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ANALYSIS
March 2, 2009
Sagging Index no longer reflects what’s going on in the market, some say, Replacements? Google it, to start.
March 2, 2009
Downward price spiral will actually boost the cost of capital for most companies. CFOS, take note.
March 2, 2009
The latest bailout at AIG could be a preview of how the president will deal with Wall Street.
March 2, 2009
No corporate defaults. Big debt offerings. Percolating CP issuance. Things may be looking up in the capital markets.
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November 2, 2008 12:01 AM ET
A clearinghouse for the murky credit default swaps market appears just months away after two derivatives exchanges moved closer to becoming a reality. But analysts said that, while a guarantor of the quasi-insurance contracts on bonds would disperse risk and increase transparency in the $55 trillion market, federal regulators aren't thinking big enough. Some other types of derivatives will still have no clearinghouse to provide backing for over-the-counter contracts, leaving participants in these trillion-dollar sectors exposed if one of the two parties can't meet its obligations. “Who's to say the next big crisis won't involve commodity or currency swaps?” said Texas University law professor Henry Hu, who testifies regularly before Congress about derivatives. “If we really care about transparency, we ought to care about all over-the-counter derivatives.” A clearinghouse takes deposits from all participants and uses the money to backstop potential losses. It spreads the risk among all members rather than leaving it concentrated in just the two parties to an agreement. Some clearinghouses also offer electronic quote platforms to make prices and volume more transparent. University of Houston finance professor Craig Pirrong said a single clearinghouse for the entire $600 trillion derivatives market would do more to address risk and inefficiencies than a guarantor for just one of its sectors. For example, a dealer facing potential losses in two types of derivatives markets—say, currency and credit default swaps—would present a greater risk profile than if he were involved in just one of those sectors. A credit default swaps clearinghouse would only capture the risk faced by the dealer in that market alone. “People are a little starry-eyed about how the credit default swap solution is going to work,” said Mr. Pirrong, who has been researching derivatives clearinghouses for the last decade. Messrs. Hu and Pirrong said they did not foresee any effort in Congress or among regulators to try to extend the clearinghouse concept to the entire derivatives market in the near future. “It may take a scandal or a firm's collapse,” Mr. Pirrong said. The International Swaps and Derivatives Association, the influential group of derivatives dealers, hasn't yet considered the merits of a single derivatives clearinghouse, group spokeswoman Louise Marshall said. Another limitation of the clearinghouse will be that participation is voluntary, so dealers can continue to make over-the-counter agreements outside its purview. But Callcott Group consultant Richard Lindsey said market forces will likely push dealers to participate. “If nothing else, people have learned in the last year that counterparty risk matters a lot,” said Mr. Lindsey, former head of Bear Stearns' clearing unit and ex-director of the Securities and Exchange Commission's market-regulation division. The push for regulation of credit default swaps, which SEC chairman Christopher Cox has described as “urgent,” stemmed from their role in the downfall of insurer American International Group and brokerages Lehman Brothers and Bear Stearns. AIG almost collapsed last month after it had issued $440 billion in swaps and couldn't back up its promises to cover debt defaults. Other types of derivatives include currency, commodity, interest-rate and equity swaps. Portions of the interest-rate and equity swaps markets already have clearinghouses. Four teams of firms have applied for recognition as a credit-default swap clearinghouse. Regulators indicated last month that they may pick more than one. CME Group Inc., a Chicago-based derivatives exchange, and Citadel Investment Group hedge fund reached a milestone last week when their planned clearinghouse passed internal testing. Its system could be ready to roll in January. Another applicant, derivatives-exchange-operator IntercontinentalExchange Inc., acquired dealer-run Clearing Corp. last week. It got a commitment for more capital for its clearinghouse from dealers including Goldman Sachs Group and Credit Suisse Group. FW
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