CME’s CDS platform approved

The Chicago Mercantile Exchange Group (CME) received the green light from the Securities and Exchange Commission (SEC) on March 13 to clear credit default swaps (CDSs), but now faces the hard task of getting customers to sign up to its platform.

Electronic clearing platform CMDX - a joint venture between CME and Chicago-based hedge fund Citadel Investment for clearing CDS contracts - had already received approvals from the Federal Reserve Bank of New York and the Commodity Futures Trading Commission on December 23. In addition, CME signed a deal with financial information services company Markit on March 11 to clear CDSs referencing the latter's CDX and iTraxx indexes.

However, even with the necessary regulatory approvals in place, CME will not roll out CMDX immediately. Instead, the derivatives exchange will market the product to both buy-side and sell-side firms and encourage users to sign up.

The exchange declined to provide a launch date for its platform. But currently, the platform has no signed commitments; meaning potential users have yet to begin systems work to enable them to hook up to CMDX.

CME plans to clear 75% of the highest-volume CDX and iTraxx index trades and their single-name constituents from launch. Indexes included are current on-the-run and the previous three off-the-run series of investment grade, investment grade high volatility, high yield and crossover CDX contracts, as well as iTraxx Europe, Europe high volatility and Europe crossover indexes, all with 3, 5, 7, and 10 year tenors. Additionally, the exchange intends to clear iTraxx indexes for European senior financial and subordinated financial contracts with 5 and 10 year tenors.

For index trades, each side of a bilateral over-the-counter contract will be replaced with a standard contract facing CME Clearing, the exchange’s central counterparty. For single-name trades, an existing bilateral position with a non-standard coupon will be converted into one or two contracts with standard coupons, which will have the same net notional value and cash flows as the original trade.

The CMDX service will draw on the $7 billion common guarantee fund backstopping all clearing activity at the CME, rather than creating a segregated fund solely for counterparty defaults on CDS contracts.

When it launches its CDS clearing service, CME will face competition in the US from Atlanta-based rival IntercontinentalExchange which launched its CDS central clearing platform - Ice Trust - on March 9. Ice Trust 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.

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 yet to clear any trades. 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.

See also: CME Group one step closer to CDS clearing
Ice launches US CDS clearing service