IntercontinentalExchange Inc.'s (ICE) proposal to clear credit-default swap trades surpassed a major regulatory hurdle Wednesday after the U.S. 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. In the wake of 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 CDS 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.

Trans-Atlantic exchange operator NYSE Euronext (NYX) has received approval from regulators to launch its own U.S. swaps clearing platform, but that effort remains in development, according to officials.

"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 U.S. Justice Department approved a portion of its clearing plan by allowing for the merger of ICE and the Clearing Corp.

ICE said it plans to close the deal with the Clearing Corp. within a week and launch ICE US Trust shortly thereafter pending SEC approval. ICE shares were up in after-hours trading, rising to $59.23 from $57.37 at Wednesday's close. CME shares were little changed from the close.

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's and ICE's plans "in short order."

Once the SEC does approve the plans, however, the question will remain whether financial companies will opt to use the clearinghouses.

In Europe, NYSE Euronext in December launched a credit-default swap clearinghouse in conjunction with LCH.Clearnet, but that service has yet to see any volume, according to NYSE Euronext.

Exchange officials have cited connectivity and integration issues for the slow start, but banks are seen as reluctant to support a CDS clearing solution that isn't backed by the dealers.

ICE, however, has secured support in the U.S. from nine major banks including Bank of America Corp. (BAC), JP Morgan Chase & Co. (JPM), Citigroup Inc. (C), Morgan Stanley (MS) and others, which indicates that ICE US Trust is likely to see some volume.

To address the 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 beginning 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 autumn. 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.)