CME Group cleared two regulatory hurdles on Dec. 23 in its goal to clear credit default swaps (CDSs). The Commodity Futures Trading Commission (CFTC) and the Federal Reserve Bank of New York granted regulatory approval for clearing CDSs through CMDX, CME Group’s joint clearing venture with Citadel Investment Group. CMDX, which will offer all major CDX and iTraxx indexes and their single-name constituents, is operationally ready to launch pending SEC approval.
NYSE Euronext’s Liffe-LCH.Clearnet CDS clearing solution through Bclear, which was launched in Europe on Dec. 22, was granted permission by the SEC to provide CDS clearing in the United States on Dec. 23.
The Intercontinental Exchange (ICE)’s clearing solution, a joint venture with the Clearing Corporation, Markit Group Ltd. and Risk Metrics Group that has the backing of nine investment banks, received approval on Dec. 4 from the New York State Banking Board, but it still needs New York Fed, CFTC and SEC approval before moving forward.
Experts are split on whose clearing solution is better. John Jay, senior analyst at Aite Group, thinks ICE’s solution is the most comprehensive because of its link with Markit and because ICE now owns Creditex. “All of these guys want to brag about being first [but] CDS is a completely different animal than a derivative contract in oil or grains and it requires a different set of expertise. The ICE setup is going to ultimately draw more business,” Jay says.
Gary DeWaal, general counsel at Newedge, says the CME proposal is better than the ICE proposal, with the Liffe proposal falling somewhere in between. “Each of the systems bring different components into play. CME has a leg up because of their stature and the long-term effectiveness of their clearing process, but ICE and Liffe have good products,” he says, adding that the marketplace and the dealers will ultimately determine winners and losers.
“[Neither exchange] is in the lead, they’re just coming at it from different angles. It will be a while until we see what the market gravitates to,” says Kevin McPartland, senior analyst at Tabb Group. Experts agree that over the long term, the fervor for CDS products will cool and a few leaders will emerge.
“In the planning stages, everyone thinks it’s the greatest thing, but if it’s a slow start, it will be telling for what will happen to the entire clearinghouse approach. The most standardized CDSs will be fine on one or two or three of these clearinghouses,” Jay says.
McPartland agrees that there will be fewer CDS clearing players in the long run. “Not everyone will be able to be successful and the market doesn’t need a half dozen central CDS clearing agencies. The credit crisis lit the fire, but this will ultimately lead to a more efficient CDS market,” he says.
