The government finally approved an exchange for trading Credit Default Swaps. With so many financial institutions, from banks to hedge funds, holding on to these things, the question has been how to finally close out all these trades. A lot of the issuers can meet their obligations on these trades, and a lot of buyers of CDSes tied up a lot of their capital into these instruments. Everyone wants out, but there hasn't been an exit until now.
Frankly, I'm glad we're going to have an exchange, it should have been done this way from the beginning. Everyone's stuff will be in the open, let the various market participants do this, not the government. I would rather these folks close out their trades between themselves than having the government buy them and deal with it. Also, this will open the way for a future Credit Defualt Swap product that would be more fungible.
Below is a news item from the CME Group website about this:
CHICAGO, March 13 /PRNewswire-FirstCall/ -- CME Group, the world's largest and most diverse derivatives exchange and its associated joint venture, CMDX, today announced that they have received a special exemption from the U.S. Securities and Exchange Commission (SEC) for clearing and trading credit default swaps (CDS) through CME Clearing and the CMDX platform. With this exemption, CME Group and CMDX have completed the regulatory reviews necessary to launch CDS clearing and trading in the U.S.
The SEC exemption allows CME Group to use its existing clearing membership structure to offer CDS clearing services backed by CME's industry-leading financial safeguards package of approximately $7 billion. Clearing members that are registered FCMs or Broker-Dealers will be able to clear CDS trades on behalf of their qualified customers. CME Group will utilize its robust portfolio-based margin methodology for determining index and single name margin requirements.
"We are pleased to have successfully completed the U.S. regulatory review process," said CME Group Executive Chairman Terry Duffy. "We are confident our significant financial safeguards package and the proven counterparty risk management framework of CME Clearing, which has protected investors across a range of financial instruments more than 100 years, can bring stability to the CDS market."
"As the CDS market migrates to a central counterparty clearing model, participants will benefit from the financial strength and risk management capabilities of CME Clearing - the largest derivatives clearing organization in the world," said CME Group Chief Executive Officer Craig Donohue. "CMDX and CME will offer the most complete CDS solution for all market participants, providing segregation of customer funds and positions, and the broadest product offering, including all major CDS indices and single-names."
An open solution for CDS products, CMDX will use the proven clearing, settlement and risk management capabilities of CME Clearing. CMDX provides straight-through processing to CME Clearing through CMDX's migration utility, trade booking facility and trading platform. CME Group will also provide CDS clearing services to market participants who submit trades directly or via inter-dealer brokers or other execution venues.
With the SEC exemption, CME Clearing and CMDX can now offer market participants key benefits that are distinguished from today's OTC market and other clearinghouses. These distinguishing characteristics include:
A time-tested legal and regulatory framework that protects both customer positions and margin. In the event that a CME clearing member was to default on their proprietary positions, all customer positions and collateral will be fully protected.
A state of the art clearing, settlement and risk management solution that provides significant improvements over the existing OTC CDS infrastructure.
A mutualized guaranty fund of approximately $7 billion, which provides unmatched protection for market participants