Originally appeared in MiFID Monitor
The clearing counterparty (CCP) race for the credit default swap (CDS) market has proved to be controversial from the off. Not only has there been an ongoing battle between the contenders for market share, each trying to convince the market that only one solution is necessary, there has also been a furore over who will regulate these entities in the long run. To add to this muddle, it seems that despite the best efforts of the European Commission and the European Central Bank (ECB), European dealers are unconvinced that a European offering is necessary.
European Commissioner for Internal Market and Services Charlie McCreevy has for some months been grandstanding the importance of a Europe-based CCP, in order to prevent the risk associated with these OTC derivatives being concentrated in the US market. There are also concerns from the Commission that European regulators would be at a disadvantage dealing with an entity out of their jurisdiction.
However, thus far, European dealers have been unconvinced about signing up to a European specific solution. Instead they are in favour of a “global” solution, regardless of where the entity is based. There is also concern that by separating out European clearing it will involve breaking liquidity into dollar and euro pools. Moreover, the idea of adding yet more contenders into the race is unpopular as this would add cost and further complexity to the clearing process.
The Commission and the ECB hoped to get the commitment from dealers to be able to launch a European solution by June but this has not been forthcoming and the current stalemate is unlikely to be broken any time soon.