Barn door meets horse

By DOUG CAMERON and KARA SCANNELL
Wall Street Journal
December 24, 2008

The Securities and Exchange Commission on Tuesday granted a key exemption allowing New York Stock Exchange parent NYSE Euronext to clear credit-default swaps in the U.S., though has yet to approve two rival offerings.

The approval is a first step toward providing greater oversight to the $54 trillion market, which has operated unregulated while its growth has exploded over the past decade. Congress is expected to take up the issue next year as it sorts out a broader review of financial-market oversight.

Approving new platforms to process CDSs is part of an effort to reduce risk in a market blamed for exacerbating the financial crisis.

NYSE Euronext, in partnership with large U.K.-based trade-clearing house LCH.Clearnet Group Ltd., is one of at least three rivals seeking to process CDS trades in the U.S.

Chicago Mercantile Exchange parent CME Group Inc. and IntercontinentalExchange Inc. are awaiting SEC exemptions to launch their own CDS platforms. ICE also requires approval from the New York Federal Reserve.

The three regulators involved in the process have maintained that all approvals would be coordinated to avoid any party securing a competitive advantage.

NYSE Euronext launched a European CDS clearing operation this week, and the SEC decision extends access to U.S. market participants.

The CME cleared one hurdle Tuesday when the Commodity Futures Trading Commission and the New York Fed said that they had no objections.

The CFTC said the proposed Credit Market Derivatives Exchange controlled by CME and Citadel Investment Group, the hedge-fund manager, complied with federal laws for derivatives clearing organizations. The partners are establishing a $7 billion fund to guarantee CDS trades.

Credit-default swaps are privately traded contracts that require one party to pay another if a third party defaults.

In October, LCH.Clearnet agreed to be acquired by U.S. Depository Trust & Clearing Corp., the large U.S. stocks and bond clearinghouse.

Until now, buyers and sellers of credit-default swaps made their deals privately with little scrutiny from regulators. When big players in the market started having problems, it sent ripples through financial markets and fear spread.