May 19, 2009 / 10:03 PM / 10 years ago

Nasdaq's swap clearer says acting on U.S. plan

NEW YORK (Reuters) - The head of an upstart U.S. clearinghouse expects to speed up a planned expansion of interest rate swaps and other products, after the Obama administration proposed a clampdown on the market last week.

Christopher Edmonds, chief executive of the International Derivatives Clearing Group, also said he expected new participants to emerge as regulators move the over-the-counter market into the light, adding that regulators may reward banks that embrace the transition.

IDCG is 80 percent owned by Nasdaq OMX (NDAQ.O), which runs the Nasdaq Stock Market. Exchange operators that own clearinghouses are expected to benefit from the regulatory shift because they can earn fees from derivative traders whose transactions they clear.

“We have to be prepared to act, based on last week’s comments, probably sooner than we had anticipated,” Edmonds said in an interview. “I would set that time frame early in (the third quarter).”

IDCG began clearing U.S. interest rate swaps in January. Nasdaq originally wanted IDCG to clear non-U.S. denominated interest rate swaps by the end of the year. It has said euro-denominated swaps would come first, followed by other G7 currencies.

Nasdaq and IDCG would not provide clearinghouse volumes, seen by analysts to be very light so far. The swaps allow investors to exchange future interest payment obligations.

Nasdaq wants banks and others to take stakes in IDCG and drive business there.

Business may also ramp up after Treasury Secretary Timothy Geithner said he would require all OTC derivatives, products that base their value on other assets, to be cleared through regulated central counterparties in an effort to avoid a repeat of the current credit crisis.

Edmonds said he also expects IDCG to clear swap options, or “swaptions,” which give investors the right to enter into an interest rate swap, “over a very short period of time.”

There was $146 trillion in U.S. interest rate swaps outstanding at the end of last year, according to the Bank for International Settlements. Interest rate-related derivatives represent the largest slice of the global OTC market.

London-based clearinghouse LCH.Clearnet now clears about half of the world’s interest rate swap trades. Chicago-based CME Group Inc (CME.O), which runs the top interest rate futures market, also plans to ramp up interest rate swap clearing.

“Given dealers are clearing their interest rate trades at LCH and liquidity begets liquidity, we see LCH as the favorite to clear OTC interest rate trades,” JPMorgan analyst Kenneth Worthington told clients last week.

IDCG’s Edmonds argued government pressure to clear products has historically opened markets, such as equities, to more participants, and would do the same now.

He added regulators could also reward those that use clearinghouses with less stringent capital requirements. Last week, regulators said they would require all big derivatives participants to have “conservative capital requirements.”

“The issue right now is an ever-contracting number of counterparties holding an ever-increasing amount of risk,” Edmonds said.

Reporting by Jonathan Spicer, editing by Matthew Lewis

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