Battlelines Are Drawn As CME/Citadel Win SEC Approval for CDS Clearinghouse

With and hedge fund manager Citadel Investments receiving final regulatory approval from the Securities and Exchange Commission (SEC) last Friday to clear credit default swaps (CDS) through their joint venture CMDX platform, the business of central counterparty (CCP) clearinghouses is in full swing.

“It’s about time and let’s get started and see how this plays out,” commented Kevin McPartland, senior analyst at TABB Group in New York.

Industry observers are expecting full-blown competition to break out as the various CCPs begin courting customers for order flow to send through their respective clearinghouses. “Now we’ve got three legitimate businesses in play,” commented Alexander Harrison, managing director at IDX Capital LLC, an electronic interdealer brokers in credit default swaps based in New York.

In the U.S. market, ICE Trust, spearheaded by the IntercontinentalExchange, has gone live with bulge-bracket dealer support, while CME, the world’s largest derivatives exchange, received the SEC’s nod last week. In Europe, NYSE Euronext via Liffe’s Bclear platform is live in Europe. In addition, Swiss-German futures exchange Eurex is also planning to launch a European-centric central clearinghouse for CDS in Europe. (Eurex is looking for dealers to invest in its initiative, in return for sending clearing flow into the system).

“The battle lines certainly have been drawn. Dealers have certainly aligned around the ICE,” commented Harrison, who spelled out the differentiating features in an email. In New York, ICE Trust has materialized as the predominant dealer-supported play and has begun clearing index swaps already, said Harrison in the email. “ICE has set the participation barrier very high, and thus will prevent firms outside the bulge bracket from clearing trades,” added Harrison.

“Conversely, the CME out of Chicago is pursuing broader participation via an FCM model where the participation hurdle is still in the millions, in terms of required balance sheet capital, but implies buy-side participation that would be disruptive to incumbent market structure,” he added.

Ivy is Editor-at-Large for Advanced Trading and Wall Street & Technology. Ivy is responsible for writing in-depth feature articles, daily blogs and news articles with a focus on automated trading in the capital markets. As an industry expert, Ivy has reported on a myriad ... View Full Bio

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