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Banking Industry to Clear CDS in EU

Nine of the world’s top banks have committed to the use of central clearing houses when trading credit default swaps in the European Union, EU officials said last Thursday.

But bankers and EU staff alike sidestepped a reported French call for the countries that use the euro to set up a clearing house in Paris to counter the weight of London and New York, saying that they did not care where the business was carried out.

The Brussels-based European Banking Federation (EBF) has “no preference as to the location of the (one or more) central counterparties. Above all it wishes for these CCPs to be safe, sound, efficient and reliable,” the group said.

Members of the EBF and the International Swaps and Derivatives Association (ISDA) pledged to use central clearing services within the 27-nation region by the end of July 2009 in simultaneous letters sent to European Commissioner, Charlie McCreevy.

The financial crisis and credit crunch has spurred policymakers on both sides of the Atlantic to improve transparency in the global $27 trillion credit derivatives market, saying it is too opaque, making it hard to quickly assess the extent of risk when things go wrong. 

Funded by its members, a clearinghouse adds stability to markets by becoming the buyer to every seller and the seller to every buyer.

The letter from ISDA 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 co-signatories of the letter are: Barclays Capital, Citigroup Global Markets, Credit Suisse, Deutsche Bank, Goldman Sachs, HSBC, JP Morgan, Morgan Stanley and UBS.

“This commitment provides the basis for constructive dialogue with the European Commission, both on arrangements for central clearing and on related regulatory matters,” says Eraj Shirvani, ISDA chairman and head of fixed income for EMEA, Credit Suisse.”

The exchanges that are vying for business in the EU are: NyseLiffe, Eurex Clearing, part of Deutsche Brse, and the US-based Intercontinental Exchange, which is in talks with the UK regulator about allowing its existing London clearer to clear CDSs.

LCH.Clearnet announced earlier this month that it, too, will start offering clearing through a Paris-based unit to meet European regulators’ demands by year end.

In the US, the Federal Reserve Bank of New York last year encouraged dealers to commit to processing trades through one of four clearing entities being created by exchanges. The plans however have been held up by regulatory approvals after the Fed in October said it hoped to have at least one clearinghouse guaranteeing trades by the end of 2008 (Squawkbox, 17 November 2008).

Intercontinental Exchange, which has the support of nine dealers through its acquisition of the Clearing Corp., has been seen as the most likely to win the business.

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