Hedge Funds Say Moody’s Downgrades Call for Dodd-Frank Clearing

Moody’s Investors Service credit downgrades of Credit Suisse Group AG (CSGN), Morgan Stanley (MS) and 13 other banks highlight risk in the financial system and the need for regulators to quickly adopt a swaps-clearing rule, according to a coalition of proprietary traders and hedge funds.

“The Moody’s downgrades underscore the critical need to reduce the risk to the financial system associated with the interconnectedness of the global financial markets,” according to a statement from The Clearing Coalition, which includes Citadel LLC and Getco LLC and other asset managers, trading platforms and banks.

The group has urged the Commodity Futures Trading Commission and Securities and Exchange Commission to implement the 2010 Dodd-Frank Act’s clearing rules before next year. Clearinghouses owned by CME Group Inc. (CME), LCH.Clearnet Group Ltd. and IntercontinentalExchange Inc. (ICE) stand between buyers and sellers and intend to reduce risk in trades. Dodd-Frank was enacted after largely unregulated trades helped fuel the 2008 credit crisis.

“We urge the regulators to complete the implementation of the clearing mandate under Dodd-Frank as expeditiously as possible,” the coalition said in the statement.

Interest-rate and credit-default indexes would face the first Dodd-Frank clearing requirements, CFTC Chairman Gary Gensler, said in May. “Standard swaps between financial firms will move into central clearing, which will significantly lower the risks of the highly interconnected financial system,” Gensler said in testimony May 22 at a Senate Banking Committee hearing.

The coalition sent a letter to Gensler and Mary Schapiro, SEC chairman, in May urging regulators to implement central clearing this year.

To contact the reporter on this story: Silla Brush in Washington at sbrush@bloomberg.net

To contact the editor responsible for this story: Maura Reynolds at mreynolds34@bloomberg.net