ICE US Trust Member Banks Support European Swaps Clearing
March 13 2009 - 9:51AM
Dow Jones News
The same dealer banks backing a U.S. credit derivatives clearing
solution launched by IntercontinentalExchange Inc. (ICE) are seen
to support the exchange's European solution, due in July.
Atlanta-based ICE, which launched the first U.S. clearinghouse
for credit default swaps Monday, will also incorporate segregation
of customer funds into its U.S. offering ICE US Trust, the
exchange's chief executive said Thursday.
ICE Chief Executive Jeffrey Sprecher said in an interview with
Dow Jones Newswires that ICE's agreement to acquire the bank-backed
Clearing Corporation, a deal announced last fall that was seen
helping ICE win the backing of major banks, included a provision to
extend credit derivatives clearing to Europe "if it was
required."
Sprecher said that members agreed it was required; however,
there exists no formal commitment for the banks to use the planned
platform.
ICE announced last month that it would launch ICE Trust Europe
by July, when exchange officials anticipate European credit default
swap indexes will be ready for clearing.
Since its launch earlier this week, ICE US Trust's clearing
member banks have begun backloading old index trades into the
clearinghouse, a process ICE initially estimated would take about a
month.
Sprecher said new trades could begin clearing in late March.
ICE, a derivatives exchange company operating futures markets in
energy, agriculture and equity indexes, is one of several exchanges
seeking to clear trades in the $27 trillion credit default swap
market.
Chicago-based CME Group Inc. (CME) has developed a platform with
Citadel Investment Group that awaits final regulatory approval, and
NYSE Euronext (NYX) plans to develop its own U.S. offering.
Clearing credit derivatives trades is being pushed by regulators
in the U.S. and Europe, who see a central counterparty model
reducing risk and adding transparency to a historically opaque
market.
Segregation of Funds An Option For ICE US Trust
ICE US Trust will also provide for segregation of customer
funds, a key protection for firms trading credit derivatives
through the platform's clearing member banks.
Segregating customer funds, a process that generally takes place
at the futures commission merchant level, protects a client's
capital in case the bank through which it's trading credit
derivatives files for bankruptcy - a prospect that has become more
real following the fall of Lehman Brothers.
If customer funds aren't segregated in a clearinghouse, a hedge
fund or proprietary trading firm whose prime broker goes down - for
instance, Lehman Brothers - could find the initial margin it posted
with that firm locked up in bankruptcy proceedings.
"Members have agreed to offer this as an option," Sprecher said,
noting that segregating customer funds could raise the overall cost
for the end user.
As things stand, Sprecher said ICE's swaps clearinghouse will
maintain its high threshold for membership, which includes a $5
billion minimum net worth and a minimum $20 million contribution to
the guaranty fund for starters.
The standards have been criticized by other exchanges and
observers as maintaining banks' dominance in the credit derivatives
market.
Sprecher said that the clearinghouse will revisit membership
requirements in ICE US Trust after existing positions are loaded
in, and there is a better view of the clearinghouse's overall
risk.
Meanwhile, as part of an ongoing effort by the International
Swaps and Derivatives Association, Sprecher said ICE is working
with the clearing member banks of ICE US Trust on the rules around
standardizing trades for clearing.
As these proposals are adopted by the banks, which drive the
lion's share of volume in CDS trading, he said the rest of the
market is likely to eventually adopt the same standards.
Sprecher said dealer banks will likely transition to new credit
default swap contract standards around the April 8 roll into series
12 of the CDX credit default swap indexes.
-By Jacob Bunge, Dow Jones Newswires; 312-750-4117;
jacob.bunge@dowjones.com