By Jacob Bunge Of DOW JONES NEWSWIRES CHICAGO -(Dow Jones)- A pact between three U.S. financial regulators to coordinate approval of central clearing for credit derivatives is showing cracks as their year-end start-up deadline approaches.
The Federal Reserve, the Commodity Futures Trading Commission and the Securities and Exchange Commission have collectively approved only one of the three clearing proposals from U.S.-based exchanges.
Discord among the agencies, mostly directed toward the SEC, so far has produced a hodgepodge of approvals and has seen the U.S. fall behind the U.K., where credit derivatives clearing went online last week.
While NYSE Euronext (NYX) received the go-ahead last week for a U.S. operation, following the launch of its European platform, credit-default swap clearing proposals from CME Group Inc. (CME) and IntercontinentalExchange Inc. (ICE) still await the green light from some regulators.
The three regulators pledged to cooperate in approving the platforms, part of Fed-driven efforts to improve the efficiency and transparency of the CDS market and reduce systemic risk.
The Nov. 14 memorandum of understanding identified clearing solutions for the CDS market as the "top near-term OTC derivatives priority" with the goal of launching one or more platforms by the end of 2008.
Spokesmen for the SEC and CFTC said that the MOU to share oversight of credit derivatives remains in effect.
But there are signs of disagreement. CFTC Commissioner Bart Chilton said in an interview with Dow Jones Newswires that by approving the NYSE Euronext-LCH.Clearnet proposal to clear U.S. CDS trades, the SEC effectively awarded the partnership first-mover advantage in the U.S.
"The whole issue is really troubling because there is no clear legislative or regulatory path for how credit-default swaps should be cleared and the SEC's action is I think one of the first examples that we've seen of a potential misstep," said Chilton.
"In this regard it would give LCH, a foreign entity, a leg up in the clearing competition for CDS, and I think we shouldn't be picking winners and losers," he said.
Others have expressed frustration with the SEC as well. Speaking on condition of anonymity, one official involved in the approval process said that the securities regulator hasn't kept the Fed and the CFTC as up-to-date with its approval processes as the other regulators have done.
As a result, the official said, the U.S. has been passed up by the U.K., where last week NYSE Euronext began clearing CDS trades via its BClear platform.
The November MOU was intended to resolve a turf war between regulators over CDS oversight. SEC Chairman Christopher Cox and CFTC Chairman Walter Lukken both pressed their agencies' case before Congress last fall.
The brewing spat has also drawn in the New York Fed, and prompted the MOU as pressure mounted for regulators to open the way for a clearing solution for the swaps.
But wrangling over credit derivatives oversight continued, with Chilton continuing to argue that the instruments belong under the CFTC.
The NYSE Euronext-LCH.Clearnet partnership is the only CDS clearing effort approved for operation in the U.S. The firms got the SEC nod last week, and with LCH's status as a CFTC-registered derivatives clearing organization, no further approval is needed, an LCH official said.
But with NYSE Euronext and LCH forecasting a January 2009 launch for the platform, there is little hope for regulators' stated goal of introducing credit derivatives clearing in the U.S. by year end.
CME's effort, a joint venture with hedge fund Citadel Investment Group dubbed Credit Market Derivatives Exchange, last week got clearance from the New York Fed and the CFTC. CMDX still needs an exemption from the SEC, which was expected by mid-December.
ICE structured its CDS clearinghouse as a New York trust bank and got the go-ahead from the New York State Banking Department in early December, but continues to await approval from the Fed and the SEC.
Some of the regulators' initial urgency may have lifted.
Joel Telpner, a New York-based partner at law firm Mayer Brown LLP, said that one of regulators' chief concerns - a huge systemic failure in CDS markets following a massive credit event - wasn't borne out in the aftermath of the Lehman Brothers (LEHMQ) bankruptcy.
Telpner, who specializes in credit markets, said that when the Lehman-related swaps were settled in late October, actual payouts came in far lower than the $400 billion some had feared, and the orderly operation of the market may have given regulators some breathing room on the credit derivatives issue.
He also said that the netting down of CDS positions has reduced the size of the market substantially. Current estimates come in around $33 trillion, down from about $55 trillion at the time of the Lehman bankruptcy.
-By Jacob Bunge, Dow Jones Newswires; (312) 750 4117; jacob.bunge@dowjones.com
(Sarah N. Lynch contributed to this report.)
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Publié le 30 Décembre 2008 Copyright © 2008 Dowjones