This week marks the end of the deadline for the launch of Europe’s credit default swap (CDS) clearing counterparties (CCPs) and both IntercontinentalExchange’s (ICE) ICE Clear Europe and Eurex’s Eurex Credit Clear are due to go live today. Both parties have declared they have already begun operations and will soon be ready to clear European iTraxx indices.
The CCPs are aimed at addressing the operational and risk management needs of the credit derivatives market, as well as providing a response to calls by regulators for transparency, standardisation and systemic risk reduction. In line with their position as first to the table to meet the July deadline, ICE and Eurex are thought to be the frontrunners in the CDS CCP race.
The joint venture between Liffe and LCH.Clearnet, BClear, was, technically speaking, the first CCP to launch on the European market, but has since been put on review due to its failure to clear a single trade. LCH.Clearnet’s ambitions have not ended there however, as it is considering using Paris-based Clearnet as a more European flavoured CCP option. CME Group is also some way behind the others in the race, as it is yet to gain approval from the UK Financial Services Authority (FSA), although it has recently appointed ex-LCH.Clearnet CEO, Andrew Lamb, to head its European CCP endeavour.
For now, the market will have to make do with Eurex and ICE’s offerings. The FSA has completed its regulatory review of ICE Clear Europe’s CDS clearing operations, risk management and governance, and Eurex has undergone and passed a similar review. The US Securities and Exchange Commission (SEC) has also granted both parties conditional exemptions to operate their CCPs in Europe.
ICE Clear Europe, which also provides clearing services for ICE’s futures and OTC energy markets, indicates it has established a separate risk pool for clearing CDS, including guaranty fund and margin accounts, as well as a dedicated risk management system and governance structure.
Together with ICE Trust US, the CCP and exchange operator says it is attempting to bring a common infrastructure to global CDS market participants within their respective regulatory jurisdictions, while leveraging clearing systems and risk management processes already in use by the industry. ICE Trust has cleared US$1.6 trillion in North American CDS indexes to date, and is preparing to introduce enhanced protections to support the addition of buy side participants.
Paul Swann, president of ICE Clear Europe, says: “We have developed a sound risk model that recognises the unique requirements of clearing European CDS instruments. By separating the risk pool from our energy markets and employing a bespoke CDS margining system, we are taking the steps necessary to offer the transparency and security provided by clearing, while containing risk exposure within the CDS markets.”
Initial CDS clearing members at ICE Clear Europe include: Bank of America, Barclays, Citi, Credit Suisse, Deutsche Bank, Goldman Sachs, HSBC, JPMorgan, Morgan Stanley and UBS.
According to ICE, each clearing member has made a significant contribution to establish the European CDS guaranty fund. The guaranty fund will continue to scale in conjunction with the transfer of CDS positions to ICE Clear Europe. In addition to member contributions, ICE has contributed US$10 million toward the ICE Clear Europe CDS guaranty fund, in addition to its US$10 million contribution to the ICE Trust guaranty fund to date. ICE says it remains committed to a guaranty fund contribution of US$100 million over a two year period, which will be split evenly between its US and European CDS clearing houses.
ICE has also announced that Suzanne Hubble has joined ICE Clear Europe as director of CDS development. Hubble is responsible for the strategic development of ICE Clear Europe’s European CDS clearing business. Prior to joining ICE, she spent 10 years at JPMorgan where she was most recently responsible for e-Commerce and Strategic Initiatives for the European Credit Trading business.
Eurex Credit Clear became operational on 27 July and is ready to begin clearing today for a European CDS product suite of the iTraxx benchmark indices and 17 single name iTraxx index constituents from the utility sector. It will later expand its coverage to the full iTraxx benchmark index constituents.
Eurex Credit Clear indicates it is interlinked with the North American Depository Trust & Clearing Corporation (DTCC) Trade Information Warehouse to deliver STP and seamless integration into the existing OTC market infrastructure. For Eurex Credit Clear, Eurex Clearing has also developed a CDS specific risk management model. This model was drawn up in cooperation with risk management vendor Calypso Technology and was implemented within the space of four months. Eurex Credit Clear is currently providing production simulation for 20 market participants.
Thomas Book, member of the Eurex Executive Board and responsible for clearing, says: “The key challenge in developing Eurex Credit Clear was to design and build a new risk management solution specifically to meet the unique risk characteristics of CDS. This new service significantly strengthens our clearing capabilities with a sound, reliable and flexible engine to deliver central clearing initially for credit derivatives and subsequently also for further OTC traded asset classes.”
So, two have set off already and more are waiting at the starter gate to set off later this year in the CDS CCP race. But will it be a sprint finish or a tortuous slog to the end?