In OTC Battle, CME Sees Success In Commodity Index Swaps

As CME Group Inc. (CME) struggles to gain traction in clearing credit default swap transactions, it has found more success in over-the-counter products closer to its core futures business: commodity index swap deals.

The Chicago-based exchange operator's clearinghouse in the last week has handled about $206 million in swap contracts tied to the S&P GSCI Commodity Index since introducing the service via its ClearPort platform last year, according to exchange officials.

That figure outpaces the $190 million in credit derivative transactions cleared via a long-delayed CME venture that launched in December, amid an intense focus by regulators and legislators pushing for tighter rules around the $25.5 trillion credit default swap market.

Clearing--the process in which a central counterparty guarantees trades--is a keystone of financial reforms being considered for U.S. and European financial markets, seen as one way of reducing systemic risk tied to off-exchange trading.

CME's credit derivatives clearing service far trails a rival effort from IntercontinentalExchange Inc. (ICE), which has cleared more than $7 trillion in CDS trades in the U.S. and Europe, with most transactions linked to credit default swap indexes.

The commodity index swap transactions cleared by CME were arranged by UBS AG (UBS) on behalf of a client seeking to back up a set of swap deals tied to the GSCI index, according to John Fraad, managing director and head of UBS's North American commodity index business.

The move is another sign that some bank customers are gravitating toward the idea of backing up swap trades through clearinghouses, even as other such buy-side participants push for exemptions from any requirement to clear OTC trades.

"We're finding that there are counterparties that do want [cleared] products," said Fraad. "People are going to look at some balance of facing banks or dealers directly and facing the exchanges for their risk as they look to maintain diversified portfolio of credit risk."

UBS is in talks with investment managers, commercial companies and sovereign entities that have expressed interest in clearing commodity-linked derivatives, Fraade said, with the goal of offering clearing services if customers want them.

As off-exchange markets go, commodity-linked products represent a far smaller market than other instruments targeted by exchanges for clearing.

The Bank of International Settlements last year estimated the size of the over-the-counter market for commodity-linked products at $3.7 billion, a fraction of the CDS market or the $341 interest-rate swap market.

About $126 billion is benchmarked to the S&P GSCI and Dow Jones-UBS commodity indexes, most of which is represented by swap deals, according to Fraade.

CME's Clearport platform, which handles over-the-counter trades in energy, agriculture and metals-linked instruments, introduced clearing services for commodity index swaps in late 2009.

Tim Andriesen, managing director of agricultural products at CME, said UBS approached CME with its client's request to clear certain forward-dated GSCI index products, and CME put together the capability in about six weeks.

-By Jacob Bunge, Dow Jones Newswires; (312) 750 4117; jacob.bunge@dowjones.com

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