ICE Trust Seen Revamping Clearing Access Requirements

ICE Trust, the U.S. credit derivatives clearing arm of Atlanta-based IntercontinentalExchange Inc. (ICE), is working to be compliant with the Dodd-Frank financial overhaul law by mid-July, even though the rules may not be finalized until later this year.

It has already brought its membership criteria in line with draft rules for over-the-counter derivatives clearinghouses, according to a person familiar with the requirements.

A spokesman for ICE declined to comment, but Chairman and Chief Executive Jeffrey Sprecher said on an earnings call Wednesday, "There is uncertainty and a lack of clarity with regard to what the final rules will be [but] it won't be an issue for us to conform."

ICE announced first-quarter revenues of $334 million, up 19% on the year-earlier period, of which $13 million was from credit default swap clearing.

The 2010 Dodd-Frank requires that all standardized, off-exchange derivatives be processed by central clearinghouses and traded over transparent platforms. It also mandates that U.S. regulators finish writing rules for how the law can be implemented by July 15, but regulators have said they may miss this deadline.

In December, ICE was forced to withdraw a Commodity Futures Trading Commission application for clearinghouse status that the company said conflicted with "significant changes proposed to the commission regulators" last year.

Earlier that month, the CFTC voted in a proposal that derivatives clearing organizations would not be permitted to set capital requirements on new clearing members above $50 million. The Securities and Exchange Commission, which was also tasked with overseeing swaps, has similar clearing access proposals.

At the time, ICE Trust required members clearing trades on behalf of customers to maintain a minimum of $1 billion in adjusted net capital, and other firms not acting as clearing brokers to have $5 billion in tier one capital.

Now, ICE Trust is guiding customers that its adjusted net capital threshold is $50 million, on top of $20 million in one-time guarantee fund contributions and a variable rate depending on how much the member exposes the clearinghouse to risk, the person said.

Additionally, ICE Trust requires that its members be regulated by certain authorities, such as the Federal Reserve or the Office of the Comptroller of the Currency; that they have a minimum long-term debt rating of A from a nationally recognized rating agency; and that they meet operational competency tests, including the ability to submit prices to the clearinghouse and participate in default management exercises, the person said.

Clearinghouses are capitalized by their members so that they can bear the risk of a member default when the margin firms have posted is insufficient to cover losses.

Market participants see the jump to $50 million from $5 billion as a huge step because it means any firm that can meet the new criteria can be in the business of clearing--not just the handful of incumbent dealers who currently control the space. "We can get into the sandbox now," one official at a would-be clearing broker said.

It also in theory becomes possible for customers to trade with each other once they become members--cutting out major dealers--since swap execution rules and clearing go hand in hand under Dodd-Frank, and no tying between clearing and execution is allowed.

All firms offering to make markets in swaps will need a way of clearing those trades under the new law, and now many more will meet the access requirements. Until now, because these smaller firms could not self-clear trades, they had been trying to clear through the incumbent dealers that would be their eventual competitors.

The changes to ICE's model reflect discussions that have evolved between market participants and regulators, and ICE's desire to capture as much business now as possible to compete with its rival CME Clearing, owned by CME Group Inc. (CME), the person familiar said.

CME Clearing has a minimum capital requirement of $500 million, though the company also plans to be compliant with the rules when ready. LCH.Clearnet Group is not currently clearing CDS in the U.S.--it only operates CDS clearing out of Europe--but its minimum requirement is EUR3 billion ($4.5 billion) in tier one capital.

ICE Trust began clearing inter-dealer trades in March 2009 and customer trades in December 2009. In its first-quarter earnings Wednesday, the company announced it has cleared $18 trillion of cleared CDS across 295 instruments so far. Some $6 billion of those trades were customer, or buyside, trades.

"We don't have a large assumed number from buyside clearing...I suspect we will see that migration this year," Sprecher said on the call.

CME has cleared only $264.5 million of CDS trades to date, although most of that has been customer trades, a spokesman said.

When Dodd-Frank becomes effective, ICE Trust will transition from being a bank regulated by New York banking authorities to a derivatives clearing organization, regulated by the CFTC, and a securities clearing agency regulated by the SEC. As a result, ICE Trust will change its name to ICE Clear Credit in July.

-By Katy Burne, Dow Jones Newswires; 212-416-3084; katy.burne@dowjones.com

--Jacob Bunge contributed to this article.

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