Certainty of clearing is turning into one of the hottest derivative reform debates. The crux of the issue is how can swaps traders be sure that when they execute on a SEF the trade will be accepted for clearing. In most other exchange-like markets the vertical integration makes this a moot point. If you trade equities at the NYSE or futures at CME, the exchange can easily check your single clearing account to ensure you have enough credit to cover the trade.
The swaps market presents a whole new set of challenges, top among them a world in which you can trade the same product on multiple SEFs and clear that same product at multiple clearinghouses – many-to-many. TABB Group research (and my experience) says this problem can be solved with technology, namely pre and post-trade risk checks, rather than a legal agreement. Most of the big banks disagree. I discuss this issue in detail in my recent study on US Swap Dealers.
Karen Brettell at Reuters does a good job of laying out the issue and diverging view points. My comments:
“The documentation issue is still the most polarized of the issues,” said Kevin McPartland, analyst at TABB Group in New York. “It’s very hot or cold depending on who you talk to.”