Europe’s top regulator on Friday welcomed the start of the region’s first clearing of over-the-counter derivatives, but warned it would “take account of the progress made by market participants” when it unveils further proposals for such markets this autumn.
Developing clearing mechanisms for over-the-counter (OTC) derivatives – especially credit default swaps – has been a top priority of regulators in the US as part of the clean-up of the financial system in the wake of the Lehman Brothers default last September. A clearing house steps in when a trader defaults insuring that the transaction is completed.
The European Commission has insisted that Europe also develop such mechanisms, which help safeguard financial systems against the wider damage caused by defaults.
Brussels had imposed a deadline of Friday by which participants in the derivatives market, exchanges and clearing houses were to have started clearing credit default swaps (CDSs), which were blamed for exacerbating the financial crisis.
Eurex Credit Clear, a new clearing organisation set up by Deutsche Börse, the German exchange and clearing group, said it had cleared its first CDS contracts on Thursday. ICE Clear Europe, owned by ICE of the US, started a weekly cycle of clearing on Monday.
EU internal market commissioner Charlie McCreevy, said: “Back in October, I called on the industry to reduce the risks inherent in the CDS market, in particular by moving the clearing of the contracts on to a European central counterparty,” he said.
“I am pleased that the extraordinary efforts by the industry and service providers have made it possible that two European CCPs [central counterparty clearers] are starting to clear these products now, with a third aiming to launch its service by the end of the year.”
The third possible clearer is be LCH.Clearnet, out of its Paris unit.
The European Commission said that, with this groundwork established, it “expects that, as of today, dealers will live up to their commitment and will start using all available CCPs for all eligible trades”.
The International Swaps and Derivatives Association, which represents dealers in the OTC markets, said: “Our membership continues to devote the greatest number of resources possible to meet these challenges and, with our help, is striving to build on the many improvements to the mechanics and infrastructure for these important risk management instruments.”
Thomas Book, member of the Eurex executive board and responsible for clearing, said: “Eurex Credit Clear has successfully completed its first production cycle and effectively delivers OTC clearing for CDS for the first time in Europe.”
Eurex so far has two “credit clearing members” – Unicredit and Nomura – connected to Eurex Credit Clear. They have submitted the CDS trades for clearing.