Nine leading brokers have committed to use central counterparty (CCP) clearing for CDSs in the European Union amid growing support for the formation of European CCPs to clear the contracts.
CDS contracts are typically transacted over-the-counter and cleared bilaterally, but following the greater focus on counterparty risk after the collapse of Lehman Brothers, there have been increasing calls to clear CDS trades through a CCP. CCPs stand between buyer and seller and bear the risk of either failing.
The nine brokers – Barclays Capital, Citigroup Global Markets, Credit Suisse, Deutsche Bank, Goldman Sachs, HSBC, J.P. Morgan, Morgan Stanley and UBS – signed a letter to Charlie McCreevy, commissioner for internal market and services, confirming their intention to use EU-based central clearing for eligible CDS contracts by the end of July.
The letter also commits the signatories to work closely with infrastructure providers, regulators and the European Commission in resolving outstanding technical, regulatory, legal and practical issues. Each firm will make an individual choice on which central clearing house or houses might best meet its risk management objectives, subject to regulatory approval of any such clearing house in Europe.
The European Banking Federation (EBF) has also written to McCreevy, lending its support to the establishment of CCPs for CDS clearing in Europe.
The EBF said it has no preference for the location of the CCPs, but hopes they are sound, efficient and reliable, and meet users’ requirements of technical specifications and governance.
McCreevy has welcomed the commitment from the industry. “Central clearing of CDS is particularly urgent to restore market confidence,” he said in a statement. “Given the size of the derivatives markets I am looking whether other measures might be necessary to make sure they are adequately supervised and do not pose unnecessary risks to financial markets.”
Meanwhile, derivatives bourse IntercontinentalExchange (ICE) has become the latest firm to announce that it is planning to launch a European CDS clearing service. The service, called ICE Trust Europe, will be operated from within the exchange’s existing ICE Clear Europe CCP, but will have a segregated risk pool and dedicated risk management systems for the European credit derivatives market.
European clearing house LCH.Clearnet announced plans on Monday to launch a eurozone CDS clearing service, which will be managed by its French subsidiary by December 2009.