February 13, 2009 / 6:27 PM / 11 years ago

UPDATE 1-LCH.Clearnet enters crowded derivatives ring

(Updates with ECB statement in paragraphs 8-10)

By Huw Jones

BRUSSELS, Feb 13 (Reuters) - Anglo-French clearing house LCH.Clearnet said it will launch a service for credit default swaps by December, the fifth operator to do so as regulators crack down on opaque areas of the financial markets.

It will face competition in the estimated $27 trillion market from two operators in Europe — Deutsche Boerse’s Eurex Clearing (DB1Gn.DE) and NYSE Euronext’s NYX.N B-Clear — and two in the United States, ICE (ICE.N) and CME CME.N.

Clearers sit between a buyer and a seller of a trade and take on the risk of either side defaulting so that a trade is always completed.

Regulators in both regions say clearing of bilaterally agreed credit derivatives trades will cut risk and aid transparency.

There are legislative attempts on both sides of the Atlantic to make clearing mandatory, and some industry experts say volume is likely to migrate to just one or two operators.

“Clearing is a highly effective means of reducing counterparty risk in any market and there is a real appetite within the euro zone for a CDS clearing service,” LCH.Clearnet Chief Executive Christophe Hemon said on Friday.

The EU wants European transactions to be cleared in the 27-nation bloc so that regulators can supervise the sector.

The European Banking Federation met with the ECB on Friday to come up with a “common set of user requirements” for clearers in Europe. A further meeting will be held on Feb. 24.

“The meeting was very productive and showed broad consensus on several key requirements,” the ECB said in a statement after the meeting.

“The meeting confirmed the interest of the European users in establishing at least one European solution for the CCP clearing for CDS,” it added.

Dealers want the flexibility to clear all their global trades in one place to keep costs down but the EU fears a clearer in the United States will end up with the lion’s share.

Pierre-Dominique Renard, an LCH.Clearnet director, said some cross-margining with other assets it clears is also expected, thereby helping customers to avoid unnecessary collateral.

LCH.Clearnet sees CME or ICE as less of a competitor for euro zone customers than Eurex.

The European Central Bank is keen for credit and collateral margins to be paid in euro zone central bank money as this will give it direct access to transaction data and assets and create a quasi-supervisory role for itself, an exchange official said.

“This is their preferred choice but in the end it will be up to the final customers unless the European Commission intends to make a law on the subject,” Renard said.

The global value of credit derivatives is $27 trillion and Renard said this is roughly divided between contracts denominated in dollars and euros.

The European Banking Federation is meeting with the ECB on Friday to come up with a “common set of user requirements” for clearers in Europe. A further meeting will be held on Feb. 24.

For related story click on [ID:nLB311378]

Editing by Simon Jessop

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