Nasdaq's IDCG Broadens Swap-Clearing Service As Business Rises

A derivatives clearing venture backed by Nasdaq OMX Group Inc. (NDAQ) has broadened the way it handles customers' swap transactions as the still-small platform gathers business.

The International Derivatives Clearing Group, or IDCG, in recent weeks has moved to allow customers to back up interest-rate swap transactions in their existing form, alongside an existing service that converts swap deals to futures contracts, according to the company's chief executive.

The shift comes as nearly $400 million in rate-swap transactions have been moved into the IDCG's clearinghouse, which serves as a central repository for customer collateral posted against outstanding trades.

Clearing trades in over-the-counter derivatives such as interest-rate swaps has found favor among regulators around the world after products including credit-default swaps were blamed for deepening the 2008 financial crisis. Exchanges have pushed to develop new clearing services for the markets, geared to protect investors should a major participant fail.

IDCG is targeting the interest-rate swap sector, estimated at $349 trillion in size globally, making it the largest of the OTC derivatives markets.

The change in the way it accepts swap deals for clearing could help IDCG compete with larger and more established rivals such as LCH.Clearnet Group Ltd. and CME Group Inc. (CME).

The move also gives IDCG added flexibility as regulators scrutinize the process of converting swaps to futures for clearing. Concerns have arisen in recent months that such futures contracts may not measure up to federal rules that govern the open trading of listed derivatives.

"Accepting cleared swaps alongside an exchange of futures for swaps model is in line with IDCG's approach of giving participants a full range of options of how to bring central counterparty clearing efficiency to their OTC portfolios," said IDCG Chief Executive Garry O'Connor, in an interview.

"We have also been mindful of the increased scrutiny of EFS and enhanced regulatory treatment of cleared swaps post the passing of the Dodd-Frank legislation," he said.

O'Connor said more than $10 trillion in interest-rate swap deals have been submitted into IDCG's "test-clearing" environment, which acts as a staging zone for existing and prospective customers to get familiar with the facility's rules and handling of collateral.

The unit counts four clearing members after State Street Corp. (SST) joined up last month; Bank of New York Mellon Corp. (BK) and brokerage firms Newedge and MF Global Holdings Ltd. (MF) are also onboard.

Newedge last month reported that it had cleared around $100 million in rate-swap transactions through IDCG in the firm's initial set of transactions.

O'Connor said the majority of the business done through IDCG to date represented deals that wouldn't have been done via clearinghouse rivals such as LCH.Clearnet, or without the clearing function at all, suggesting that the service could bring more investors into the market.

IDCG is now laying the technical groundwork that will allow U.S.-regulated "swap execution facilities" to connect to the clearing platform, according to O'Connor, who said IDCG may eventually consider opening a London facility.

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

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