Exclusive Online Only ContentCME Group Says It Has Dealer Support For Clearing Swaps
December 4, 2009
The CME Group said eight big dealers have promised they will use the world’s largest derivatives exchange to clear some of their credit default swap trades, setting the stage for competing services.
The CME plans to launch a clearing service on Dec. 15 that it hopes can compete with IntercontinentalExchange’s ICE Trust, which major dealers have supported since its inception in December 2007.
The CME named as “dealer founding members” Barclays Capital, Citigroup, Credit Suisse, Deutsche Bank, Goldman Sachs, J.P. Morgan, Morgan Stanley, and UBS.
CME said these banks signed “a non-binding term sheet” promising to participate in CME’s credit default swap clearing system.
But the exchange operator did not say whether final agreements would include investments in the initiative by the banks.
These same banks have revenue-sharing agreements with ICE Trust. These were finalized March 6 when ICE completed its acquisition of CCorp, an entity the major dealers decided to recapitalize in December 2007 to serve as the industry’s CDS clearinghouse.
Since launching March 9, ICE Trust has cleared some $4 trillion in total face value of CDS: No competitor has arisen to test this dominance.
The CME has for over a year tried to garner promises of sell-side support for its CDS clearing service, which it announced Thursday.
The CME asserted Thursday that Bank of America Merrill Lynch, Nomura Group and Royal Bank of Scotland also plan to become CDS clearing members and test and participate in the service.
The CME first approached the big banks about taking a stake in the CDS clearing initiative in October 2008. What began then as a joint venture between CME and hedge fund giant Citadel Investment Group for a buy-side inclusive CDS clearer, grew into a rallying cry of heavy-hitting buy-side institutions that now includes AllianceBernstein, BlackRock, BlueMountain Capital Management, Citadel, the D. E. Shaw Group and PIMCO.
The firms wanted an alternative to the dealers’ ICE Trust to ensure their needs would be met in a newly regulated and reformulated market.
BlueMountain was the most vocal. The hedge fund’s chief operating officer, Samuel Cole, wrote in a June letter to banks that the banks appeared interested only in supporting one successful global CDS clearinghouse – ICE Trust – to preserve their “oligopoly” in the market. The letter leaked to the press.
CME’s reference to non-binding term sheets means that final agreements have yet to be worked out with each of the banks. Term sheets are brief, bullet-pointed documents that outline the material conditions that guide or inform final agreements; the latter spell out the nitty-gritty terms and legal obligations of a business agreement.
