UPDATE: ICE Plans To Clear European Swaps In 1st Half Of 2009
February 19 2009 - 6:46PM
Dow Jones News
IntercontinentalExchange Inc. (ICE) plans to begin clearing
European credit default swap trades by July through a new entity
called ICE Trust Europe, the exchange announced Thursday.
ICE's proposal comes as European regulators call for a
euro-zone- based clearing solution for the swaps, which serve as a
kind of insurance against corporate defaults and trade in
over-the-counter markets.
Atlanta-based ICE welcomed those calls Thursday, saying in a
statement that the planned clearinghouse's separate guaranty fund
and margin accounts for credit derivatives will help reduce risk in
the estimated $30 trillion credit derivatives market.
"It was a recognition that the European marketplace, consisting
of dealers, buy-side clients and regulators, desired a European
central counterparty," said Sunil Hirani, chief operating officer
of ICE's Creditex unit.
In the U.S., ICE is awaiting regulatory approval for ICE US
Trust, a credit derivatives clearinghouse developed in conjunction
with the bank-backed Clearing Corporation, which ICE is in the
process of acquiring.
ICE Trust Europe will function within ICE Clear Europe, the
exchange's European clearing facility that launched in November and
is regulated by the U.K. Financial Services Authority.
"We're in a unique position, that we have a European central
counterparty already that's a recognized clearinghouse, and we've
already been working with the FSA and other European regulators to
extend the business of our European clearinghouse," Hirani
said.
He added that ICE will be able to build on the regulatory work
done with the FSA in establishing ICE Clear Europe last year,
hastening the process for ICE Trust Europe.
Deutsche Boerse's (DB1.XE) derivatives unit, Eurex, is also
looking to clear CDS trades in Europe, with a platform slated to
launch by the end of the first quarter. London-based clearing firm
LCH.Clearnet last week announced its own plan to develop a swaps
clearinghouse by the end of 2009.
NYSE Euronext (NYX) and LCH.Clearnet currently are partnered in
the only functioning CDS clearing platform; that partnership will
continue as LCH.Clearnet develops its own platform, according to
officials.
However, this effort is based in London, a sticking point for
some European regulators who want a euro-zone-based solution.
ICE Trust Europe will also be based in London, according to
exchange officials, but will seek to provide clearing across all
European credit markets.
U.S. regulators also have expressed their preference for a
domestic clearing solution for credit derivatives.
Earlier this month, ICE Chief Executive Jeffrey Sprecher aired
concerns about an emerging sense of regulatory "nationalization" at
play on both sides of the Atlantic.
With regard to credit derivatives clearing, Hirani said the
first step is getting U.S. and European clearinghouses up and
running; after that, regulatory harmonization may follow.
Some progress was seen on this front Thursday, when the Federal
Reserve Bank of New York announced discussions between global
regulators, including the FSA and the European Central Bank,
centered around cooperating on credit-default-swap clearing.
The primary objectives include mutual support for CDS clearing
oversight and applying consistent standards and objectives to the
clearing platforms, according to a Fed release.
Earlier Thursday, a group of nine dealer banks voiced their
support for the central clearing of credit derivatives in a letter
to European Commissioner Charlie McCreevy.
While ICE competes in CDS clearing against Eurex, NYSE Euronext
and LCH.Clearnet in Europe, in the U.S. it will go up against a
joint venture between CME Group Inc. (CME) and hedge fund Citadel
Investment Group, as well as a planned U.S. effort from NYSE
Euronext.
Hirani said that despite the increasing number of competitors to
clear credit derivative trades, he didn't view it as a crowded
field, as other entrants don't possess the credit-specific
infrastructure that ICE and Creditex already have in place.
-By Jacob Bunge, Dow Jones Newswires; 312-750-4117;
jacob.bunge@dowjones.com