Following the announcement of its European ambitions in February, IntercontinentalExchange (ICE) has indicated that it has finally received regulatory approval from the board of governors of the Federal Reserve for ICE US Trust to act as a clearing house and central counterparty (CCP) for credit default swap (CDS) transactions in the US. The exchange operator is also awaiting regulatory approval for its acquisition of the Clearing Corporation (TCC), which it expects to receive this week.
TCC has developed the CDS risk management framework, operational processes and infrastructure for ICE Trust’s clearing operations. Upon closing the transaction, ICE Trust will begin processing and clearing positions held by the members of the clearing house. Clearing of North American CDS indexes will be followed by liquid single name CDSs, says ICE.
The European version, which it announced last month, will use its existing London-based clearer, ICE Clear Europe, and extend its remit to CDSs. According to the exchange operator, it is also currently in talks with the UK Financial Services Authority (FSA) to gain approval for this move.
As ICE bids for Europe, Eurex has declared that, despite its former intentions to register in the US, it is now going to focus solely on the US market. Thomas Book, the board member at Eurex, explains: “We would like to focus on a European Union solution with global products while other competitors are actively going for separate US and European solutions. Our priority is not to be the chosen one in the US, but to be the chosen one in Europe.”
Regardless of these European plans, however, another European contender has already stolen a march on Eurex and ICE. Bclear, which is owned by NYSE Euronext, became the first CDS CCP to offer CDS clearing to Europe at the end of December. The platform was launched to initially cover the Markit iTraxx Europe, Markit iTraxx Crossover and Markit iTraxx Hi-Vol indices.
It can be assumed from the progress over recent months, the CDS CCP race is finally coming to the mid-point and, accordingly, regulators have also begun to shine a spotlight in the area. This was signalled by the pledge last month by US and European regulators that they will work in concert to oversee the sector.
However, the proposals have stirred up a hornet’s nest in the interdealer broker community and the Wholesale Market Brokers Association (WMBA) is being prompted by its members to champion their cause. Although regulators are hoping that the introduction of CCPs in this sector will reduce counterparty risk, brokers are concerned about the number of contenders in the CDS clearing race. They fear that the requirement to post margin collateral at multiple clearing houses will involve significant costs and that splitting the market may have unwanted side effects, such as breaking liquidity into dollar and euro pools.
Moreover, Icap, Tullett-Prebon and GFI have all this month stated their intention to fight the introduction of more regulation in the OTC derivatives market via the WMBA and strong lobbying. The association has therefore decided to adopt a more aggressive stance and accordingly has hired a new CEO in the guise of Alexander McDonald, formerly chief executive at hedge fund BSAM Global Alpha.
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