Wall Street gets ready to trade defaulted U.S. debt

Fri Oct 4, 2013 6:51pm EDT
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By Jason Lange

WASHINGTON (Reuters) - While most on Wall Street continue to believe it very unlikely the United States will default on its debt later this month, banks and securities firms are already gearing up for how to handle any U.S. Treasuries tainted by missed payments.

The Securities Industry and Financial Markets Association, a trade group that represents hundreds of securities firms, banks and asset managers, has drawn up plans so that trading platforms can still process deals involving defaulted U.S. Treasuries, SIFMA Managing Director Rob Toomey said on Friday.

Political dysfunction in Washington has raised the possibility of the once unthinkable: a default that could potentially trigger financial and economic mayhem.

Washington could start missing payments on its debt if Congress and the White House fail to reach a deal soon to raise the nation's $16.7 trillion cap on government borrowing.

SIFMA is counting on an announcement by the Treasury Department the day before it misses payment on a bill, note or bond. That would allow the financial world to calibrate systems to recognize instruments in default.

"Protocols are being put into place," Toomey said in a conference call with reporters.

Banks have been working intensely on their plans to deal with a potential default.

"We're so focused on the plumbing on this, and have been for awhile," a source at a major bank said of the contingency planning underway. "We're dealing with the key people in IT, financing, and risk management to make sure it's all working. But the environment will be tricky."   Continued...

The U.S. Capitol is seen at night on the eve of a potential federal government shutdown, in Washington September 30, 2013. REUTERS/Kevin Lamarque