Banks back mandatory CDS clearing: report

LONDON (Reuters) - Some of the world's top banks are backing a proposal to develop a mandatory central clearing system for the $55 trillion credit default swap (CDS) market, a report in the Financial Times said on Thursday. Dealer banks are stepping up efforts to back CDS clearing to head off a more radical overhaul, which includes a proposal to move trading of over-the-counter CDS on to an exchange, the report said, citing an internal Morgan Stanley email.

Credit default swaps, which protect against a debt issuer's default, have been blamed for the worsening financial crisis, and banks fear that they might lose business if regulators insist on an exchange model for trading, the FT said.

"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," said the internal email, sent by James Hill, a managing director at Morgan Stanley, according to the FT.

"This proposal will include mandatory clearing of CDS, margin rules, oversight of dealers and large market participants and SEC jurisdiction over anti-fraud and market manipulation activities," the email said.

Morgan Stanley could not immediately be reached for comment.

(Reporting by Natalie Harrison)