UPDATE: ICE Expands CDS Clearing To Buy-Side, Single Names

IntercontinentalExchange Inc. (ICE) reported Monday its ICE Trust credit-derivatives clearing facility has begun handling buy-side customer business as the exchange operator expands the service beyond bank participants.

Atlanta-based ICE also said it has begun clearing single-name credit derivatives in Europe, expanding beyond the more liquid index-based products.

The exchange operator is broadening its range of clearing services for over-the-counter derivatives like credit default swaps as regulators in the U.S. and Europe consider mandating clearing for swap transactions.

Clearing, in which a central counterparty serves as the buyer to every seller and the seller to every buyer, is seen as a way to reduce risk in the $26.6 trillion credit derivatives market.

Credit derivatives are complex financial instruments structured to protect against defaults, and the bilateral nature of the market came under criticism for exacerbating the financial crisis.

ICE's introduction of buy-side clearing services in the U.S. will let firms such as asset managers, hedge funds and pension plans clear swap transactions through dealer bank clearing members of the ICE Trust facility.

Bank-to-bank trading accounts for an estimated 80% of the credit default swap market, and ICE has cleared this business since introducing its service in March, so far handling $4.3 trillion in notional contract value.

Dealer bank members had been waiting on regulatory approval to begin clearing their buy-side customers' business prior to today's launch.

ICE reported that 10 buy-side participants were involved in testing and preparations ahead of Monday's launch, including D.E. Shaw Group, AllianceBernstein Holding LP (AB) and BlueMountain Capital Management.

In Europe, ICE received approval to expand its credit default swap clearing capabilities to include single-name contracts, beginning with companies in the European utility sector.

ICE's service started out clearing contracts on the North American CDX index and the European iTraxx index, which consist of 125 companies each, and are more actively traded than single-name CDS contracts, making them easier to clear.

Two more bank participants signed on to ICE's European CDS clearing effort, with the addition of BNP Paribas SA (BNPQY, BNP.FR) and Nomura (NMR, 8604.TO) bringing the number of European clearing members to 13.

ICE has taken the early lead over rivals in the credit default swap clearing business, thanks to support from dealer banks.

Frankfurt's Deutsche Boerse AG (DBOEF, DB1.XE) began clearing credit derivatives in late July via its Eurex Credit Clear service, although it remains a distant second to ICE, having so far handled about $140 million in business.

Chicago-based CME Group Inc. (CME) is preparing to launch its own credit derivatives clearing service, which will handle both inter-dealer and buy-side transactions, on Tuesday. Clearing entity LCH.Clearnet SA plans to introduce a France-based CDS service in January.

ICE officials estimate that the business will earn the exchange operator about $30 million for 2009, a fraction of the money it makes from energy products.

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

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