Credit Safest Since ’08 as Clearinghouses Control Swaps (Bloomberg)

I’m back from vacation.  Thought I’d picked a quiet summer week to be away, but obviously not.  The title of this article seems someone ironic given the downgrade on Friday evening.  Nevertheless, it is hard to deny that the growth in clearing has removed some of the risk from the swaps market.  The trade netting alone that happens as a matter of course for cleared trades has reduced the real money at risk within the CDS market.

But rest assured new structured products are already being used that do not and will not qualify as swaps.  Hence my comments below.  So although money at risk might be lower in the swaps market, that risk is more than likely now somewhere else.

“History shows us that the regulatory and legislative changes will stick, but the bankers are the smartest guys in the room,” said Kevin McPartland, a senior analyst in New York with Tabb Group, a financial markets research and advisory firm. “They will eventually find ways to do the business they want to do and make the money they want to make.”

Before the financial crisis, Basel capital rules allowed large banks and investment banks to employ credit swaps to reduce the amount of capital required by regulators by using the contracts to shift risk from their balance sheets. That, in part, made the contracts popular with banks, McPartland said. “We saw how that worked out.”

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