Liffe, along with several other exchanges, mooted plans to enter the credit derivatives market from as early as late 2006. “We started looking at the credit space around the same time as the other exchanges,” said John O’Neill, the London-based senior analyst at Liffe responsible for finalising the contracts. “We got two pieces of initial feedback when we started talking about it: the first was they weren’t talking about futures and options products, and the second is they weren’t looking for a central venue on which to conduct trades.”
The Chicago Board of Trade, Chicago Board Options Exchange, Chicago Mercantile Exchange and Frankfurt-based Eurex all launched credit derivatives futures and options over the course of 2007. But since then trading in the contracts has been sparse.
Instead of inviting market participants to trade credit on-exchange, Liffe intends to clear existing over-the-counter CDS contracts through its BClear platform. The platform allows centralised clearing of eligible OTC trades, and currently covers a swath of major global equity underlyings, including European equity indexes and variance futures linked to them.
The exact specifications of the BClear contracts are yet to be finalised, but O’Neill said the platform was likely to accept privately negotiated trades based on the Markit iTraxx Europe, Crossover and HiVol indexes. Although the specifications would entail a standard notional size, he declined to say what the minimum would be.
Once CDS contracts are cleared under the scheme, counterparties to the contracts will relinquish their exposure to each other and have it replaced by exposure to a single counterparty, London-based clearing house LCH.Clearnet.
Counterparty risk has burgeoned throughout the financial sector recently, making it an increasingly pertinent issue for CDS market participants. The near-collapse of Bear Stearns, in particular, has caused major dealers to push forward an initiative with the Chicago-based Clearing Corporation aimed at centralised clearing of OTC trades. Unlike the dealer-led clearing scheme, however, O’Neill said BClear would be accessible to all market participants.