House Set To Require Derivates Clearing, Ban Naked CDS

Jul 27 2009 | 11:29am ET

Big changes are coming to the credit default swaps market, according to one of the congressmen crafting part of President Barack Obama’s proposed financial regulatory reforms.

The House of Representatives will consider a bill that both requires derivatives to be cleared through clearinghouses and bans naked CDS, Rep. Collin Peterson (D-Minn.) said. Peterson, who heads the House Agriculture Committee, said he and Financial Services Committee Chairman Barney Frank (D-Mass.) have agreed on the new rules.

Peterson’s committee has already approved a bill that would allow the Commodity Futures Trading Commission to suspend trading of naked CDS, which is when a trader does not actually own the underlying asset being insured in the swap. Peterson and Frank’s agreement, however, goes further.

The two committee chairs also want tougher clearing requirements than those currently proposed by the Obama administration, which would still allow customized contracts.

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