ICE Lays Out Plans for Buy-Side Clearing of Credit Default Swaps

IntercontinentalExchange (ICE) said it plans to introduce a buy-side solution for credit default swap clearing. The solution will enable buy-side participation in credit default swap clearing, and is expected to rollout in October 2009, pending regulatory approval.

According to the exchange, ICE’s solution offers a roadmap for the industry’s transition to clearing based on participants’ specific risk management needs, allowing firms to retain trading relationships and a range of competitive execution models.

The government has been pressuring the major dealers in OTC derivatives to back central counterparty clearing facilities, according to an article in Finextra. In June, Samuel Cole, CEO of Blue Mountain Capital, accused the dealers of trying to maintain their oligopoly by withholding support from buy-side friendly rivals (i.e., CME/Citadel) to the ICE Trust. Buy-side institutions and hedge funds are counterparties to the dealers in the CDS transactions. Back in April, CME said that it wants buy-side firms to participate in CMDX, a CDS clearing facility that it formed in partnership with Citadel. CME indicated it would allow the buy-side to access its CDS clearing facility if a clearing member sponsored the buy-side firm.

ICE’s solution will provide segregation of customer funds and positions in CDS clearing as well as enhanced position and margin portability, according to ICE’s release.

The expanded legal framework protects customer positions and collateral in the event that a clearing member defaults on its obligations to the clearinghouse,

ICE said its buy-side solution addresses systemic risk by supporting both new trades and the existing backlog of outstanding OTC CDS contracts at the DTCC Trade Information Warehouse (TIW). ICE said its buy-side solution would accelerate time to market by supporting existing market infrastructure and incorporating existing International Swaps and Derivatives Association (ISDA) agreements, rather than entering lengthy renegotiations. ICE said it supports existing connectivity to all dealers, more than 400 buy-side firms and the TIW through its ICE Link platform.

Meanwhile, ICE is preparing to begin clearing European CDS transactions (via ICE Clear Europe) by July 31, 2009. ICE said it would release further details about buy-side solution for CDs clearing in Europe following discussions with regulatory authorities and market participants.

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