06 Jul 2009, Alastair Marsh, Risk magazine
Liffe’s platform, run in association with London-based clearing house LCH.Clearnet through its BClear service, launched ahead of three competing CDS clearing initiatives on December 22, 2008. But despite offering clearing services for series 8, 9 and 10 of the Markit iTraxx Europe investment grade, Crossover and Hi-Vol CDS indexes, the exchange has yet to process any trades.
“We have not seen the success we thought we would. We hoped by starting first that we would see business early on, but we haven’t so far and are reviewing where we go from here,” the official told Risk.
Numerous explanations have been put forward for Liffe’s inability to capture market share. In an interview with Risk in early January, Ade Cordell, Liffe's director of over-the-counter services, said trades were not expected until the end of that month – he explained that the Christmas-New Year holidays had delayed buy-side firms' efforts to hook up to the exchange’s BClear platform.
Having passed the end of January without a trade, Cordell told Risk in February that dealers had refrained from signing up over concerns that a UK-domiciled central counterparty might be undermined by the European Commission's desire for a eurozone clearing platform.
However, a commitment made on February 19 by nine major dealers to use an EU-domiciled central counterparty for clearing CDS trades by the end of July seems to have had a negligible effect on the firm’s fortunes.
NYSE Liffe’s service is aimed at buy-side firms such as hedge funds and asset managers. Typically, these firms are reliant on banks for clearing services, meaning their dealers would also need to sign up to the central counterparty. Duncan Niederauer, chief executive of NYSE Euronext, NYSE Liffe’s parent company, complained at a June 5 conference in New York that dealers have proved reluctant to use Liffe's offering.
“I don’t actually think we’ll have a lot of success in CDS, to be honest,” he said. “The dealer motivations continue to be quite clear: they have no interest in any transparency and they’re trying to limit the regulation as much as they can.”
Four days later on June 9, Gary Jones, chief executive of NYSE Liffe, told a meeting of derivatives professionals in London the solution had been thwarted because it did not offer what the dealers wanted. “Our CDS solution failed to get traction because it is a futures-clearing type solution and it does not plug into the infrastructure of the over-the-counter market in the same way other services do. You could argue the dealer-to-dealer market prefers a direct OTC approach, with trades going straight into the clearing house.”
Despite these difficulties, Jones insisted the service would be operational by July. However, the official declined to confirm whether the July deadline was still intact. When asked by Risk if the CDS service would be abandoned entirely, he replied: “All we are doing is reviewing it.”
The fortunes of the dealer-backed Ice Trust, the New York-based central clearing facility for CDS trades set up by the Atlanta-based IntercontinentalExchange, have been markedly different. As of July 2, it had cleared $1.3 trillion notional in CDS index trades since launching on March 9.
Other contenders for CDS clearing include the Chicago Mercantile Exchange (CME) in conjunction with hedge fund Citadel Investment Group, and Frankfurt-based Eurex. CME’s offering has received the necessary regulatory approvals but has yet to process any trades, while Eurex intends to launch its service by the end of July.
An official at the Frankfurt-based exchange confirmed to Risk that approximately 20 firms are testing its service, many of which are major dealers and clearing members of Ice Trust in the US.