I made quite deliberate use of tenses. The CME “APPEARED” to be the front runner. If they back away from using their clearinghouse due to members refusing to back the idea, they are no longer the head of the pack. It was the supposed willingness to use their current platform that gave them a leg up.

But read the Bloomberg article you posted! The owner of the firm doing 14% of the world’s equity options trades says he prefers a separate exchange from the CME. And “a rival proposal by ICE would avoid the issue raised by [the options trading firm's owner].”

How can CME still be the frontrunner when this kind of systemic risk worry is raised? If there are going to be kinks in CDS settlement, why do we want to invite contagion into the equity options market or the other CME markets?

Why do you think AIG needed $85 billion + $38 biliion + another $10 billion of rescue money from the Fed? That was for their CDS exposures. Had they gone under, everyone is agreed it would have constituted a systemic event. And the fact the numbers keep getting bigger says there is serious stress.

Just because the officialdom threw $133 billion at AIG to avert a crisis, and may have succeeded, you now argue that because there were no disastrous outcomes, there was no risk. That is tantamount to saying that because no one died as a result of Three Mile Island, really it was not a big deal at all.

And per the later post citing Roubini, we are not through hedge fund failures. He thinks the worst is yet to come, and some hedge funds were protection writers. Now none of them may big enough players to do much damage individually (protection writing was concentrated in about ten firms), but if there were to be liquidations/failures in close succession, we might see some unravelling.

The recent LEH auction was quite orderly.

WM, also appears to be going without a hitch.

After reading blogs like this, I was expecting MUCH worse. It just hasn’t been that bad.

The simple solution with CDS is to make it illegal to purchase CDS that exceeds your holding of the underlying bonds issued by the refrence entity.

Further. If your bond holding is very liquid then you just have to accept that full CDS insurance may not be possible. Contracts must have a cancellation clause which takes effect if/when the CDS purchaser has received settlement funds upon sale of underlying bonds. There needs to be a duty to notify CDS writer that contact is now void.

This will cap the value of all CDS to the total issuance of the companies/entities covered. It may even overcome the concerns raised about exchange trading.

There is still a problem with managing transference to 3rd parties. Perhaps that should only be possible for exchanged traded CDS.

Perhaps, like the market for heroin, Congress should consider whether the market for CDS and similar derivatives is simply a creation of financial speculators and predators, provides no positive social function and may actively undermine our political economy.

Here is a case where a market has not only delivered a grossly inefficient outcome, but it appears to be a product that does not conform to the public interest. This is a market that Congress should consider dismantling.

What would then be the intial margin?

Limit exchange traded CDS to fungible CDS. Make any CDS that is not exchange traded illegal, and writer/buyer punishable by 5 years in prison and 200% of expected profits for each count.

Clearing Houses also depend on the ability of being able to transfer a failed position to someone else.

A trader can’t meet a margin call on a future that he sold at 100 that is now trading at 110. The Clearing House will transfer the short futures positon to another trader and along with the $10.

The Clearing House can even buy futures temporarily to hedge their positon.

How on earth does the Clearing House expect do that with illiquid CDS?