CME and Citadel plan CDS exchange

Chicago-based exchange operator CME Group and hedge fund management firm Citadel Investment Group are set to launch a fully integrated trading and clearing platform for credit default swaps (CDSs).

CME says the launch of trading could take place within 30 days, although it “will be subject to completion of definitive agreements and any necessary regulatory approvals”. The company is still negotiating details of the platform with regulators including the Securities and Exchange Commission and the New York Federal Reserve.

Atlanta-based rival Intercontinental Exchange (Ice) - which fuelled rumours that it was entering the credit derivatives market with the purchase of New York-based electronic brokerage Creditex in June 2008 - is in discussion with regulators over launch of its own platform.

Both the SEC and the New York Fed refused to comment on any ongoing discussions.

An official argued there was room in the market for more than more than one CDS trading platform, drawing comparisons to the over-the-counter energy derivatives market in which both Ice and CME platforms compete: “In the OTC energy market, which is much smaller than the OTC CDS market, there is room for two participants, so we certainly think there will be ways we can continue to serve the market-place,” she said.

Meanwhile, Frankfurt-based derivatives exchange Eurex said it plans to clear OTC CDS contracts referencing the European iTraxx indexes “in the first half of 2009”. One market participant predicted regulators would urge other European operators to follow suit: "They’ll try and force competition in Europe on all the different layers - trading, clearing and settlement.”

On September 29, Chicago-based clearing house The Clearing Corporation (ClearCorp) revealed plans to establish a New York trust bank that will serve as a central clearing house for CDS deals. ClearCorp hopes to launch by the end of the year, and is currently working with regulators to obtain a New York state banking license. A spokesperson refused to comment on recent developments.

See also: Gearing for clearing