EU eyes clearing credit derivatives by mid 2009

BRUSSELS, Dec 10 (Reuters) - The European Commission has secured a preliminary commitment from the credit derivatives industry to centrally clear off-exchange traded contracts within six months, two sources familiar with the situation said on Wednesday.

EU Internal Market Commissioner, Charlie McCreevy, has called on brokers and banks to centrally clear credit derivatives, in particular credit default swaps (CDS), a $47 trillion market found at the heart of the credit crunch.

“The Commission said it did not want to mandate any particular clearing solution, as long as it’s in the EU,” one of the sources said.

McCreevy has said central clearing would cut risk and increase transparency and the commitment from industry is a victory for his push to secure a faster market-led solution rather than resorting to regulating.

Dealers had been reluctant to agree to the EU request for central clearing of contracts inside the 27-nation bloc, preferring to use just one clearer being set up in the United States and avoid the expense of two piles of collateral money.

EU regulators insist a central counterparty must be located in the EU in case of a clash with U.S. regulators, who are also pushing for central clearing of CDS on American soil.

IntercontinentalExchange ICE.N, a U.S.-based futures market, aims to start clearing credit default swaps in the United States by the end of the year and is backed by nine major banks.

Eurex, part of Deutsche Boerse DB1Gn.DE wants to offer central clearing of CDS in Europe.

At Wednesday’s meeting with Commission officials, the derivatives industry agreed in principle to start clearing indexes within three months, with single contracts starting three months later, the sources said on condition of anonymity.

Credit default swaps are contracts that insure against the default of debt issuers. CDS indexes are used as a hedging tool against a basket of CDS or bonds and are standardised while individual CDS relate to a single company and are more bespoke. (For story on ICE click on [ID:nL5736116] (Reporting by Huw Jones, editing by Hans Peters)