Sept. 24 (Bloomberg) -- Trading in credit-default swaps may need to shift to an exchange to ``exist,'' according to strategists at CreditSights Inc.

Resistance to trading the privately negotiated derivatives on exchanges may be waning after U.S. Securities and Exchange Commission Chairman Christopher Cox yesterday asked Congress for authority to regulate the market and the bankruptcy of Lehman Brothers Holdings Inc. last week triggered concern that more market-makers could fail, New York-based strategists Louise Purtle and Brian Yelvington wrote yesterday in a note to clients.

``The fundamental idea behind being able to hedge or speculate on credit risk is a sound one that has been marred by the opaque nature of the CDS market itself,'' the analysts wrote.

Banks and securities firms have staved off previous efforts by CME Group Inc., Chicago Board Options Exchange and Eurex AG to lure credit-default swaps to their exchanges as trading in the over-the-counter market grew 100-fold over seven years to $62.2 trillion in outstanding contracts by the end of 2007.

The dealers ``never had any incentive to see the products succeed and lose a profitable piece of business'' to the exchanges, the analysts wrote.

``With fewer investment banks to provide liquidity, a rise in counterparty concerns owning to financial institution failures and a push for regulation specifically targeting the CDS market, it appears to us that CDS might actually have to migrate to an exchange to exist,'' they said.

New York Fed

After the collapse of Bear Stearns Cos. in March, the Federal Reserve Bank of New York prodded the 17 largest dealers in credit-default swaps to create a clearinghouse by the end of the year that would absorb the failure of a market-maker.

A central clearinghouse that would act as a counterparty to trades ``would provide transparency to the market,'' set a standard rate for the amount posted to back trades and mitigate the risk of market-wide failures if a dealer collapses, the CreditSights strategists said.

In addition to Cox's plea for regulation powers yesterday, New York Governor David Paterson said in a statement on Sept. 22 that the state will start regulating some of the derivatives by deeming them insurance and requiring sellers to be licensed.

Credit-default swaps, which are traded between banks, hedge funds, insurers and other investors, are financial instruments based on bonds and loans that are used to speculate on a company's ability to repay debt or to hedge against losses.

They pay the buyer face value in exchange for the underlying securities or the cash equivalent should the borrower fail to adhere to its debt agreements.

To contact the reporter on this story: Shannon D. Harrington in New York at sharrington6@bloomberg.net

Last Updated: September 24, 2008 15:24 EDT