The head of CME Group Inc. (CME) said Tuesday the readiness of investment banks rather than regulators remains the key hurdle for plans to clear credit derivatives.

The Chicago exchange operator is among three groups trying to migrate over-the-counter credit derivative swap business onto centrally cleared platforms, partly at the behest of regulators.

Craig Donohue, CME chief executive, said in an interview that "the longest yard" is the back-office interfacing work required for banks to connect to the platforms.

Regulators have yet to approve the CME's CDS platform and a rival offering led by IntercontinentalExchange Inc. (ICE) that is backed by a group of nine banks.

U.S. regulators had hoped to have at least one CDS clearing solution operating by the end of last year in an effort to improve market transparency and reduce systemic risk.

"The reality is that the whole industry needs to make a lot of adaptations to move toward central counterparty clearing services," said Donohue. "It's not just the regulators holding things back."

CME has said it's been ready to launch its CDS platform, a joint venture with Citadel Investment Group called CMDX, since November 2008.

The venture won approval from the New York Federal Reserve and the Commodity Futures Trading Commission in December, but awaits an exemption from the Securities and Exchange Commission.

CME officials said Tuesday they hope to win SEC approval for CMDX soon.

The ICE platform requires approval from the New York Fed and the SEC.

NYSE Euronext (NYX) has secured regulatory approval for its effort, but has yet to launch in the U.S. It has opened for business in Europe, but saw no trades in its first month of operation as dealer banks worked to establish connectivity.

Donohue saw a similar issue ahead for CDS clearing in the U.S., noting the market stress and headcount reductions that have hit the sector in recent months.

Hooking up to CDS clearing platforms will require banks to support daily mark-to-market and processing requirements, which represent "a totally different paradigm than currently exists in credit default swap markets," Donohue said.

Despite regulators' push to introduce central counterparty clearing to over-the-counter derivatives markets, Donohue maintained that CME is not looking for a government mandate that all OTC products be cleared.

"We really think that should be a private sector initiative," Donohue said.

CME Executive Chairman Terry Duffy is expected to reiterate that position as he testifies before the U.S. House Committee on Agriculture later Tuesday.

Donohue said that CME is looking for other ways to address over-the-counter traders' aversion to counterparty credit risk in the current market climate.

The exchange is considering a fresh approach to OTC foreign exchange products after shuttering FXMarketspace, a joint venture with Thomson-Reuters (TRI), last fall.

CME officials also said the exchange will look to draw more interest to Swapstream, its interest rate swap trading platform.

CME Group reported Tuesday that net revenue declined 69% over the fourth quarter of 2008, as hedge funds and other market participants reduced trading activity on the exchange.

CME's average daily volume for January declined 41% from the same period a year ago, with interest rate futures trading down 59% and equity index volume down 26%.

Shares of CME were recently up 4.6% at $175.94.

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

Click here to go to Dow Jones NewsPlus, a web front page of today's most important business and market news, analysis and commentary. You can use this link on the day this article is published and the following day.