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A-Team Insight Blogs

NYSE Euronext and Eurex Indicate Concern Over Derivatives Regulation, CDS CCP Debate Continues

Two of the contenders in the credit default swap (CDS) clearing counterparty (CCP) race, NYSE Euronext and Eurex, have expressed their concern about a draft bill in the US aimed at expanding derivatives regulation. The firms are worried that the regulation, which would require mandatory clearing of most OTC products, would have the unintended consequence of preventing non-US clearing companies from entering the market.

The bill was proposed and drafted by Agriculture Committee Chairman Collin Peterson and would require all CDS CCPs to be regulated by the Commodity Futures Trading Commission (CFTC). It would also require that the CFTC impose detailed reporting requirements on those CCPs. Peterson is keen to make the market more stable amid complaints that speculators in derivatives markets contributed to commodity price jumps and that a lack of oversight amplified the credit crisis.

To express their concern, the chief regulatory officer of NYSE Liffe, Karl Cooper, and a member of the executive board for Eurex and Eurex Clearing, Thomas Book, spoke before the House Agriculture Committee this week. “Eurex Clearing currently does not operate in the US, but would like to consider offering clearing and other services here in the future with respect to OTC contracts, agreements and transactions,” said Book.

Thus far, NYSE Euronext is the only CCP contender that has received the necessary approvals from the Securities and Exchange Commission (SEC) to offer clearing for CDSs in the US. Cooper is concerned that the restrictive legislation will force it to seek approval from the CFTC as well as the SEC. “The OTC derivatives market is a global market, which demands a global response,” he added.

The Security Industry and Financial Markets Association (Sifma) and the International Swaps and Derivatives Association (ISDA) have also sated that the bill would have a negative impact on the CDS market. Robert Pickel, CEO of ISDA, said the draft rule could force firms to terminate privately negotiated contacts and undermine legal certainty of some trades. A Sifma spokesperson called the move “impractical and unnecessary”.

However, the US is not the only jurisdiction in regulatory uproar with regards to the CDS CCP plans, European Commissioner for Internal Market and Services Charlie McCreevy has continued his campaign for a European only CCP this month. He has gone as far as threatening legislation in this area to spur on the industry to action. The European Commission is also considering the regulation of the credit derivatives market in general at the moment with regards to more adequately monitoring risk.

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”.

The US is also continuing the ongoing debate about which body should regulate the derivatives market, the SEC or the CFTC, or whether the two should be merged. Despite calls for a merger, Gary Gensler, US President Barack Obama’s nominee to head the CFTC, is not keen on the idea and hopes to retain control over the regulation of derivatives rather than ceding it to the SEC.

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