IntercontinentalExchange Inc. (ICE)'s proposal to clear credit-default swap trades surpassed a major regulatory hurdle Wednesday after the Federal Reserve Board approved the plan, advancing the federal government's goal of establishing a clearinghouse for these complex instruments.

The Fed's approval will allow ICE to form a limited purpose bank, known as ICE US Trust, to serve as a clearinghouse for credit-default swaps.

Until now, trading of credit-default swaps, or CDS, has been over-the-counter and outside the oversight of regulators. Following the financial crisis, however, some lawmakers have called for centralized clearing of these products to avoid widespread risks to the marketplace in the event of a major default. Clearinghouses help contain defaults because they assume the risk between buyers and sellers.

But who should regulate them and how they should be structured continue to stir controversy among lawmakers.

Several plans for offering clearing services for credit-default swaps have emerged, including a rival proposal from CME Group Inc. (CME). Because they are structured differently, ICE's plan will be regulated by the Fed while CME's will be overseen by the U.S. Commodity Futures Trading Commission.

Both plans, however, still need approval from the Securities and Exchange Commission before they can operate. Until then, the U.S. still lacks a place where credit-default swap trades can be cleared.

"The establishment of ICE Trust as a central counterparty for credit-default swap contracts is expected to minimize the impact on financial markets of the failure by a single participant," the Fed said in its approval of ICE's plan.

"After carefully considering all the facts of record, the board has concluded that ICE Trust's financial condition, capital adequacy, future earnings prospects and other financial factors are consistent with the approval of the proposal."

The Fed's approval of ICE's application comes just two days after the antitrust division of the Department of Justice approved a portion of its clearing plan by allowing for the merger of ICE and the Clearing Corporation.

ICE said it plans to close the deal with the Clearing Corporation within a week and launch ICE US Trust shortly thereafter pending SEC approval.

The SEC isn't expected to announce any decisions on ICE's plan Wednesday. In a recent interview, though, the SEC's trading and markets director Erik Sirri said he hoped to sign off on both CME and ICE's plans "in short order."

Meanwhile, even once the SEC does eventually approve the plans, questions still remain about whether or not financial companies will opt to use the clearinghouses.

In Europe, NYSE Euronext has struggled to build volume for its credit-default swap clearinghouse.

ICE, however, has the support of big banks including Bank of America, J.P. Morgan, Citigroup, Morgan Stanley and others, which indicates that ICE is likely to see some volume.

To address that issue, regulators and lawmakers are currently considering passing legislation to mandate clearing for over-the-counter derivatives, including credit-default swaps.

The Fed's approval of ICE's plan comes as Wall Street derivatives dealers prepare to start trading a new set of credit-default swaps with more standardized features from March 20. The new features include fixed coupons for swaps tied to individual companies' bonds, and are meant to help facilitate central clearing of the contracts.

On Wednesday, an index that measures counterparty risk in the financial markets hit its highest level since the failure of Lehman Brothers Holdings last fall. The index, created by Credit Derivatives Research LLC, gets its value from the cost of credit protection on 14 banks that are also sizable players in the derivatives markets.

-By Sarah N. Lynch, Dow Jones Newswires; 202-862-6634; sarah.lynch@dowjones.com

(Jacob Bunge from Dow Jones Newswires and Serena Ng from The Wall Street Journal contributed to this report.)