After months in the making, competition in credit default swaps (CDS) clearing started officially when CME Group launched its CDS initiative and began clearing trades on Dec. 15. Intercontinental Exchange (ICE), through its ICE Trust clearing solution, successfully achieved buy-side access to CDS clearing on Dec. 15. ICE Trust had cleared more than $4 trillion in CDS at the end of 2009.
Analysts say that the industry should be applauded in meeting its deadline to achieve buy-side access. “It’s a great accomplishment and it’s something that the lawmakers and the regulators should take notice of. The bills reflect the progress the industry has made and it’s gotten much more realistic than what we started talking about in the beginning of 2009. The mandated clearing of all OTC derivatives was unrealistic [then] and now it’s gotten to a point where it is realistic and it can be implemented in a way that will let the market grow and thrive but reduce risk in the process,” says Kevin McPartland, senior analyst at Tabb Group.
Paul Zubulake, senior analyst at Aite Group, expects ICE to retain its dominance in the CDS clearing market. “The good news is they met the deadline. The reality is that ICE is clearing the majority of the deals. CME’s not clearing many deals. It’s significant now that they’re all up and running and that there’s competition. ICE is clearing the majority of the business, and I don’t see that changing.”
On Dec. 21, CME Group submitted a revised petition to the CFTC to commingle customer funds used to margin, secure, or guarantee CDS cleared by CME Group with other funds held in the segregated account. CFTC is seeking comments on the petition until Feb. 19.
“CME essentially wants to do cross-product margining. You’d be looking at the client’s entire portfolio — all of their CDSs, all of their interest rate swaps and all of their futures and use that to calculate necessary margin. This would provide huge benefits. If approved, it could be a huge win for the CME,” McPartland says, adding that it could take some time to get approved. “It needs to be done in such a way that people see that the same risk procedures are in place despite the changes.”
Several FCMs have expressed concern over commingling margin capital for standard futures contracts and CDSs and supported segregating to two pools of capital.
Zubulake says the margining issue comes down to the need for a competitive edge for CME Group. “Allowing this portfolio margining is where [CME Group] can offer the end user some sort of advantage. The dealers are going to want to clear through ICE Trust because of a vested interest. If CME can offer the client some sort of margin advantage, then they have an opportunity to gain some market share.”