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 shares, which closed up 4% at $60.39 Friday, climbed to
$61.99 in after-hours trading.
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.
A Regulatory Consortium
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.
The Fed, the SEC and the Commodity Futures Trading Commission
agreed in November to share oversight of credit derivatives,
heading off a brewing turf battle.
However, regulators' self-imposed year-end deadline passed with
no clearinghouses operational in the United States, and the
piecemeal approvals that trickled out rankled some who wanted
several platforms approved at once, to mitigate any potential
first-mover advantage.
CFTC Commissioner Bart Chilton on Friday lambasted what he
termed as the SEC's "one-sided action," giving ICE a leg up on the
competition by approving it ahead of Chicago-based CME Group Inc.
(C), which has developed its own CDS clearinghouse and still awaits
SEC approval.
"I had hoped and expected that the SEC would act so as not to
disadvantage any market participant, not to create 'regulatory
arbitrage,' not to be in the position that government should never
be in - of acting such as to create winners and losers in the
marketplace," Chilton told Dow Jones Newswires.
ICE, which is based in Atlanta, is one of several exchange
groups angling to clear credit derivatives trades in the United
States. CME 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.
Market Participation
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. A consortium of 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.
The exchange secured support from the banks as part of its
acquisition of The Clearing Corp., a Chicago-based clearing firm
backed by the banks.
The deal was announced in late October and closed today,
following approval from the Department of Justice. Terms of the
deal included a $39 million cash payment from ICE and a 50%
profit-sharing arrangement in ICE Trust.
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.
Beyond the U.S., ICE plans to develop a separate credit
derivatives clearinghouse for Europe, following calls by European
regulators for a Eurozone-based solution. The European entity will
function within ICE Clear Europe, the exchange's European
clearinghouse, and will be regulated by the U.K. Financial Services
Authority.
In Europe, ICE expects to initially clear trades in Markit
iTraxx credit default swap indexes.
-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