Chicago bills itself as the “risk management capital of the world.” No wonder it is worried about the war against credit default swaps.
From the Chicago Tribune:
For Chicago, risk can be the city’s own reward. The new world of global financial risk can create opportunities for those who professionally manage them.
It’s not all upside, though. Competitors may move in if the new challenges are not ably met here. Expertise and opportunity could be lost in Chicago.
The newest front in this battle is in a market sector as inscrutable as it is important: Credit default swaps.
“Credit default whats?” you might be asking. Don’t worry. It’s less important to know the intricacies of such arcana than the potential impact of the battle over them.
While it may dazzle dinner-party guests who hear you explain that these contracts allow companies, bankers, investors and others to buy and sell—”swap”—the risk of default on a corporate IOU, it’s best to refrain from such showmanship. Instead, focus on the essential knowledge: that Chicago jobs and the city’s standing in the financial world are on the line in the battle over how the swaps will trade.
Two big Chicago outfits, CME Group and hedge fund firm Citadel Investment Group, are banding together to offer to clear the trading of credit default swaps. They would match buyer and seller, guaranteeing that both would have the financial strength to stand behind their trades.
Contesting the CME-led effort is one by The Clearing Corp. in partnership with the IntercontinentalExchange. A European group is also in the fray.
The Clearing Corp. is headquartered in Chicago. But its bid essentially is run by swaps dealers themselves.
Swaps dealers don’t want the Chicago futures giant to get a toehold into their lucrative business. Let the CME start with clearing, their thinking goes, and before long CME will begin offering trade execution. Then it will begin designing its own swaps contracts for sale.