Last week, the SEC issued exemptive orders that will add two European entities to the list of approved central counterparties for clearing credit default swaps. The orders issued on July 23 provide the necessary regulatory exemptions to allow ICE Clear Europe Limited and Eurex Clearing AG to join two other companies, ICE US Trust LLC and the Chicago Mercantile Exchange, Inc., approved in March, as central counterparties. Though the Commission's jurisdiction over the over the counter markets for credit default swaps is limited, or those CDS that are not swap agreements (“non-excluded CDS”), the Commission’s exemptive orders for these counterparty designations provides conditional exemptions from certain requirements of the Exchange Act, will provide the SEC with extensive oversight of the central counterparties, "and should enhance the quality of the credit default swap market and the Commission's ability to protect investors."
The Commission believes that using well-regulated CCPs to clear transactions in CDS would provide a number of benefits, by helping to promote efficiency and reduce risk in the CDS market and among its participants, requiring maintenance of records of CDS transactions that would aid the Commission’s efforts to prevent and detect fraud and other abusive market practices, addressing concerns about counterparty risk – through the novation process – by substituting the creditworthiness and liquidity of the CCP for the creditworthiness and liquidity of the counterparties to a CDS, contributing generally to the goal of market stability, and reducing CDS risks through multilateral netting of trades.
The SEC's announcment of the new central counterparties is available at: http://www.sec.gov/news/press/2009/2009-170.htm
The exemptive orders are availble at:
- "SEC Permits CME to Operate as Central CDS Counterparty," April 9, 2009