The European Commission has issued a press release stating that as of 31 July 2009, credit default swaps (CDS) relating to European entities and indices based on these entities will start clearing through central counterparties regulated in the EU. The Commission states that this will reinforce financial stability by ensuring better risk management for European CDS, and comes in response to Commissioner McCreevy's call to reduce the risks inherent in this market.
Internal Market and Services Commissioner Charlie McCreevy said: "Back in October 2008, I called upon the industry to reduce the risks inherent in the credit default swaps market, in particular by moving the clearing of these contracts onto a European central counterparty (CCP). The financial crisis highlighted a number of problems in the credit default swaps market, especially where transparency, market concentration and risk mitigation were concerned. Clearing through central counterparties is key to improving risk management and to increasing the stability of the financial system. I am pleased that the extraordinary efforts by the industry and service providers have made it possible that two European CCPs are starting to clear these products now, with a third aiming to launch its service by the end of the year. The existence and the use of more than one CCP is essential for the proper development of a safe and competitive environment."
The Commission will monitor the migration of the CDS onto CCPs and will take account of the progress made by market participants in the CDS area when formulating its policy orientations for over-the-counter (OTC) derivatives in general. The Commission intends to publish these policy orientations by the end of October 2009, as announced on 3 July 2009 in its Communication "Ensuring efficient, safe and sound derivatives markets". To this end, the Commission is currently running a public consultation and will also organise a high-level conference entitled "Derivatives in crisis: Safeguarding financial stability" on 25 September 2009.
View European market for credit default swaps becomes safer, 31 July 2009