Atlanta-based Intercontinental Exchange (Ice) is to take over Chicago-based clearing house The Clearing Corporation (ClearCorp) as part of an effort to establish itself in the credit default swap (CDS) market.
Ice said that it expected to start operating through ClearCorp, which will become a subsidiary under the name Ice Trust, in the fourth quarter of this year. Financial details have not been disclosed.
On October 10, ClearCorp and Ice announced they were planning to set up a jointly-operated CDS clearing house, and were seeking regulatory approval from the New York Fed.
Ice, which originally fuelled rumours that it was entering the credit derivatives market with the purchase of New York-based electronic brokerage Creditex in June, is now in the final stages of testing a central counterparty clearing system for CDSs with the launch date depending “on the regulatory approval cycle”.
Three other potential counterparties have confirmed plans to launch CDS initiatives over the coming months: Frankfurt-based derivatives exchange Eurex; Chicago-based exchange operator CME Group, in partnership with hedge fund management firm Citadel; and NYSE Euronext. Eurex has previously stated that it plans to clear OTC CDS contracts referencing the European iTraxx indexes “in the first half of 2009”.
A large part of the over-the-counter derivatives market is expected to shift towards central clearing houses by next year. The European Commissioner for internal markets and services, Charlie McCreevy, recently outlined his intentions to move credit derivatives away from the over-the-counter (OTC) market and under regulatory control in order to reduce the counterparty risk involved in credit derivative trades.
Similarly, in testimony to the US Senate Banking Committee on September 23 SEC chairman Christopher Cox argued that there were “significant” opportunities for manipulation within CDS markets, which he described as being “completely lacking in transparency and completely unregulated”.
Ice today reported that its consolidated net income for the third quarter was $75 million, up 12% from the $67 million recorded in the same period in 2007. The company attributed growth to the introduction of new products, strong trading volumes on futures and OTC products, and its acquisition of Creditex.
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