Efforts to Create CDS Clearing Houses Gathering Momentum

Tokyo, Nov. 12 (Jiji Press)--Efforts to create central clearing
houses for credit default swaps, a type of financial product that has played
a key role in the global financial crisis, are gathering momentum at
Japanese and foreign financial exchanges.

CDS central clearing houses are expected to facilitate settlements
of payments related to CDS deals and improve the transparency of CDS
transactions. Because most such deals are concluded directly among financial
institutions, details, including inherent risks, are undisclosed.
Leaders of the Group of 20 major countries, set to get together in
Washington this weekend for an emergency financial summit, are expected to
discuss a framework to allow cooperation among CDS clearing bodies planned
by Japanese, European and U.S. exchanges, informed sources said.
CDS is a type of derivatives designed to provide protection against
losses incurred in the event of defaults on bonds and securities. Sellers
receive premiums in return for providing the protection.
Since the mid-September collapse of Lehman Brothers Holdings Inc.,
many U.S. and European financial institutions have disclosed huge losses on
their CDS positions.
The situation at American International Group Inc., a major CDS
underwriter, was particularly serious, leading the U.S. government to bail
out the insurance giant.
In the United States, the Chicago Mercantile Exchange, the
Intercontinental Exchange and NYSE Euronext plan to establish CDS clearing
bodies.
A similar clearing body covering the entire euro area is also
expected to be launched.
In Japan, where the impact of the CDS debacle has been relatively
small, the Tokyo Stock Exchange and the Tokyo Financial Exchange are
examining similar ideas in study groups that include market participants.
If CDS transactions were concentrated at clearing houses, it would
be far easier to obtain details, including the progress of financial
settlements.
Such an organization will also help create standards for the terms
of deals and systems for premiums and other fees, making it easier to
estimate precisely the losses that sellers of protection might incur in the
event of defaults by the issuers of underlying securities.