US regulatory agencies have signed a memorandum of understanding to jointly guide the development of central counterparty clearing arrangements for the credit default swaps market.
In a statement released late Friday, the President's Working Group on Financial Markets said its "top near-term OTC derivatives priority" is to oversee the successful implementation of central counterparty services for credit default swaps.
"A well-regulated and prudently managed CDS central counterparty can provide immediate benefits to the market by reducing the systemic risk associated with counterparty credit exposures," the statement said. "It also can help facilitate greater market transparency and be a catalyst for a more competitive trading environment that includes exchange trading of CDS."
The Working Group, which is chaired by the Treasury and includes the Federal Reserve, the Securities and Exchange Commission and the Commodity Futures Trading Commission, says it is reviewing proposals from several potential providers of counterparty services and that it anticipates that one or more CDS central counterparties will commence operations before the end of 2008.
IntercontinentalExchange, Nyse Euronext, Eurex and the CME have each submitted plans to develop a CCP for the $60 trillion CDS market. The PWG says the relevant regulatory authorities are assessing these proposals by conducting detailed on-site reviews of risk management and other key design elements.
In Europe, the European Commission last week set a year-end deadline for financial market participants to draw up a blueprint for the clearing of credit default swaps.