Friday, December 12, 2008

Swap in broad daylight

By Nandini Sukumar and John Rega

Dec. 12 (Bloomberg) -- Banks that deal credit-default swaps over the counter agreed to a European Union regulator’s request to process trades through a central clearinghouse, according to six people with direct knowledge of the plan.

Banks agreed to use a central counterparty in Europe by the end of the second quarter of 2009, said the people, who declined to be identified because the negotiations aren’t public. The agreement came after a Dec. 10 meeting in Brussels between banks, regulators and clearinghouse providers, the people said.

A counterparty combining the U.S. and Europe would keep CDS traders from having to use multiple venues. U.S. regulators are imposing oversight on the $31 trillion credit-default swap market after the contracts contributed to this year’s demise of Lehman Brothers Holdings Inc. and the U.S.-led bailout of New York-based American International Group Inc.

“It’s only the pressure of events that have made them be more transparent and open it up,” Karel Lannoo, the chief executive officer of the Centre for European Policy Studies, said in a telephone interview in Brussels. “The market and price formation will be much better.”

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