By Suchita Nayar
Despite the global financial collapse and a shift in political power in Washington, there's still little certainty about what financial reform will look like. But of all the proposals floating around, the move to central clearing for the credit default swaps market seems most likely to happen. Hedge funds, which make up a big chunk of the market, are getting ready for the inevitable.
Over the past six months, the industry has taken initial steps toward standardizing some contracts to prepare for central clearing. Legal counsels have pored over minutiae of agreements. Managers, meanwhile, have analyzed the portfolio and trading risks of clearinghouses' higher collateral requirements, all of which will make the new system more costly to hedge funds.
Once managers have figured out the financial details, they'll have to devise a way to make their order- and risk-management systems reflect the change from bilateral to central...