Regulators to Approve Derivatives Clearinghouse

Steve Liesman
CNBC Senior Economics Reporter

Regulators are expected to approve a clearing house for credit derivative swaps in the next several weeks, CNBC has learned.

Regulators and industry participants have voiced concern that the private nature of the $55 trillion market for credit default swaps poses systemic risks because no one knows the size of a counterparty's derivative portfolio, and the failure of a large counterparty can create massive losses globally.

Creating a clearing house would remove the risk posed by a counterparty failure, provide price transparency and offer simpler, more standardized settlement of contracts when an issuer defaults, proponents argue.

Calls for regulation and centralized clearing of credit default swap trades has gathered steam in the wake of Lehman Brothers' failure last month.

The New York Federal Reserve Bank Friday said it "welcomes" progress in clearing credit default swaps and urged "broader action."

The Chicago Mercantile Exchange, or CME Group, and Citadel Investment Group unveiled plans earlier this month for an electronic exchange for credit default swaps, which they said would be integrated with a central clearinghouse.

Clearing operations will be in place for CDS indexes in November and for single-name CDS in January. Depository Trust & Clearing Corp. will begin releasing total stock and trade data on Nov. 4.

About $24 trillion has recently been netted of the gross exposure in the CDS market, almost a third of the total.

—Reuters contributed to this report

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