Yesterday, the International Swaps and Derivatives Association (ISDA) and the European Banking Federation (EBF) finally committed to use a central counterparty (CCP) for the clearing of credit default swaps (CDS) in the European Union. Internal Market and Services Commissioner Charlie McCreevy welcomed the development, stating that “central clearing of CDS is particularly urgent to restore market confidence [and] [g]iven the size of derivatives markets I am looking [at] whether other measures might be necessary to make sure they are adequately supervised and do not pose unnecessary risks to financial markets.” The agreement of the derivatives industry has been long-awaited, as Commissioner McCreevy stated earlier this month that the response of the industry to the financial crisis has been “disappointing.”

In a statement released yesterday, ISDA announced that nine of its major dealer participants – Barclays Capital, Citigroup Global Markets, Credit Suisse, Deutsche Bank, Goldman Sachs, HSBC, J.P. Morgan, Morgan Stanley and UBS – had signed a commitment letter sent to Commissioner McCreevy, confirming their engagement to use EU-based central clearing for eligible EU contracts by the end of July 2009. These banks agreed to “work closely with infrastructure providers, regulators and the European Commission in resolving outstanding technical, regulatory, legal and practical issues,” whereby each firm “will make an individual choice on which central clearing house or houses might best meet its risk management objectives, subject to regulatory approval of any such clearing house in Europe.”

In its statement, the EBF, representing both buyers and sellers in the derivatives markets, expressed its support of the establishment of a CCP to facilitate clearing of CDS in Europe. While the EBF expressed no preference as to the location of a CCP in Europe, it stated that the CCP should “first and foremost meet the users’ requirements in terms of technical specification and governance.”