The head of credit derivatives at a major dealer has told Risk he expects to see 35-40% of the credit default swap (CDS) market centrally cleared by the end of June, and as much as 85% by year's end barring any unforeseen mishaps."I think it is a realistic target that 85% of CDS indexes and their constituents could go through central clearing platforms [CCPs], unless we hit a roadblock such as bank nationalisations in the US or the bankruptcy of a major reference entity," he remarks. "And the 85% figure would represent 100% of the clearable inventory - it would be difficult to clear non-standardised contracts."
The credit head's firm is among the nine clearing members of Ice Trust - the US-domiciled CCP established by Atlanta-based derivatives exchange IntercontinentalExchange (Ice). Ice Trust opened for business on March 9, having cleared the final regulatory hurdle on March 6 when the Securities and Exchange Commission gave its approval.
Initially, the CCP will clear trades linked to series 10 and 11 of the Markit CDX North American investment-grade, high-volatility and high-yield indexes. The credit head told Risk clearing members are taking a step-by-step approach to begin with - focusing on recent trades involving one or two counterparties. But he expects back-loading of older trades to start within a month.
If CCPs are successful in clearing 85% of trades by the end of the year, market participants hope that will placate the likes of Charlie McCreevy, European commissioner for internal markets and services, who demanded last year that the majority of CDSs be centrally cleared.
But the credit head says the European Commission would only be satisfied "if the bulk of trades are cleared through platforms it sees as acceptable". The Commission wants all trades involving European protection sellers or reference entities to be cleared through a European-domiciled CCP, a demand that many market participants believe could add unnecessary operational complexity and cost.
Both dealers and buy-side firms had been voluntarily working towards a clearing house for credit derivatives. But the issue has become increasingly politicised on both sides of the Atlantic in recent months, which the banker claims has caused unnecessary delays to CCPs being established.
"The problem is not so much with the regulators, but with politicians focused on sound bites, and the exchanges pushing them to legislate the CDS market. The sheer scope of the regulatory enquiry has become a cottage industry," he asserts.
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