A STEP IN THE RIGHT DIRECTION

The first credit-default swap trade that is believed to be compliant with new swap trading rules being proposed by US regulators as a result of the Dodd-Frank financial overhaul law was completed yesterday.

Behind the trade were BlueMountain Capital Management, a US hedge fund, and Deutsche Bank, acting as the dealer and processing agent.

Credit default swaps, or CDS, are over-the-counter derivatives that allow investors to hedge or speculate against losses on corporate or government debt.

The CDS in question was executed on an electronic platform for institutional customers run by Tradeweb, which is considered a leading candidate for swap execution facility, or SEF, status under the new rules.

SEFs are a type of trading venue born out of the Dodd-Frank law. To be eligible as a SEF, platforms have to allow multiple customers to access prices from multiple dealers at the same time, should they wish.

“The financial markets are now preparing for the new regulatory environment under Dodd-Frank,” said Scott Beardsley, principal and head of operations at BlueMountain Capital, in a statement. “Today’s trade represents the first-ever transaction to fit within what many market participants expect to be the new model for central clearing and electronic execution of derivatives.”

Under the new law, a large part of the swaps market will have to be traded electronically and centrally cleared by processors that guarantee the swap in case either counterparty fails. Regulators want to see as many swaps as possible go through these clearinghouses because they believe it will reduce counterparty risk in the financial system and prevent another financial crisis.

“After implementation of Dodd-Frank, clearing and trading on regulated electronic platforms will be required and the market is now accelerating its preparation for the new environment,” said Lee Olesky, chief executive of Tradeweb.

The electronically executed and cleared CDS trade from BlueMountain was cleared by CME Clearing, part of CME Group, and ICE Trust, the clearing arm ofIntercontinentalExchange.