place to clear index transactions commencing in November 2008".
On November 14, the OMG revealed that at least one central clearing counterparty (CCP) - that proposed by the Chicago-based Clearing Corporation (CCorp) - was already in the advanced testing stages and would be operational just days after the November deadline.
"CCorp has been testing its credit derivatives clearing platform for the US CDS index for some time, with those tests set to conclude on November 17. The CCorp CCP will then go completely live on December 2, although we could see some level of operation before that," said a senior figure involved in the process.
A spokesperson for the IntercontinentalExchange, the Atlanta-based company that recently acquired CCorp, could not corroborate the dates but did confirm CCorp "expects to be trading index CDS within a matter of weeks". Despite the readiness of such a CCP platform to go live, trades cannot commence until regulatory approval is given.
Last week, in its most recent update on the efforts towards establishing CCPs, the US President's Working Group on Financial Markets stated: "Relevant regulatory authorities are assessing these central counterparty proposals by conducting detailed onsite reviews of risk management and other key design elements. After completing the onsite reviews, regulators expect to proceed towards regulatory approvals and/or exemptions expeditiously and anticipate that one or more CDS central counterparties will commence operations before the end of 2008."
A source within the New York Fed confirmed to Risk that no regulatory approval has been given at this point and the December 2 target for approval will almost certainly not be met. The source went on to clarify that regulators will not endorse any of the competing CCP platforms explicitly but will leave the market to decide which clearing house will emerge as the industry's favoured choice for a central CDS hub.
Rival CCP platforms are under development by Frankfurt-based derivatives exchange Eurex, NYSE Euronext, and in a joint venture between the Chicago Mercantile Exchange Group and Citadel, the hedge fund that has been stricken by losses of 38% on its two flagship funds so far this year.
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