When Hank Paulson and Ben Bernanke testified before Congress a few weeks ago, they got asked about regulating credit default swaps—insurance contracts tied to bonds that have taken on a potentially dangerous life all their own. The response was basically: It’s really important to sort these things out, but also really complicated, and we’re trying to figure out how to do it. SEC chair Christopher Cox, interestingly enough, was the most enthusiastic about getting statutory authority to regulate ASAP.
Well, it looks like the Chicago Merc and hedge fund group Citadel are beating them to the punch. As the AP reports:
Exchange operator CME Group Inc. said Tuesday it is teaming up with Citadel Investment Group LLC to create an electronic trading platform for credit defaults swaps.
The nonbinding agreement calls for a joint venture to launch within 30 days that would provide a fully integrated trading and clearing platform for trading the complex derivative contracts that have been one of the central culprits in the ongoing credit crisis.
If the plan goes through and gets enough participants to work, it will be great news. The opaqueness of credit-default swaps has caused a lot of problems of late—like that whole AIG thing. But what everyone has really been worried about is the proverbial other shoe dropping. Places CDS exposure is lurking that we don’t know about.
As a sidebar, if this new market works, it will also be a nice pick-me-up for Citadel. As the New York Times reports the hedge fund business ain’t what it used to be, even for a giant like Ken Griffin.