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CDS: Sweet SNACs?

The CDS market is hoping that the move to central clearing will silence its critics. It could be disappointed.

This month should see the conclusion of the credit derivatives market’s moves to reinvent itself as a more stable and less risky industry by moving to centralized clearing in both the US and Europe. This has seen both markets adopt new CDS contracts: in the US the Standard North American Contract (SNAC) and in Europe the Standard European Contract or SEC (it’s a good job no-one had got to that acronym first). The US contract was introduced and began trading on April 8 this year – a process the market modestly dubbed "big bang" – and in Europe the SEC began trading on June 22, with the introduction of a central counterparty due on July 27 ("little bang").

The CDS market is racing to put its house in order before any money-making incentive left in the business is regulated away. According to the Depository Trust & Clearing Corp there was at least $27.5 trillion in CDS contracts outstanding at the end of April this year. This is a fraction of the wider OTC derivatives market but the instruments continue to be the focus of regulators’ ire because of public outrage over the collapse of AIG and Lehman Brothers.