The world's biggest investment banks are throwing their weight behind a proposal for mandatory central clearing of the $54,000bn over-the-counter credit derivatives market, according to a memo obtained by the Financial Times.
The initiative suggests that dealer banks are stepping up their campaign in Washington to head off proposals for a radical overhaul of the sector, including attempts to force the entire industry to move trading in contracts such as credit default swaps (CDS) on to an exchange.
CDS are attractive to traders because of their high profit margins, and the banks fear that they might lose business if regulators insist on an exchange model for trading.
"We have teamed up with a small group of dealers to put together a legal and regulatory proposal for CDS which we will propose to Congress and the Fed in an effort to address many of their concerns around CDS," says the e-mailed memo sent by James Hill, a managing director at Morgan Stanley.
"This proposal will include mandatory clearing of CDS (clearing not exchange trading), margin rules, [Federal Reserve] oversight of dealers and large market participants and SEC jurisdiction over anti-fraud and market manipulation activities."
By proposing mandatory clearing, the banks hope to demonstrate to regulators they are serious about reforming the CDS market, whose opaqueness and lack of a central counterparty is seen by many as having aggravated the financial crisis.
Nine of the largest CDS traders - including Morgan Stanley, Goldman Sachs, Credit Suisse and UBS - have joined forced with Intercontinental Exchange in a proposal to set up a New York-registered bank that would act as a CDS clearer.
That has put them in competition with the CME, the world's largest futures exchange, which plans to offer CDS clearing through its existing clearing house. Proponents of both initiatives say they are ready to begin operations as soon as regulators give their approval. Eurex and Liffe are also pushing their own plans for CDS clearing.
While CME and ICE are racing each other to be first to market, ICE's relationship with the CDS dealers looks to have put it in a stronger position, while Eurex and Liffe's solutions may come too late to gain a strong share of the market. US regulators are loathe to "pick winners" and would prefer to let the market decide.
The memo also indicates the industry's frustration with the non-trading world's lack of understanding. "We are in the process of engaging an outside PR firm to develop a strategy to educate the media so that they actually understand and describe CDS and its role in the current financial crisis correctly," it says.
So, is the banking industry arrogant or what? by Stephan Tychon, nov 23, 2008
CDS: Credit Default Swaps widely misunderstood vehicles facilitating obscured but systemic global crime of unknowable scope and scale. Complex debt 'products' known as structured investment vehicles are an unsustainable securitization of (re)packaged risk-piles consisting of mainly non-traceable mortgage-backed 'securities' within the shadow banking system of the credit derivatives market, the foundation of happiness in the parallel paradise of the happy few. It's just another sophisticated branch of greed-technology nobody really understands. Apparently even smart guys like James Hill of Morgan Stanley, because otherwise he could be sued like Enron's Ken Lay and Jeff Skilling for sucking our planet dry while sending shareholders interests down the gutter. Thus, Mr. Hill came up with a plan like many other corporate parasites trying to save their souls. The instrumentation of information and communication channels these people are able to abuse, boils down to the globally spread democratic excess layed down by lobbyists in the Congressional deceisive parliamentary deficit: ordinary people with lots of experience don't stand a chance to explain why all this happened. Just compare with my personal try during the Enron trial where I was stopped from addressing the real root cause of global misery and financial distress: the totally opaque constellation of global public-private crime rooted in the imposed energy fundamentals of the Monster Deal 1963.
See also: P3-doctrine, La Condition Americaine and The Very Complexxon.