Canadian, US Clearing Firms To Explore Swap Clearing Link

Financial clearinghouses in Canada and the U.S. on Tuesday struck an agreement to create new services for handling Canadian swap transactions, in a push to satisfy the nation's Group of 20 commitment to firm up market practices.

The Canadian Derivatives Clearing Corp. signed a memorandum of understanding with New York Portfolio Clearing, a nascent facility backed by NYSE Euronext (NYX), to develop services for the C$37 million sector.

"Today's announcement provides a valuable roadmap for building a clearing solution that best meets the needs of the Canadian OTC derivatives market," Glenn Goucher, president of the CDCC, said in a statement. The companies said they saw the agreement as a step toward forging a "cross-border template" for other G20 nations structuring similar overhauls of derivatives trading.

Swaps are financial derivatives bought and sold off the publicly accessible exchanges, designed to provide tailored hedges against shifts in key interest rates, credit conditions or energy prices. Regulators around the world are designing new rules for the marketplace--estimated at about $583 trillion in value globally by the Bank for International Settlements--after the 2008 financial crisis revealed systemic risks embedded in some products like credit default swaps.

Routing transactions through clearinghouses would guard both banks and buyers of swap contracts against the fallout of a major participant defaulting, and give regulators a broader view of trading activity and risk concentration.

The CDCC estimated that the Canadian over-the-counter derivatives market is dominated by the country's six largest banks, with counterparties spread throughout the U.S. and other countries.

The CDCC is a unit of TMX Group (TMXGF, X.T), Canada's major exchange operator, which for years has been eyeing a broader role in over-the-counter derivatives trading. Handling transactions carried out off-exchange is seen as a new profit center for exchanges around the world, with new regulations like the Dodd-Frank financial law in the U.S. mandating the incorporation of clearing for standardized contracts.

New York Portfolio Clearing is a new venture backed by the Big Board parent and the Depository Trust and Clearing Corporation, and designed to underlie a new range of fixed-income futures contracts traded in the U.S. in competition with CME Group Inc. (CME).

Walt Lukken, the former acting chairman of the Commodity Futures Trading Commission who now leads the NYPC effort, said the deal struck with the Canadian clearer comes as a "first step in our strategic pursuit to bring OTC swaps into the more capital-efficient structure of NYPC."

-By Jacob Bunge, Dow Jones Newswires; 312-750-4117; jacob.bunge@dowjones.com

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