CME CEO wary of clearing some OTC derivatives

By Jonathan Spicer and Karen Brettell

NEW YORK (Reuters) - Following the Obama administration's plan for regulating over-the-counter derivatives, the head of the world's largest derivatives exchange said on Monday he wants the freedom to decline clearing some illiquid contracts.

CME Group Inc (CME.O), which operates the CME Globex electronic trading platform and the Chicago Mercantile Exchange, is positioned to benefit as the U.S. government proposes to mandate all "standardized" OTC derivatives be cleared through central counterparties to avoid a repetition of the bank runs that contributed to the failures of Bear Stearns and Lehman Brothers.

Trading in OTC derivatives, instruments that derive their value from other assets, exploded in size in recent years, with many large firms -- such as insurer American International Group -- charging into the market.

"We have to be careful to manage the risk profile of what we clear and there will be a range of things that we would not be comfortable clearing," CME's chief executive, Craig Donohue, told Reuters. "The devil is in the details."

The CME plans to begin clearing credit default swaps (CDSs), contracts that insure against a borrower defaulting on its debt. CDSs were central to the credit crisis due to their role in insuring risky mortgage debt.

The exchange also wants to expand its clearing of interest rate derivatives, which with volumes of around $400 trillion are by far the biggest global derivative market.

It is important, however, that the government doesn't mandate clearing for all contracts, instead leaving decisions to the market, Donohue said.

"It's less a function of standardization and more a function of how often does it trade, how good is the price reporting, how independent and objective are the pricing sources," Donohue said.