U.S. bill would destroy CDS market says financial group

A U.S. House of Representatives bill that would require clearing of most over-the-counter derivatives would destroy U.S. trade in credit default swaps because it bans "naked" swaps, a financial industry group told Congress on Tuesday. In testimony prepared for a House Agriculture Committee hearing, Robert Pickel of the International Swaps and Derivatives Association said the restriction "would effectively eliminate the CDS business in the United States." The committee planned three days of hearings over the next week before discussing potential revisions to the bill and a possible vote to approve it. The proposed legislation, a measure to limit speculation, mandates position limits on energy and agricultural futures contacts and allows regulation of look-alike OTC contracts. It also bans naked CDS and requires clearing of all financial OTC derivatives, although exceptions area allowed for specialized instruments. A naked swap is one in which participants run no risk of loss. Credit default swaps could be used if participants risk financial loss if the event that is the basis of the swap occurs. Pickel also said that "while clearing should be encouraged ... mandated clearing of all OTC derivatives is unwarranted." The House bill's conditions for exempting hedge funds from position limits would "severely limit the hedge exemption and thus access to the futures markets," he said. Federal regulators have backed creation of central counterparty clearing of credit default swaps as a way to bring liquidity and transparency in trading to the market. The CDS market is estimated at $45 trillion and was blamed by some analysts for worsening the financial crisis. A handful of CDS clearinghouses are planned in Europe and the United States. They include LCH.Clearnet Ltd, based in London, and CME Group Inc in Chicago.