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CME Group Opts for Fitch Solutions and CMA Pricing Solutions for Clearing Operations

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As part of its endeavour to establish itself as a clearing counterparty (CCP) in the OTC derivatives market, CME Group has this month selected two pricing solutions to support its CCP’s credit default swap (CDS) pricing and intraday risk management services: CMA’s DataVision and Fitch Solutions’ CDS Pricing Service. Anna Mazzone, vice president of product management and marketing at CMA, explains to Reference Data Review how DataVision will support CME Group’s OTC CDS Clearing service.

The selection of CMA DataVision to support CME Group’s CCP endeavour will have come as no surprise to most, given that the exchange operator owns CMA. However, its selection of Fitch’s solution indicates that CME has been through an assessment process like any other and that its selections are therefore reflective of those vendors it judges to be best at pricing CDSs.

CME Group will use the CDS Pricing Service from Fitch Solutions, a division of the Fitch Group, to help price CDS trades that are cleared through CME Clearing. Fitch’s CDS pricing service also includes Fitch CDS Benchmarking for highly illiquid names, a tool which provides indicative spread values where there is insufficient market information to determine a consensus price based on market maker contributions.

Likewise, CMA’s DataVision offering is also supporting the pricing process within the CCP. Mazzone reckons the selection of CMA is a strong endorsement of the vendor’s consensus-based CDS pricing model. The vendor differentiates itself from competitors on the market by using a buy side consensus-based model rather than a dealer-based model such as that used by biggest rival Markit (which has recently seen an injection of capital from the private equity sector). “CMA’s data was selected due to its independent provenance and quality,” she contends.

The Fitch solution, on the other hand, uses pricing data from the member banks of Fitch’s global pricing services consortium, similar to the Markit model. The selection of two solutions based on different models is likely a tactic on the part of CME to ensure that it can claim that its pricing is independent and fully transparent.

In order to be able to support the development of the clearing house, CMA has been working closely with CME Group for more than a year, says Mazzone. Unlike the Fitch deal, the agreement also extends to areas other than market data, she adds.

In the meantime, the integration process for the CMA data into the CME CCP system was smooth and went without a hitch and Mazzone is positive that the introduction of CCPs in this space will prove beneficial for the market as a whole. “Central clearing of CDS will have a positive impact on our clients who will benefit from a significant reduction in counterparty risk, cost benefits due to margining efficiencies and increased transparency on CDS markets,” she says.

This work fits nicely into CMA’s wider strategy for 2010, she continues: “CMA will be expanding and deepening relationships with a broad variety of swap market participants in order to provide firms transparency in OTC pricing to facilitate trading and accurate risk management.”

It will also be expanding into other OTC asset classes: “So you can expect to see CMA provide independent pricing and technological support for other assets aside from CDS.”

The vendor is also in the process of seeking out a new CEO to replace current incumbent Laurent Paulhac, who is heading off to become managing director of OTC products and services for CME Group. In the interim before a replacement is selected, Paulhac will continue as head of the vendor during a transition period.

The selection of the Fitch and CMA solutions by CME Group should prove a boost to both valuations providers, as it will guarantee the usage of their valuations feeds for trades that are cleared via the CME CCP.

To read more about the CCP race and how it fits into the regulatory revamp going on in the market.

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