CME Group one step closer to CDS clearing

US exchange operator Chicago Mercantile Exchange (CME) Group has come one step closer to entering the credit derivatives market by signing a deal to clear credit default swaps (CDSs) on financial information services company Markit's CDX and iTraxx indexes.

Under the terms of the agreement, which was announced on Wednesday, newly issued and existing CDSs can be transferred onto the CMDX clearing platform - a joint venture between CME Group and Chicago-based hedge fund Citadel Investment.

The platform still awaits approval from the US Securities and Exchange Commission (SEC), although this could be granted very soon. "CME Group should soon be in a position to allow the commission to take action on its requests," said John Nester, an SEC spokesman. According to one source, this could begin within a week. CME Group has already received clearance from the Commodity Futures Trading Commission and the Federal Reserve.

CMDX is just one of four platforms competing for a share of the CDS clearing business. In the US, Atlanta-based derivatives exchange IntercontinentalExchange (Ice) launched its credit default swap central clearing platform on March 9 after receiving the green light from the SEC three days earlier.

Ice Trust, a New York limited liability trust company set up by Ice for clearing CDS trades, will initially clear trades linked to series 10 and 11 of the Markit CDX North American investment-grade, high-volatility and high-yield indexes, with single-name trades to follow. At first, the exchange will focus on existing trades executed between eligible clearing members that are stored in the Depository Trust and Clearing Corporation's Trade Information Warehouse. No timetable for clearing new CDS trades has been announced.

In Europe, NYSE Liffe, the global derivatives business of NYSE Euronext, in association with London-based clearing house LCH.Clearnet, launched its clearing platform on December 22 but has thus far failed to attract any business. Frankfurt-based derivatives exchange Eurex has postponed the launch of its CDS service to the second quarter of the year, having initially planned to launch in Q1, but revealed this week it was in the advanced stages of talks to sell stakes in its clearing venture to brokerages.

The Markit CDX and Markit iTraxx indexes are the two highest-volume families of CDS indexes. The CDX indexes cover North America and emerging markets, while the iTraxx indexes cover Europe and the Asia-Pacific region.