Originally appeared in MiFID Monitor
The credit default swaps (CDS) clearing race is well underway, following regulatory approval by European and US regulators at the end of last year. The European Commission has also received commitments from dealers and exchanges that they will shift their clearing onto the available platforms in the coming months. However, although there are four main contenders in the race, only one has thus far launched clearing in Europe: Liffe’s Bclear.
Bclear, which is owned by NYSE Euronext, became the first CDS clearing counterparty to offer CDS clearing to Europe at the end of December. The platform will initially cover the Markit iTraxx Europe, Markit iTraxx Crossover and Markit iTraxx Hi-Vol indices, says Duncan Niederauer, CEO of NYSE Euronext. The decision to launch over the Christmas period was in order to allow participants to test the system before volumes increased in January, he explains.
Three other groups are working on similar systems: CME Group in partnership with hedge fund Citadel; IntercontinentalExchange (ICE) in partnership with the Clearing Corporation and dealer banks; and Eurex, the derivatives unit of Deutsche Börse.
CME Group has also indicated it is offering equity stakes in its joint venture with Citadel in order to bolster its competitive proposition. According to the group, it is in “advanced discussions” with six dealers regarding the stakes, although no names have yet been confirmed.
This is seen as a reaction to the dominance of ICE, whose joint offering with the Clearing Corporation is publicly backed by a large proportion of the main CDS dealers in the market. CME is therefore offering equity to founding members of its CDS clearing operation to encourage volumes onto its platform.
Regulators hope that the introduction of central clearing counterparties in this sector will reduce counterparty risk. However, there have been some concerns raised by dealers at the number of contenders in the CDS clearing race. Industry participants 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.
Despite these concerns, the European Central Bank (ECB) has repeatedly insisted that at least one European clearing solution should be available in order to prevent US dominance of the space. Eurex is such a contender and has confirmed that it will begin offering CDS clearing in March via the launch of a separate entity.