A regulatory mandate will be critical in achieving significant take up of central clearing party platforms for credit default swaps, industry utilities told Congress last month. In a hearing held by the House Agricultural Committee on the CDS market, representatives from four industry utilities with plans to launch CCPs agreed that while the amount of business on the platforms would be viable without a mandate, take up could still be low.
Terrence Duffy, executive chairman of the CME Group, said 20-30% of the now $40 trillion market would likely move onto the platforms without a mandate. "This product has been around for 10 to 11 years and the market has grown exponentially... as bilateral transactions," he said, though that there is incentive now for firms to use the utilities.
In part two of the hearing, Gerald Corrigan, managing director at Goldman Sachs, said while he agreed a mandate is needed, any mandates should be made with the idea in mind that the global industry is likely to gravitate toward a single platform. "Given my orientation about systemic risk, having the process at the end of the day in one place where the regulators can see and control it has a great deal of appeal," he said, adding that he does not favor monopolies.
Meanwhile, utilities were hesitant to provide specific timelines related to the ability to clear non-standard CDS contracts via their proposed platforms. In response to a question from Rep. Collin Peterson (D-Minn.) about mandating clearing for non-standard CDS, Duffy noted that it would take more time to ensure the appropriate risk management capabilities were in place for non-standard CDS contracts. He said CME's platform is waiting for final regulatory approval, but is otherwise ready for launch. However, panelists agreed indexed transactions should be the first on the platforms, followed by single name and then tranche CDS transactions.
Johnathan Short, v.p. and general counsel of the InterContinental Exchange, said the proposed ICE CCP is awaiting final approval and is otherwise ready for launch now. John O'Neill, senior analyst for fixed income derivatives at LIFFE, said that platform will launch Dec. 22, and Thomas Book, executive board member of Eurex Clearing, said Eurex's platform will launch in 2009. Corrigan said it could take an additional two or three months for the industry to add single name contracts, for example, onto the platforms. He cautioned the process of stress testing for extreme operating conditions for the utilities "should not be artificially expedited to meet a time schedule."