The Federal Reserve is seeking to become the lead regulator for clearing trades in the $33 trillion credit-default swap market, according to people with knowledge of the proposal.
The Fed, the U.S. Securities and Exchange Commission, the Treasury Department and the Commodity Futures Trading Commission are discussing a memorandum of understanding that lays out oversight of clearinghouses that would become the central counterparty to credit-default swap trades, said the people who asked not to be named because the discussions are private.
“The Fed is the natural place for it to go,” said Craig Pirrong, a finance professor who studies futures markets at the University of Houston. “The main concern is systemic risk,” Pirrong said, which the Fed is better equipped to control.
The Fed has been pushing the industry to form a clearinghouse that would absorb losses should a market maker fail. Regulators stepped up their efforts after the failure of Lehman Brothers Holdings Inc. in September and the near-collapse of American International Group Inc. The New York Fed has been meeting with groups including CME Group Inc., Intercontinental Exchange Inc. and NYSE Euronext to press them to accelerate their progress.
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New York Fed spokesman Andrew Williams declined to comment, as did CFTC spokesman David Gary and the SEC’s John Nester. Treasury spokeswoman Michele Davis didn’t immediately respond to requests for comment.
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The SEC and CFTC would also share trading information under the plan, the people said.