The SEC commissioners approved temporary exemptions from agency rules, a move that will allow LCH.Clearnet Ltd, a British firm, to operate as a central clearinghouse for transactions involving credit default swaps.

Traded in a US$60 trillion market that is unregulated and secretive, credit default swaps have come under scrutiny by Congress and federal regulators in the wake of the financial and credit crises that have plunged economies around the world into recession.

Bring transparency to market

The idea behind a system of central clearinghouses - promoted by a White House advisory group of regulators - is to bring transparency to the market, possibly reducing risks to the financial system.

The SEC move "is an important step in our efforts to add transparency and structure to the opaque and unregulated" market for credit default swaps, SEC Chairman Christopher Cox said in a statement.

"These ... exemptions will allow a central (clearinghouse) to be quickly up and running, while protecting investors through regulatory oversight."

Use of default swaps

The swaps are commonly used contracts to insure against the default of financial instruments, such as bonds and corporate debt. But they also are bought and sold as bets against bond defaults.

They played a prominent role in the credit crisis that brought the downfall of Lehman Brothers Holdings Inc, a government rescue plan for giant insurer American International Group Inc, and Merrill Lynch & Co selling itself to Bank of America Corp.

Catastrophic collapse

The huge volume of credit default swaps sold by AIG, for example, coupled with rising levels of defaulted mortgage and other debt, threatened the company's existence and prompted the government to spend US$150 billion to bail it out to avoid a catastrophic collapse. If AIG were to fail, the losses would spread to the companies and investors who bought swaps from it.

In announcing the exemptions for LCH.Clearnet, the SEC did not specify how long they would remain in force.

They will allow firms such as LCH.Clearnet to quickly put in a centralised system for clearing swaps trades, while giving the SEC time to review their operations and assess whether permanent exemptions should be granted, the agency said in a statement.

Well-regulated central clearinghouses "should help promote stability in financial markets" by reducing the risks from the default or financial distress of a major market player, the SEC said.

Several companies are seeking similar exemptions, some of them from other federal agencies that oversee them such as the Commodity Futures Trading Commission.

Executives of CME Group Inc and IntercontinentalExchange Inc in the US, Britain's LIFFE exchange and Eurex Clearing AG of Germany assured the House Agriculture Committee at a recent hearing that they would provide safe, neutral central structures that would contain risk and manipulation in the market for the swaps.

- AP