With just two weeks remaining until the European Commission’s deadline for central counterparties (CCPs) to begin clearing credit default swaps (CDSs), two of the competing platforms are still waiting for regulatory approval.Both Ice Trust Europe, the facility set up by the Atlanta-based IntercontinentalExchange (Ice), and the unnamed venture launched by Chicago Mercantile Exchange and Chicago-based hedge fund Citadel Investment Group remain in discussions with the UK Financial Services Authority (FSA).
An official at Ice declined to speculate on when it expects the FSA to give the green light, but said it is “operationally ready following testing with member applicants”.
Ice Trust Europe will start by clearing index trades and single name constituents of those indexes, following the path set by its US CCP, Ice Trust, which launched in March. By the end of June, Ice Trust had cleared $1.3 trillion of index trades.
A spokesperson for the CME Group also refused to say when it expects FSA approval, stating: “The application to become a UK-registered clearing house is with the FSA and we are working with them to gain clearance in good time”.
Meanwhile, another contender for European CDS clearing, Frankfurt-based derivatives exchange Eurex, insisted it will be ready to begin clearing by the July 31 deadline. Eurex had originally planned to launch in the first quarter of 2009.
A Eurex official told Risk that 20 participants, including some major dealers, are currently testing the service and putting in place the necessary back-office infrastructure, “but how many achieve market readiness by the end of July remains to be seen”, he said.
Eurex’ initial focus will be on clearing European iTraxx index trades and the most liquid single-name constituents of those indexes.
Assuming Ice Trust Europe gets FSA approval, it can be expected to achieve similar success to Ice Trust in the interdealer market reasonably quickly. The US platform currently has 12 dealer members.
But short-term success for the buy-side focused platforms, such as those being launched by Eurex and CME, is another matter. A rival initiative launched in December by NYSE Liffe in partnership with London-based clearing house LCH.Clearnet is currently under review, having yet to clear any trades. An official at the company recently told Risk: “We had hoped by starting first we would see business early on, but we haven’t so far and are reviewing where we go from here”.
In other derivatives asset classes that already have central clearing, interest rates and equity derivatives, most buy-side clients access CCPs through their main dealer. That will also be the case with CDSs, but there have been widespread rumours that the buy-side focused CCPs have struggled to get dealer backing.
From the outset, Ice Trust said membership of its platform would be exclusive – limited to institutions with a net worth in excess of $5 billion, a credit rating of A or higher, and sufficient operational capabilities and risk management experience.
While it currently has no buy-side members, the official said the CCP “is open to all market participants that meet the membership requirements as detailed in the rule book. Ice Trust is developing a segregated funds regime for Europe and the US that will support buy-side participation in clearing”.
The Operations Management Group (OMG), consisting of 15 major dealers, nine buy-side firms and three industry bodies, which has since 2005 set targets for improving the operational infrastructure of the over-the-counter derivatives market, committed in June to achieving buy-side access to CDS CCPs by December 15.
A source at the Federal Reserve Bank of New York, who has been party to discussions with the OMG on the issue, said that although clear progress has been made in the interdealer space, “there is less satisfaction in getting the models in place that will bring the benefits of clearing to the buy side”.
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