Take Some Risk out of Credit Derivatives

Wed, 08 Oct 2008 12:43:33 +0000

It will be interesting if it happens. From FINalternatives:

Hedge fund giant Citadel Investment Group is teaming up with the Chicago Mercantile Exchange to launch an electronic credit derivatives market with a central counterparty clearing facility.

The joint venture between Citadel and the CME Group, both based in Chicago, comes ahead of the debut of a central clearing house for credit default swaps planned by The Clearing Corporation. The Federal Reserve met with industry participants in New York yesterday to discuss a central clearing facility.

“It is imperative to bring stability and transparency to the CDS market,” Citadel CEO Kenneth Griffin said. The Citadel-CME venture will “reduce much of the systematic risk inherent in the current CDS market structure.”

The marketplace and clearing house is expected to launch within 30 days. Citadel and the CME have invited banks and hedge funds to become founding members of the exchange, offering equity stakes in it of as much as 30%.

We'll get ourselves out of the mess when people see value in establishing better institutions. Bad money drives out good. Central clearing facilities help prevent that from happening ... next time.