Wednesday, March 14, 2012
Yesterday, a short but ominous press release was issued at the Commodities Futures Trading Commission. It said, “At the request of CME Clearing Europe Limited (CMECEL), pursuant to Section 7 of the Commodity Exchange Act, the Commodity Futures Trading Commission issued an Order on March 13, 2012, vacating the registration of CMECEL as a derivatives clearing organization.” (Click here for the CFTC press release.)
In plain English, the Chicago Mercantile Exchange (CME) no longer wants to be the clearing house for European derivatives. The derivatives market in Europe must have been very lucrative for the company. After all, just the credit default swap (CDS) market is reportedly worth $50 trillion globally. (A CDS is a form of insurance. If there is a default, the debt is paid by the entity that sold the insurance contract.) I ask myself, why would the CME willingly stop being the clearing house for this profitable and large market?
Just last week, it was reported there was a new Greek debt deal where 95% of the bondholders voluntarily agreed to take nearly a 75% loss on Greek debt. CNBC reported, “Greece successfully closed its bond swap offer to private creditors on Thursday, opening the way to securing the funding it needs to avert a messy default on its debt, according to several senior officials. . . . The biggest sovereign debt restructuring in history will see bond holders accept losses of some 74 percent on the value of their investments in a deal that will cut more than 100 billion euros from Greece’s crippling public debt.”
Buried in the CNBC story was this little tidbit that said, “That would potentially trigger payouts on the credit default swaps (CDS) that some investors held on the bonds, an event which would have unknown consequences for the market.” (Click here for the complete CNBC story.)
This article was posted: Wednesday, March 14, 2012 at 3:49 am