Clearinghouses Seek To Merge Margin Accounts For CDS Clients

ICE Clear Credit, the North America credit-default-swap-clearing arm of IntercontinentalExchange Inc. (ICE), and CME Group's (CME) CDS-clearing unit want to combine the margin accounts that customers use to backstop single-name and index CDS trades, for capital efficiency purposes, executives of the firms said Thursday.

Single-name CDS are insurance-like derivatives designed to compensate holders when an individual company defaults on its debt, whereas index CDS contracts reference a number of companies and are designed to pay out pro-rata based on the number of defaults in the basket.

ICE Clear Credit filed separate petitions with U.S. regulatory agencies on Tuesday in a bid to get permission for so-called "commingling" and portfolio margining effects for single-name and index CDS, said Corry Bazley, director of sales and marketing at the ICE unit at Structured Credit Investor's 2nd annual CDS seminar in New York on Thursday.

ICE had filed draft petitions in May, she added.

Representatives of the regulatory agencies -- the Commodity Futures Trading Commission and the Securities and Exchange Commission -- didn't immediately return requests for comment on the filings.

Commingling of customer margin would help bring down costs for users of CDS, in consideration of the common practice of trading single-name and index swaps in tandem. Without regulatory approval, customers would have to post capital contributions to separate accounts based on the risks in individual instruments, rather than benefiting from any offsets. For example, if the customer was long a CDS index and short its component names, it would get no capital relief.

Bazley said that ICE had approached dealer banks and customers to attend a meeting in Washington in the coming months aimed at discussing this issue. "We are beating that drum," she said on a panel at the conference, noting that it is one the unit's "number-one priorities."

Jennifer Peve, director of over-the-counter derivatives product management at CME Group, said on the same panel that CME "wants to also commingle index and CDS single names."

The ICE petition requests that the agencies issue "exemptive" orders, allowing ICE and its customers to hold customer capital backing broad-based index CDS, regulated by the CFTC, and single-name CDS, regulated by the SEC, in a commingled "omnibus" account at ICE Clear Credit.

Disallowing this "will require a significantly greater and unnecessary capital outlay that will discourage participation in the U.S. swap market and potentially add to systemic risk during times of stress," the ICE petition reads.

Because of the regulatory hurdle, ICE has been unable to offer customers clearing services on 128 different single-name CDS contracts. It has, however, been able to offer single-name CDS clearing for dealer-to-dealer trades because portfolio margining is allowed on those contracts.

ICE Clear Credit hopes to be in a position to offer commingling and portfolio margining relief with respect to customer-related cleared CDS by year end. It is already better known for interdealer clearing of CDS, where it has cleared $23 trillion of CDS since launching in March 2009.

On the customer CDS clearing side, ICE has cleared $8.6 billion since launching that service in December 2009.

CME's CDS clearing business, which is almost all customer-focused and serves 11 firms since launching December 2009, had a record September, clearing $6.5 billion in customer CDS.

The surge in CDS clearing comes more than a year after the enactment of the Dodd-Frank financial market overhaul law and as growing fears about contagion in the euro zone pressure stock and bond prices.

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

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