Exclusive Online Only ContentSecurities Industry Outlook 2009
For Centralized CDS Clearing, More May Not Be Merrier | Spending Cuts Could Spare Execution, Order Management Systems | Niche Opportunities in Global Crisis | Volatility and Data Demands Driving Options Tech |
For Centralized CDS Clearing, More May Not Be Merrier
January 5, 2009
Exchanges are gearing up to offer clearing for credit default swaps (CDS) and regulators are pushing to mandate price reporting. But new disputes are surfacing as the sector seeks to mitigate counterparty risk and increase transparency.
CME Group, Eurex, IntercontinentalExchange (ICE) and NYSE Euronext are all planning to launch central counterparty (CCP) services early this year, starting with CDS indexes--the most standardized contracts--followed by index tranches and single-name CDS. But while market players largely agree that greater oversight and central clearing will herald increased electronic trading of the instruments in the U.S., some have urged regulators to approve only one of the solutions, citing the need for standardization and simplification.
"Ultimately it probably works best if there's one global, central clearinghouse," said an executive at a New York-based bond trading platform that offers credit derivatives. Though his firm is not backing any of the initiatives, he asked that his name not be disclosed.
"We'll probably have two or three or maybe four different approaches to this on a competitive basis, but over time I'd rather we gravitate toward a single, global CCP," E. Gerald Corrigan, managing director of Goldman Sachs, told the House Committee on Agriculture last month. Corrigan, former president of the Federal Reserve of New York, argued that a single entity would enable easier oversight. "You would still have a great deal of front-end competition between exchanges and other entities, but having the process in one place where the regulators and everybody else can see it and control it has a great deal of appeal."
Others envision the various CCPs splitting market share across regions and products. Dealers, for one, see competition as a way to keep clearing fees and collateral requirements low. "ICE will be the clearing mechanism most favored for single-names and more complex credit derivatives," while CME, Euronext and Eurex will likely see the most index futures and over-the-counter index business, asserted Michael Gooch, CEO of interdealer broker GFI Group, which is an ICE Clearing shareholder. Gooch spoke at a GFI-sponsored conference on credit derivatives in New York last month.
"It appears that ICE has created an interesting head start here in the U.S.," said the unnamed bond trading executive. Europe, however, "may favor a different solution."
Focusing initially on Europe are NYSE Euronext and the Eurex derivatives market. Euronext began clearing for Markit Group's iTraxx European indexes on Dec. 22 through Bclear, the confirmation and processing platform of its Liffe derivatives subsidiary. Bclear feeds trades to LCH.Clearnet, which expects to begin clearing for U.S. CDS indexes shortly and is considering servicing U.S. single-name CDS and index tranches. Liffe and LCH.Clearnet announced Dec. 23 that they had received exemptions from the Securities and Exchange Commission to let U.S. users clear through the system.
LCH.Clearnet expects to reach by March 15 an agreement to merge with the U.S. Depository Trust & Clearing Corp. (DTCC), operator of the Trade Information Warehouse, which stores credit derivative trade details and automates settlement, and the Deriv-Serv matching and confirmation service. On Nov. 4, DTCC began publishing weekly aggregate data for some of the contracts placed by dealers in its CDS database.
Both ICE and CME, which is partnering with Citadel Investment Group on its service, say they are ready to launch their U.S. clearing mechanisms as soon as they receive regulatory approval. On Dec. 23, CME said that it had received the green light from the Commodities Futures Trading Commission and New York Fed but was still awaiting SEC exemptions.
