SEC plan would help create CDS clearinghouse

WASHINGTON/NEW YORK (Reuters) - U.S. securities regulators will help speed efforts to create a central counterparty for the $55 trillion credit default swap market by temporarily exempting exchanges, dealers and other applicants from lengthy registration requirements, according to a document obtained by Reuters on Tuesday.

Among those informed of the U.S. Securities and Exchange Commission's plan were IntercontinentalExchange Inc (ICE.N), CME Group Inc (CME.O), NYSE Euronext (NYX.N) and Eurex, the SEC document said.

SEC staff want to promote the swift creation of one or more central counterparties for credit default swaps (CDS), which are used to insure against bond default risk.

A central counterparty would help standardize the criteria to evaluate risk exposure and free collateral. It would also give regulators and the public a glimpse into an opaque and complex part of the derivatives market, blamed for contributing to the financial crisis.

According to the SEC document, a central counterparty would be eligible for exemption from certain agency registration requirements if it meets certain conditions. Those conditions include giving the SEC access to conduct on-site inspections of the central counterparty's books, records, facilities and systems.

Raymond James analyst Patrick O'Shaughnessy said the move would likely streamline the lengthy application process exchanges now face in setting up new venues.

"It's probably a necessary step to make sure we have a platform up and running in the timeline that the government is hoping for," he said, adding that exchanges should have the infrastructure in place for CDS by the end of the year.

U.S. and European regulators want one or more central counterparties set up to avoid such crises, and exchange operators have been quick to propose answers.

The front runners for the U.S. market are ICE, which is seen to have the support of big CDS dealers, and CME, the world's biggest derivatives exchange, which with hedge fund Citadel Investment Group said it can launch a CDS exchange as early as this month.

Proposals from both Deutsche Boerse AG's (DB1Gn.DE) derivatives arm, Eurex, and NYSE Euronext's derivatives arm, Liffe, are seen as the front runners in Europe.

The four exchanges had no immediate comment about the SEC document.

Last week, the New York Federal Reserve said it hoped that one or more central counterparties would be operating by the end of 2008.

It is not clear which regulator would oversee such a central counterparty.

Robert Claassen, chair of the derivatives and capital markets group at law firm Paul Hastings, said that the U.S. Congress will most likely have to intervene with legislation.

"If the SEC looks to step up and regulate the clearinghouse, that would have to be resolved by an act of Congress," said Claassen.

SEC Chairman Christopher Cox has already called on Congress to give the agency authority to supervise the CDS market.

The European Commission and the European Central Bank also back the creation of a central counterparty for CDS.

"A few years from now we may see that the speed was not necessary, but there certainly is that desire to get things done," O'Shaughnessy said.

It is unclear whether U.S. and European regulators will agree on a transatlantic solution for CDS, and whether they will allow exchanges to compete for market share.

(Editing by Leslie Gevirtz, Matthew Lewis, Richard Chang)