Credit default swaps can finally be cleared, technically speaking, at least. IntercontinentalExchange unit ICE Trust has received green lights from the Federal Reserve Bank and the Securities and Exchange Commission to open for business this week, clearing CDS indices. It won’t start clearing individual CDS entities for another six months.
In July 2008, the Federal Reserve Bank of New York and leading players in the CDS market agreed to have a functioning clearing house operation in place by the end of 2008; in October, the EU ordered up clearing by the end of 2008. Nobody’s clearing, yet. Under threat of legislation introduced by EU Finance Commissioner Charlie McGreevy February, six of the biggest CDS market participants finally agreed to use a EU-based clearing house by the end of July. If it’s ready.
“We’ll see clearing houses,” says Viral V. Acharya, professor of finance at NYU. “In good times, the private sector always take risks, large parties control markets, and they always resist regulation,” says Acharya. “In good times, the position of regulators is not very strong. Regulators have a great deal of leverage right now over the private sector.”