CDS central clearing may increase risk, says DTCC's Bodson

The transfer of credit default swaps into electronically managed and centrally cleared markets may be increasing rather than lowering risk, according to Michael Bodson, chief operating officer of Depository Trust and Clearing Corporation. Credit-default swaps are “scary, scary products,” Bodson said at the SIBOS 2011 conference, according to an article by Securities Technology Monitor. 

The exchange of risks involved in CDS clearing may not fit a transaction model that has been used for futures contracts, Bodson said.

 “We may be creating a much higher level of risk,’’ he said, by requiring swaps to be turned into standardised products, traded on electronic exchanges and where risks are covered by a central counterparty, backing up the two sides of a trade.

Clearing houses are ready to clear only about 400 names, Bodson said, compared with total reference universe of around 4,000.