BRUSSELS_Under pressure from the Eropean Union, banks in Europe will start processing complex financial contracts known as credit default swaps through a central clearing house by the end of July, EU regulators said Friday.

Swaps offer insurance against securities for lenders worried about a borrower's ability to pay them back. The unregulated $60 trillion market lost its main central clearing house to handle the deals with the September collapse of U.S. investment bank Lehman Brothers.

Clearing manages who is liable for losses and a central counterparty becomes the buyer and seller to every trade in order to manage the risk in the market. For swaps, many deals were done by buyers and sellers directly and in private without clearing, a practice regulators view as risky.

The swaps can lead to huge financial exposures when companies go bankrupt unexpectedly, as three Icelandic banks did last year. They 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 defaults, even by parties that do not own the security in question.


Frustrated by the financial industry's failure to plug the gap left by Lehman and agree on a clearing house by the end of last year, the European Commission threatened that regulators would step in and set up their own system in Europe.

Two EU-based clearing houses are now operational _ ICE Clear and Eurex Clearing _ and another, LCH.Clearnet SA should follow by the end of the year, the EU executive said.

Regulators said they expected "that as of today, dealers will live up to their commitment and will start using all available central counterparties for all eligible trades."

They said they would monitor how many deals were moving to the European clearing houses and would publish new ideas on regulating over-the-counter derivatives in October.

Credit default swaps 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.'s sale to Bank of America Corp.

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 $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 the swaps.