UPDATE: SEC Approves ICE's Credit-Default Swap Clearing Plan
March 06 2009 - 5:49PM
Dow Jones News
IntercontinentalExchange Inc.'s (ICE) plan to clear
credit-default swap trades received the final approval it needed
from the Securities and Exchange Commission Friday, paving the way
for it to become the first operational clearinghouse for
credit-default swaps in the United States.
The company said in a release that its new clearinghouse, dubbed
ICE US Trust, will start offering clearing on Monday for
credit-default swap index transactions before it branches out to
other types of credit-default swap contracts.
The SEC's approval of ICE US Trust, which exempts the
clearinghouse from certain securities laws, marks a big step toward
the U.S. government's efforts to offer clearing for
over-the-counter derivatives like credit-default swaps, which alone
make up an estimated $27 trillion market.
"Regulatory approval allows ICE Trust to bring to market the
most comprehensive range of credit-default swap clearing and risk
management services available today," said Jeffrey C. Sprecher,
chairman and chief executive of ICE. "ICE Trust has been designed
to further enhance well-functioning credit-default swap markets by
reducing counterparty and systemic risks, and increasing
transparency and capital efficiency in the CDS markets."
Some critics believe these complex instruments have played a
role in the financial crisis. As evidence, they point to the
near-collapse of American International Group (AIG), which issued
credit-default swaps without having enough collateral to fulfill
the provisions in those contracts.
Clearing, regulators believe, will help reduce risks that
credit-default swaps pose to financial system and provide
regulators with a window into the now opaque market.
"It is critical that we bring increased transparency to
credit-default swaps by developing efficient and effective
oversight of credit-default swap clearing agencies," said SEC
Chairman Mary L. Schapiro.
The SEC's approval of ICE Trust comes just days after the
Federal Reserve Board and the antitrust division of the U.S.
Department of Justice also approved the plans. ICE Trust is
structured as a limited purpose bank and will be overseen primarily
by the Fed.
ICE, which is based in Atlanta, is one of three exchange groups
angling to clear credit derivatives trades in the United States.
Also in the hunt are Chicago-based CME Group Inc. (CME), which has
teamed with the hedge fund firm Citadel Investment Group to develop
a platform for clearing and trading credit-default swaps, dubbed
CMDX.
CME has secured regulatory approval from the Commodity Futures
Trading Commission and the Federal Reserve for CMDX, and continues
to await an exemption from the SEC. CME officials said Friday that
they believe SEC approval of the platform is imminent, and an SEC
spokesman said CME's application is "actively being
considered."
Meanwhile, in December, NYSE Euronext (NYX) cleared all the
regulatory hurdles for a credit-default swap clearinghouse in the
United States. It has already launched a clearing platform in the
United Kingdom through a partnership with LCH.Clearnet, but its
U.S. platform is still in development.
Despite these efforts by the private sector to offer
clearinghouses, some lawmakers and regulators still fear the
derivatives industry will not use them voluntarily and are pushing
for legislation to mandate clearing. In Europe, for instance, where
there are no mandates on clearing, NYSE Euronext has struggled to
gain volume.
But there are strong indications that ICE's platform will be put
to use. Ten banks have already signed on as initial clearing
members, including Bank of America (BAC) and its Merrill Lynch
unit, Barclays Capital, Citigroup (C), Credit Suisse (CS), Deutsche
Bank (DB), Goldman Sachs (GS), JPMorgan Chase (JPM), Morgan Stanley
(MS) and UBS (UBS). Each has contributed to the guaranty fund and
completed "rigorous technical testing" in recent months, according
to ICE.
ICE said Friday it will fund ICE Trust's operations with $35
million from cash on hand and that it has contributed an initial
$10 million to the guaranty fund. This figure is expected to rise
to $100 million over the next two years, with the guaranty fund's
aggregate size determined by the positions held in the
clearinghouse.
ICE also said it had tapped Dirk Pruis to serve as president of
its new clearinghouse. Pruis previously served as the head of a
securities lending consortium called EquiLend. He also oversaw
global bank relations and market infrastructure in Goldman Sachs'
operations division. ICE shares, which closed at $60.39 per share
Friday, climbed as high as $62 in after-hours trading before
heading lower, recently $58.01.
-By Sarah N. Lynch, Dow Jones Newswires; 202-862-6634;
sarah.lynch@dowjones.com
-By Jacob Bunge, Dow Jones Newswires; 312-750-4117;
jacob.bunge@dowjones.com