SEC OKs Chicago Merc on swaps clearing

  • Business
  • Saturday, 14 Mar 2009

WASHINGTON (AP) - The Securities and Exchange Commission on Friday approved temporary exemptions from agency rules that will allow the Chicago Mercantile Exchange to operate as a central clearinghouse for transactions involving credit default swaps.

It was the third such approval granted by the SEC to a trading firm.

The moves go toward creating a new system of central clearinghouses for the swaps, complex investments traded globally that have been partly blamed for the financial crisis.

The SEC approved similar exemptions for LCH.Clearnet Ltd., a British firm, in December, and for ICE US Trust LLC last Friday.

IntercontinentalExchange Inc., an electronic stock and futures trading platform also known as ICE, began operating that clearinghouse on Monday.

Well-regulated central clearinghouses should help promote stability in the financial markets by reducing the risks from the default or financial distress of a major market player, the SEC says.

The Chicago Mercantile Exchange, the world's largest financial exchange, is part of Chicago-based CME Group Inc., along with the Chicago Board of Trade and the New York Mercantile Exchange.

The Chicago Merc, as it is known, joined with Citadel Investment Group LLC, one of the biggest hedge funds, to apply to operate the new clearinghouse.

Traded in a $60 trillion market that is unregulated and secretive, credit default swaps have come under scrutiny by Congress and federal regulators in the wake of the financial and credit crises that have plunged economies around the world into recession.

The idea behind a system of central clearinghouses - promoted by a White House advisory group of regulators - is to bring transparency to the market, possibly reducing risks to the financial system.

The swaps are commonly used contracts to insure against the default of financial instruments such as bonds and corporate debt.

But they also are bought and sold as bets against bond defaults.

They played a prominent role in the credit crisis that brought the downfall last year of investment firm Lehman Brothers Holdings, a government rescue plan for giant insurer American International Group Inc., and Merrill Lynch & Co. selling itself to Bank of America Corp.

The huge volume of credit default swaps sold by AIG, for example, coupled with rising levels of defaulted mortgage and other debt, threatened the company's existence and prompted the government to spend billions of dollars to bail it out to avoid a catastrophic collapse.

If AIG were to fail, the losses would spread to the companies and investors who bought swaps from it.

Government efforts to save the company now total more than $170 billion.

The exemptions will allow firms such as the Chicago Mercantile Exchange to quickly put in a centralized system for clearing swaps trades, while giving the SEC time to review their operations and assess whether permanent exemptions should be granted, the agency says.

"The SEC is committed to increasing investor protection and reducing systemic risk by facilitating the development and oversight of central counterparties to clear credit default swaps," SEC Chairman Mary Schapiro said in a statement Friday.

"Today's actions will further enhance opportunities to manage the risk related to credit default swaps, and improve the transparency and integrity of the market for these products."

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