Following repeated calls by European Commissioner for Internal Market and Services, Charlie McCreevy, for a European clearing service for credit default swaps (CDS), LCH.Clearnet has decided to step up to the plate. The service would be based in Paris and will be launched by December, pending regulatory approval, says the firm.
Christophe Hémon, CEO of the firm, explains that its offering will be aimed at reducing counterparty risk in the European CDS market. “We are leveraging expertise from across the group to deliver the benefits of clearing to the euro zone CDS market,” he elaborates.
Prior to the announcement by LCH.Clearnet, McCreevy had gone as far as threatening legislation in the CDS market to spur on the industry to action. In January, he told a conference in Brussels that he was “open the option of legislating” to get a European clearing counterparty (CCP) in place before the end of the year. No doubt he will be pleased at the decision by LCH.Clearnet to take heed of his warnings.
European legislators are keen to establish a European CDS 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, industry associations including the International Swaps and Derivatives Association (ISDA) and the Futures and Options Association have both spoken out against a European solution in favour of a “global” option.
ISDA is strongly against the idea of multiple regional clearing houses and has been championing the establishment of a single CCP for all trades. Eraj Shirvani, the chairman of ISDA and the head of European credit at Credit Suisse, has indicated that the association is keen to establish “global dialogue with all concerned regulators as a matter or priority”.
LCH.Clearnet has also recently been garnering headlines due to the rumoured ongoing discussions between the Depository Trust and Clearing Corporation (DTCC) and a consortium of financial institutions including interdealer-broker Icap over a possible takeover of the clearing firm. DTCC is said to be going head to head with the consortium in a bidding war for LCH.Clearnet, although the consortium has not yet publicly announced its intentions.