CME Says Banks Remain Key Hurdle To CDS Clearing
February 03 2009 - 2:25PM
Dow Jones News
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
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