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Derivatives dealer banks want regulators to lay out guidelines for new clearinghouses set up to handle over-the-counter transactions, seeking better coordination between the platforms in the event of a major blow-up in the swap market.

A growing roster of platforms designed to handle complex derivatives deals has brought varying approaches to handling defaults, which could make it tougher for clearing members to wind down the swap book of a big participant, according to senior bank officials.

"Each [clearinghouse] is approaching these issues in a slightly different way," said Eraj Shirvani, head of fixed income for Europe, the Middle East and Africa at Credit Suisse, and chairman of the International Swaps and Derivatives Association. "It would be good if we had some sort of best practices globally."

Regulators in the U.S. and Europe view clearing -- the process in which a central counterparty stands between every transaction to mitigate the risk of any default -- as a key way to improve the functioning of the $605 trillion over-the-counter derivatives market.

Complex, customized instruments like credit default swaps were seen exacerbating the financial chaos of 2008, creating a web of credit exposure that tangled major market participants.

Dealers have been clearing some of these products since 1999, and lawmakers in Washington are debating legislation that would vastly expand the range of products that must be routed through central counterparties, or CCPs.

Now dealers are asking that there be supervisory guidelines set out for clearinghouses as well, as they begin devising an industry-standard process for emergency auctions.

Financial authorities want swap products to be clearable across a range of clearinghouses in a bid to promote competition in the market. Exchange companies like IntercontinentalExchange Inc. (ICE), Deutsche Boerse AG (DB1.XE), Nasdaq OMX Group Inc. (NDAQ) and CME Group Inc. (CME) have built clearing capabilities for the instruments over the last two years, alongside incumbent clearinghouse operator LCH.Clearnet.

With a half-dozen platforms now operational on both sides of the Atlantic, representatives of some dealer banks worry that their divergent approaches to handling the instruments could gum up the works if a big firm goes down holding swap positions in multiple clearinghouses.

"Currently, each CCP has its own default management arrangements with unique timings and process," said Paul Hamill, a director at Barclays Capital. "This could make managing a single large default very complex, due to poor visibility of the overall risk."

Without proper communication between clearers, Hamill said, "the result could be a blend of paralysis and auction prices which reflect significant uncertainty."

Roger Liddell, chief executive of LCH.Clearnet, said that central counterparties do share information when it looks as though a major default is imminent, but this is "quite different" from risk-sharing.

"I don't think that's feasible," he said. "When it comes to an actual default... much information becomes confidential."

A spokesman for CME said that in a default situation, the company would seek to coordinate with other clearinghouses in the way of sharing information. Representatives for ICE declined comment.

-By Jacob Bunge, Dow Jones Newswires; (312) 750 4117; jacob.bunge@dowjones.com

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