The Fed, SEC, CFTC and Treasury Department have signed a memorandum of understanding for the creation of a clearing house for credit default swaps (CDS), which will begin operations by the end of 2008.

"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. It also can help facilitate greater market transparency and be a catalyst for a more competitive trading environment that includes exchange trading of CDS," reads a press release from the President's Working Group (PWG).

The unregulated and opaque nature of the credit default swap industry has been partially attributed for the collapse of investment bank Lehman Brothers and the failure of other financial institutions worldwide.

"The virtually-unregulated over-the-counter market in credit default swaps has played a significant role in the credit crisis, including the now $167 billion taxpayer rescue of AIG," said SEC Chairman Christopher Cox. "Bringing transparency to this market is vitally important. The SEC has regulatory and supervisory authorities over the clearing agencies that may be established for credit default swaps, and we will use those authorities to strengthen the market infrastructure and to protect investors."

The prices and volumes of CDSs will be publicly repaired and regulators will share information over the organization's oversight, added the PWG.

By Erik Kevin Franco and edited by Nancy Girgis
©CEP News Ltd. 2008