New developments in the nascent regulation of credit-default swaps: Regulators announced an agreement Friday to share information about CDS clearinghouses, hoping to boost confidence that order was coming to the market despite an agency turf war.
The Commodities Futures Trading Commission, the Federal Reserve Board and the Securities and Exchange Commission-the three dueling suitors for CDS regulation-came together under the guidance of the President´s Working Group on Financial Markets. They said they would share information with each other on the management of competing clearinghouses being set up to standardize CDS trading.
The move came after weeks of squabbling among the three over which one was best qualified to regulate financial derivatives. They had been using competing clearinghouse projects as battle tools. One of the clearinghouses, created by the CME Group, will be overseen by the CFTC. The other, created by The Clearing Corp. and IntercontinentalExchange, Inc., is set to be governed by the Federal Reserve Bank of New York.
Said Dino Kos, managing director of Portales Partners and a former official at the New York Fed: "This is good for the two groups that are working on this because it creates a little bit of clarity on how the regulators will work together."
The agreement is non-binding. It requires the agencies to share details "upon request" about their governance of the clearinghouses and any changes they make to their risk management, liquidity and financial policies. They are also to consult with each other on CDS market conditions, and designate official liaisons to communicate amongst themselves.
Some saw it as another winning Fed move. Gil Schwartz, a partner at Schwartz & Ballen, LLP, said the memo marked a new step in the formalization of the Fed´s authority over financial derivatives. "This gets the Fed more directly involved," he said. He added that while the memo didn´t give the Fed formal veto power over the other two agencies, "If somebody proposes a change that the Federal doesn´t like I suspect it won´t see the light of day."
The memo is part of this larger statement by the PWG on the regulation of CDS contracts. It emphasizes the need for more transparency in the CDS market and endorsed goals for international cooperation on its regulation laid out by the Financial Stability Forum, a global coalition of regulators.
But is the whole effort meaningful? Will it help get counterparty risk in the CDS market under control?
"I think that it´s a step in the right direction," said Michael Greenberger, a professor at the University of Maryland law school who worked for both the CFTC and the PWG. "Right now it´s almost too little too late. It´s obviously extremely general."
Mr. Greenberger pointed out that nothing in the statement was mandatory and said Congress would ultimately have to impose stricter rules on the CDS market.
Kip Weissman, a partner at Luse Gorman Pomerenk & Schick, PC and a former SEC official said none of the three agencies really had the power to regulate financial derivatives yet. "It was a crack between the regulators and it needs to be addressed," he said. "Going forward you may not see these three agencies with the same jurisdictions."
That´s not the way SEC Chairman Christopher Cox sees it. He said in a statement that the SEC would continue to exercise its authority over the clearinghouses "to strengthen the market infrastructure and to protect investors." The CFTC and the Fed declined to comment on the memo.
ICE said of its clearinghouse: "The ICE US Trust proposal fits with the regulatory structure and policy objectives laid out in today´s MOU. We are moving ahead as previously announced with our banking application, the support of nine major CDS dealers and our intention to acquire The Clearing Corporation."
CME did not respond to a request for comment.