SEC Allows Creation of CDS Central Counterparty

The SEC has granted temporary exemptive relief to allow the establishment of a central counterparty (CCP) for credit default swaps, thereby creating a central clearing agency. The temporary relief lasts until the end of this year. During this interim period, the SEC will monitor the functioning of the CCP. The CCP will be utilized for credit default swaps that are not swap agreements subject to individual negotiation, which are excluded from the definition of “security” in the Exchange Act. According to the SEC, the CCP would mitigate the market-wide impact of one counterparty’s failure and allow more transparent information. The CCP would impose margin requirements, membership standards, a clearing fund, loss-sharing arrangements, and multilateral trade netting.

OUR TAKE: Congress needs to re-think the exclusion of swap agreements from the SEC’s supervision. The market needs a central clearing agency for all credit default swaps.

http://www.sec.gov/rules/exorders/2009/34-59527.pdf