Lehman Collapse Spurs Call for Credit Derivatives Clearinghouse

Lehman Collapse Spurs Call for Credit Derivatives Clearinghouse 

By Shannon D. Harrington

Sept. 16 (Bloomberg) -- Banks may accelerate efforts to move trading in the $62 trillion credit-default swaps market through a central clearinghouse or to an exchange after the bankruptcy of Lehman Brothers Holdings Inc. and the credit downgrade of American International Group Inc.

Lehman, the first major market-maker to go bankrupt in the decade-long history of the privately negotiated, unregulated business, may leave behind billions of dollars in potential losses for trading partners, according to Barclays Plc of London. No one knows exactly how much because there's no central exchange or system for recording trades.

``The fact that I can't tell you the notional value of derivatives contracts Lehman has written the day after a bankruptcy is a scary thing,'' Brian Yelvington, a strategist at New York-based bond research firm CreditSights Inc., said yesterday.

A clearinghouse capitalized by owners could have reduced the risks because it becomes the so-called counterparty, for a fee, to each side of the trade. Now, banks are sifting through trading positions to ``net'' trades that offset each other and reduce potential losses. Untangling that web may last into 2009, said John Jay, a senior analyst at Boston-based Aite Group, a financial services consulting firm.