EC approves clearing mandate for single-name CDS contracts

Central clearing could improve liquidity and confidence in a market that has significantly declined since 2008.

The European Commission has mandated certain single-name credit default swaps (CDS) contracts for central clearing.

Jonathan Hill, EU commissioner for Financial Stability, Financial Services and Capital Markets Union, said: “Today’s decision marks another step towards making good on our G20 commitments to bolster financial stability, reduce risks and boost market confidence.”

The mandate will cover CDS derivatives that are denominated in euros covering certain European corporations.

Speaking to The TRADE Derivatives, Frank Soussan, global head of CDSClear at LCH.Clearnet, says the clearing mandate will help improve both liquidity and confidence in a market that has dramatically declined since the financial crisis.

“As soon as you clear any financial instrument, you provide transparency around pricing, valuation and flows. This is good for the market and will help improve liquidity. Clearing single names requires dealers to contribute prices which means the buy-side have a valuation for their books and their trades. This should give them confidence to engage in further trading of CDS,” says Soussan.

Trading volumes in the CDS market have surged in recent months following severe losses at some of Europe’s largest banks. In February, the volume of contracts on benchmark indexes in the market increased two-fold to an average of $87 billion a day.

However, firms are still awaiting a clearing mandate for single-name CDS to be adopted in the US. Earlier this year, hedge fund giant Citadel called for the US Securities Exchange Commission (SEC), which regulates the CDS market, to finalise a regulatory framework for single-name CDS central clearing.

“The single-name CDS market is now at a critical juncture, with liquidity and participation impaired due in part to the lack of a firm and predictable regulatory framework,” wrote Adam Cooper, chief legal officer at Citadel, in a letter to the SEC.

“The Commission should, without delay, perform a full review of all of the instruments that clearing agencies currently accept for clearing.”

The announcement from the European Commission comes after the regulatory body dropped proceedings against 13 investment banks, along with CDS data provider Markit and the International Derivatives and Swaps Association (ISDA), from allegedly preventing CME and Deutsche Bourse from entering the market.