SEC Moves to Bring Transparency To Market for Credit-Default Swaps
Wednesday, December 24, 2008
The Securities and Exchange Commission took a step yesterday toward a new system of central clearinghouses for credit-default swaps, complex investments traded globally that have been partly blamed for the financial crisis.
The SEC commissioners approved temporary exemptions from agency rules, a move that will allow British firm LCH.Clearnet to operate as a central clearinghouse for transactions involving credit-default swaps.
Traded in a $60 trillion market that is unregulated and secretive, credit-default swaps have come under scrutiny by Congress and federal regulators in the wake of the financial and credit crises that have plunged economies around the world into recession. The idea behind a system of central clearinghouses -- promoted by a White House advisory group of regulators -- is to bring transparency to the market, possibly reducing risks to the financial system.
The SEC move "is an important step in our efforts to add transparency and structure to the opaque and unregulated" market for credit default swaps, SEC Chairman Christopher Cox said in a statement. "These . . . exemptions will allow a central [clearinghouse] to be quickly up and running, while protecting investors through regulatory oversight."
Credit-default swaps are contracts to insure against the default of financial instruments such as bonds and corporate debt. But they also are bought and sold as bets against bond defaults.
Swaps played a prominent role in the credit crisis and led the government to assemble a $150 billion rescue plan for American International Group. The huge volume of credit-default swaps sold, coupled with rising levels of defaults on mortgages and other debt, threatened the company's existence. If AIG were to fail, the losses would spread to the companies and investors who bought swaps from it.
In announcing the exemptions for LCH.Clearnet, the SEC did not specify how long they would remain. They will allow firms such as LCH.Clearnet to quickly put in a centralized system for clearing swaps trades, while giving the SEC time to review their operations and assess whether permanent exemptions should be granted, the agency said in a statement.
Several companies are seeking similar exemptions, some of them from other federal agencies that oversee them such as the Commodity Futures Trading Commission.
Executives of CME Group and IntercontinentalExchange in the United States, Britain's London International Financial Futures Exchange and Eurex Clearing of Germany assured the U.S. House Agriculture Committee at a recent hearing that they would provide safe, neutral central structures that would contain risk and manipulation in the market for the swaps.