UPDATE: CME Signs 8 Banks To Credit Derivatives Clearing Push

CME Group Inc. (CME) announced Thursday that its long-delayed credit derivatives clearing effort would officially launch Dec. 15, with the support of eight dealer banks as founding members in the effort.

The Chicago-based derivatives exchange operator said that it had signed agreements with Barclays Capital, Citigroup Inc. (C), Credit Suisse, Deutsche Bank AG (DB), Goldman Sachs Group Inc. (GS), J.P. Morgan Chase & Co. (JPM), Morgan Stanley (MS) and UBS AG (UBS) to support the initiative.

In a news release, CME said that Bank of America Merrill Lynch, Nomura Group, and Royal Bank of Scotland (RBS) will also become clearing member firms in the credit default swaps service.

CME joins rivals IntercontinentalExchange Inc. (ICE) and Deutche Boerse AG's (DB1.XE) Eurex unit, which began clearing credit derivatives transactions earlier this year.

Clearing, the process in which a central counterparty stands as the seller to every buyer and the buyer to every seller, has been identified by regulators and lawmakers as one way to reduce systemic risk in the over-the-counter derivatives market, which has taken heat for exacerbating the global financial crisis.

In Washington, proposals are being considered that would mandate clearing of over-the-counter derivatives trades, though dealer banks and other participants have already moved to utilize existing clearinghouses for swaps.

Atlanta-based ICE, which announced its own partnership with dealer banks in March, has taken the early lead, clearing about $4 trillion in CDS trades since launching its service.

While dealer banks make up the lion's share of the market, CME, which is also angling to clear interest rate swaps and over-the-counter foreign exchange transactions, has sought to focus its credit derivatives effort on buy-side participants like hedge funds and financial institutions.

In September, the exchange announced agreements with AllianceBernstein Holding LP (AB), BlackRock Inc. (BLK), BlueMountain Capital Management, D. E. Shaw & Co. and Allianz SE's (AZ) Pimco, in addition to Chicago-based Citadel Investment Group.

CME, the world's biggest futures exchange by volume, has been planning its entry into the credit derivatives clearing business for more than a year.

The effort has seen multiple delays as regulators debated how the swaps market would be overseen and banks balked at a trading platform developed between CME and Citadel.

In an effort to gain dealer support as rival clearing providers got a head start, CME in September shelved the trading platform in favor of clearing swaps business as it's currently done, with most deals negotiated privately between parties.

CME's credit derivatives clearing service will provide immediate processing of CDS trades, according to Chief Executive Craig Donohue, and will incorporate industry practices set forth by the International Swaps and Derivatives Association.

The CME service will clear trades in the CDX and iTraxx indexes, as well as single-name constituents of those indexes and "select liquid single names," according to the exchange operator.

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

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