OTC Derivatives Clearing Summit: Nearly a third of clearing-eligible CDS go uncleared

Almost a third of non-cleared North American single-name credit default swaps (CDSs) could be cleared by central counterparties (CCPs) today, according to new analysis conducted by the Securities and Exchange Commission (SEC).

Speaking at Risk‘s OTC Derivatives Clearing Summit in New York, Adam Glass, chief counsel in the division of risk, strategy and financial innovation at the SEC, revealed that while $4.8 trillion in North American single-name CDSs were not being cleared as of June 30, 2012, the commission has calculated that 31% of this notional amount – approximately $1.5 trillion – could be cleared because they meet four preconditions.

“One of the reasons that contracts are not cleared is because clearing is not mandatory for any CDS at the moment. The prerequisites for clearing are these four items: that it uses the Standard North American Contract (Snac) documentation; that the trade is interdealer; that the trade is US dollar-denominated; and that the trade does not have restructuring as a possible credit event,” said Glass.

According to the SEC analysis, for all non-cleared North American single-name CDSs, 71% use Snac documentation, 73% of the trades are between dealer counterparties, 91% are denominated in US dollars and 48% of contracts do not recognise restructuring as a credit event. When factored together, the SEC calculates that 31% of non-cleared single-name trades meet all four requirements and are therefore eligible for clearing today.

That’s in theory, of course. In practice, only two US CCPs offer CDS clearing – CME Group and Ice Clear Credit – and only the latter currently clears single-name CDSs. In addition, single-name CDSs and index CDSs are overseen by different regulators – the former by the SEC and the latter by the Commodity Futures Trading Commission – which is complicating attempts to provide margin efficiencies between the two.

According to the SEC analysis, eligible non-cleared volumes outstanding drop precipitously when the only trades considered are those referencing entities that have already been cleared. Of the 1,078 North American single-name CDS reference entities identified by the SEC, just 68 were found by the agency to have been referenced in trades cleared as of June 30.

For CDSs on these 68 names, only 5% of non-cleared trades meet all four requirements to be eligible for clearing – meaning 95% of names that have been cleared and are eligible for central clearing were being submitted to CCPs as of the end of June. That may reflect the fact that Ice Clear Credit currently clears only the more liquid single-name contracts.

“When you get to the end [of the four requirements], you can see that the number of potentially clearable trades that are uncleared is a pretty high number for all reference entities, but it is a pretty low number for the submitted names, which goes to show that they are much further along the clearing process,” concluded Glass.


This article was first published on Risk

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