CME Credit Derivatives Platform Launch Seen In Late April
April 01 2009 - 4:13PM
Dow Jones News
A credit derivatives clearing platform developed by CME Group
Inc. (CME) will not launch until late April at the earliest, a
senior executive said Wednesday.
Although the exchange's Credit Market Derivatives Exchange
facility is operational, CME is working to gather a "critical mass"
of clearing members and market participants before launching,
according to Kim Taylor, president of CME's clearing division.
Taylor said the exchange continues to hold discussions with
three to six dealer banks to secure support for CMDX, along with a
larger and more fragmented group of buy-side participants.
CME, which developed the platform with the hedge fund firm
Citadel Investment Group, has pitched CMDX as more inclusive to
buy-side firms like hedge funds and proprietary trading shops,
compared to a rival platform from IntercontinentalExchange Inc.
(ICE).
One key difference Taylor noted is that CMDX membership is open
to a wider swath of participants than a rival facility launched by
Atlanta-based ICE and backed by a group of nine dealer banks.
Clearing membership on ICE US Trust currently requires a $5
billion net worth and a minimum $20 million contribution to the
guaranty fund, although officials have said these will be revisited
once the facility is capitalized.
Taylor said that the minimum capital requirement for CMDX
clearing members will be $300 million, with an additional security
deposit required depending on the member's book of exposure to
credit derivatives.
CME is looking to sell an equity stake that is initially "larger
than 50%," according to Taylor. That figure is expected to grow as
non-founding partners can earn a larger stake as the business
grows.
According to Taylor, the diverse membership of CME's existing
clearinghouse has seen CME develop risk management practices that
are more broadly based than a clearinghouse like ICE's, where
dealer banks make up the current membership.
While Taylor said it wasn't likely that a large number of
non-dealers would pursue clearing member status on CMDX, it is
important to include them.
"They are large participants in the OTC credit market," she
said, "and events around the Bear Stearns and Lehman Brothers
situations caused a number of those participants to have a
different view of how they want to manage counterparty credit
exposure than they historically had."
To that end, CMDX will offer segregation of customer funds,
providing protection to investors if the clearing member firm
through which they trade credit derivatives were to go bankrupt,
Taylor said.
ICE US Trust does not currently provide for segregation of
customer funds, though officials have said clearing member firms
plan to offer it as an option.
While CMDX will facilitate electronic trading of credit
derivatives as well as clearing, Taylor said she expects the
clearing portion to take off more quickly, as it can be applied to
the way the market currently trades.
-By Jacob Bunge, Dow Jones Newswires; 312-750-4117;
jacob.bunge@dowjones.com