FT: Unintended consequences of swap reform

29 April 2011

What this antitrust intervention shows is that no one gave any thought as to how the dealers might manage to take advantage of the situation by being part of new market structures where they could make profits – and in a fashion that is not transparent, if what Brussels alleges is the case.

For the past year, most of the credit default swaps (CDS) market has been cleared through clearinghouses, as IntercontinentalExchange was first out of the gate in building a CDS clearing offering, when Jeffrey Sprecher, ICE’s chief executive, decided that the way to do this would be to “mutualise” with the dealer banks to get the job done.

These are antitrust regulators, quite different from the regulators that are forcing dealers to trade and clear OTC derivatives on exchanges and swap execution facilities (SEFs), and through clearing houses. The latter regulators, under the G20 protocol and the new Dodd-Frank reforms, forced the industry – exchanges, dealers and clearers – to start clearing CDS as a matter of urgency, under pressure of a deadline.

Also, in their rush to force the industry to do all this, the regulators allowed a winner-take-all situation to emerge, whereby ICE and the banks grabbed the whole CDS clearing market.

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