The next step should be the creation of a central counterparty for all securities in all European currencies.
At the moment, only Euronext, the merged French, Dutch and Belgian exchange, uses a central counterparty for equity deals.
Not even American markets have a central counterparty for all financial instruments.
Under the Dodd-Frank legislation, the Commodity Futures Trading Commission is writing legislation that will move these so-called over-the-counter derivative trades to exchanges that use central counterparty clearing.
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The attainment of these objectives might be facilitated by the introduction of a central counterparty but may also be achievable under the current framework for clearing and settlement.
For example, during a period of heightened stress, participants may be willing to provide liquidity to a market if a strong central counterparty is present but not otherwise.
The important benefit of exchange clearing is a clearing house acts as the central counterparty to both sides of a CDS transaction, thereby reducing risk on both sides of the transaction.
The Federal Reserve Bank of New York is helping to create a central counterparty for CDS trades, which should prevent the kind of disruption created by the collapse of Lehman, a big CDS dealer.
Rules for clearing swaps are still being written and the CFTC has pushed back the deadline to have swaps move to central counterparty clearing to Dec. 31 from the original deadline of July 16.
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Euronext, a continental stock exchange that offers central counterparty and netting services via its clearing house, Clearnet, says it is happy to discuss partnerships with other European clearing houses to find a pan-European solution.
These efforts include gaining commitments from private-sector participants to automate and standardize the clearing and settlement process, encouraging improved netting and cash settlement arrangements, and supporting the development of a central counterparty for credit default swaps.
It took the intervention of Congress and the Securities and Exchange Commission to set up the Depository Trust and Clearing Corporation which moved American non-government securities markets from seven settlement agencies to one settlement organisation and one central counterparty.
He also said the Fed is encouraging the development of a central counterparty clearing system for trading in credit default swaps and working on strengthening the resiliency of the short-term secured funding markets that left Bear in the lurch in March.
But quite apart from the explicit lending to banks, the ECB and central banks of the stronger economies, especially the Bundesbank, also have a huge "counterparty" risk to Greece, Italy and Spain from the way that the payments system in the eurozone works.
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