Making rules for central counter parties clearing of OTC derivatives

Gepubliceerd op 11 Sep ’09 door Alphons P. Ranner

 
The G 15 (major global) banks dealing in  interest-rate and credit-derivatives plan to funnel nearly all swap transactions through clearinghouses by the end of 2009.
The banks wrote on September 8th  to the Federal Reserve Bank of New York Tuesday that they will centrally clear interest rate  derivatives and credit default swaps.  The former will be done beginning December , the latter beginning October. As to the credit default swaps each G15 member (individually) commits to submitting 95% of new eligible trades (calculated on a notional basis) for clearing beginning October 2009.  At that time the G15 members (collectively) also commit to clearing 80% of all eligible trades (calculated on a weighted average notional basis).  Furthermore they will issue performance metrics that address both new transactions and the outstanding trade population on a monthly basis. 
The banks concerned are Bank of America-Merrill Lynch, Barclays Capital, BNP Paribas, Citigroup, Commerzbank AG, Credit Suisse, Deutsche Bank AG, Goldman, Sachs & Co., HSBC Group,   JP Morgan Chase, Morgan Stanley, The Royal Bank of Scotland Group, Société Générale, UBS AG and Wachovia Bank, N.A.  These banks are the main traders and sellers of protection (or bets) offered by over the counter derivatives.
Though most readers will pay attention to the content of the letter it is interesting to look at other aspects.  Two things catch the eye. First of all ISDA, the international Swaps and Derivatives Association, Inc, also signed the letter to the Federal Reserve Bank of New York, probably representing interests of other parties.  Secondly copies were sent to the supervisory  national authorities of individual banks, the European Central bank and the European Commission but no copies were sent to the supervisory authorities of countries in Asia.  It is clear that the rules of the game are laid out by a small group of banks on the one hand and specific public regulators in the US and Europe on the other. Buy side firms (non banks) like hedge funds, pension institutions and likewise futures and options exchanges are only indirectly involved.  Though clearinghouse operators are presently said to be working to include buy-side market participants like hedge funds in order to act as central counterparty serving as buyer to every seller and seller to every buyer the buyers of protection, apart from banks hardly have a say.
It remains to be seen whether the US and European legislators will pay attention to creating a real level playing field.  It is striking that in his speech to international Buergenstock Meeting organized by the Swiss Futures and Options Association  September 9, 2009 mr. Gonzalez-Paramo of the ECB in mentioning the deficiencies of the clearing and settlement arrangements for OTC  only stressed that the Governing Council of the ECB the importance of having at least one CCP clearing facility for OTC derivatives in the euro area.