Light Shed on a Murky Market

Data on Credit Default Swaps to Go Public; Trading Streamlined

NEW YORK, Oct. 31 -- The curtain cloaking the unregulated trading of credit default swaps is starting to get peeled back, allowing for greater transparency in a market that some government officials are eager to police.

The operator of a central registry for the swaps, contracts that offer insurance-like protection against bond defaults, announced Friday that it will start posting weekly data on the amount of protection bought and sold on the biggest names in the market.

Also Friday, more than a dozen of the top CDS dealers promised banking regulators that they would take steps to contain risk after a near-breakdown in the CDS market in September threatened to unleash losses that might have deepened the ongoing financial crisis.

Both efforts are major developments in a market so opaque that its very size has been a matter of dispute, with estimates within the industry ranging from $35 trillion to $55 trillion.

When Lehman Brothers defaulted, nobody knew how many CDS contracts on the securities firm existed or who was on the hook for settling them. With some estimates predicting that $400 billion of protection against a Lehman default had been sold, investors started worrying about whether the sellers of that protection could pay up.

As anxiety spread, the Depository Trust & Clearing Corp. -- which last year cleared more than $1.8 quadrillion of trades in stocks, bonds and other securities outside of the derivatives market -- said that by its count, there were just $72 billion of Lehman CDS contracts outstanding and only $6 billion of claims expected after netting out offsetting positions between contract sellers and holders.

The DTCC based its projections on its fledgling CDS registry, which electronically stores CDS contracts for more than 1,200 firms.

The registry was established two years ago, but the DTCC, which is owned by the firms that use it to clear and settle their trades, had never made public the CDS data it was storing for customers.

The release of the information about the Lehman CDS claims proved to be a precursor for much broader disclosure.

Beginning Tuesday, the DTCC will publish weekly calculations of the amount of default protection bought and sold on the 1,000 biggest names and indexes in the CDS market. Data reflecting such trading volume will be phased in by mid-November.

"Given the history and given what we saw, where the lack of this information turned out to give rise to speculation about things that weren't necessarily helpful, I think it became apparent to everybody that we had this information and that we ought to make it more publicly available to address those concerns," said Peter Axilrod, head of the DTCC's over-the-counter derivatives services.

The DTCC's registry was established after the Federal Reserve Bank of New York in 2005 urged major CDS dealers to do a better job of processing and tracking their CDS trades.

In a letter Friday to New York Fed President Timothy F. Geithner, the senior executives of 16 major banks and three financial industry associations said that the proportion of CDS trades with electronic confirmation processing has risen from 46 percent to 91 percent since 2006.

The letter outlined other efforts to streamline the CDS market, including the use of auctions to determine payout rates when bond issuers default. The industry also said it would aim to implement a global central counterparty system for processing and clearing trades, which would reduce the risk of concentrating exposure to any one counterparty and facilitate adjustments for offsetting trades.

In a statement responding to the letter, the New York Fed said that while the architecture for derivatives trading has improved, "financial market events have demonstrated that broader action is warranted to address additional market design elements."

In response to the DTCC's plans for weekly data disclosure, New York State Insurance Department spokesman Andrew Mais said the agency's regulators "support increased openness as part of the process the Fed has in place to create a holistic solution, of which centralized data management is one segment."