ICE Trust Begins Clearing Credit Default Swaps

IntercontinentalExchange (ICE) began processing and clearing credit default swaps yesterday through ICE Trust, its central counterparty clearing (CCP) house for CDS, according to the global futures exchange and operator.

ICE Trust was formed in response to operational and risk management needs of the credit derivatives market as well as calls by regulators and policy makers for systemic risk reduction, according to the company’s release today.

The launch follows approvals by the Federal Reserve Board of Governors and the Securities and Exchange Commission late last week the ICE, and by The New York State Banking Department previously. “The exchange has launched its clearinghouse, beating out others that were racing to market with similar CDS clearinghouses,” commented Aite Group senior analyst John Jay, in a statement emailed to the media.

Founding clearing member participants of ICE Trust have begun to transfer bilateral CDS trades to the clearinghouse for processing and clearing as of March 9.The novation process to ICE Trust is underway for outstanding bilateral trading positions that settle on North America Markit CDX indices listed for clearing by ICE Trust, according to ICE’s release.

Four main players, all exchanges, are pushing forward to get CDS central clearing off the ground- namely from CME Group with Citadel, NYSE Euronext (Liffe), wrote Tabb Group Senior Analyst Kevin McPartland in a report issued last weeki.

“Even with over a two month head start by the NYSE (Euronext Liffe), ICE has caught beat them to the same starting line. Over the next two weeks, with eight major dealers supporting ICE, it will be very telling whether or not CDS central clearing will become a reality. If central clearing takes off with ICE, it will be hard for the other initiatives to catch up.”

Analysts seem to agree that ICE Trust currently has the lead. ICE Trust “has the most dealer buy-in,” wrote McPartland in the Tabb report issued last week. He noted that execution will occur through the Creditex platform and that ICE purchased broker-consortium The Clearing Corporation (TCC).

In its release, ICE points out that it’s assembled a “comprehensive CDS infrastructure” with its recent acquisitions of Creditex, a CDS execution venue, T-Zero, a CDS traded processing platform and The Clearing Corporation, a derivatives clearing house owned by a broker-consortium. ICE Trust also entered an agreement with Markit to supply daily settlement prices required for mark-to-market pricing, marginign and clearing.

Each member of the clearinghouse has made a significant contribution to the ICE Trust guaranty fund, which will continue to scale in tandem with the transfer of CDS positions to the clearinghouse, according to the release. ICE also contributed an initial $10 million toward establishing the fund and over a two-year period, will increase the guaranty fund commitment to $100 million, according to the company’s release.

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