Wednesday, February 11, 2009

Credit Swaps Clearing Stalls on Pricing, ICE Says

By Matthew Leising on Bloomberg:

Intercontinental Exchange Inc.’s planned clearinghouse for the $28 trillion credit-default swap market is stalled over pricing on less frequently traded contracts, Chief Executive Officer Jeff Sprecher said.

U.S. regulators and industry representatives are working with Intercontinental to create a system to determine prices for credit-default swaps that differ from the standard five-year contract, Sprecher said today on a conference call with analysts. Federal officials had hoped the clearing plans would be approved by the end of 2008, they said last year.

“There’s an interactive discussion” going on about how to price contracts that don’t trade often, Sprecher said. “That’s why the clearinghouse has not been approved. We’re working with the market on this.” Chief Financial Officer Scott Hill said regulatory approval may come “in the very near term.”

U.S. regulators and other government officials are pushing the creation of a clearinghouse for credit-default swaps after Lehman Brothers Inc., one of the largest dealers in the market, filed for bankruptcy in September. A clearinghouse reduces the risk that a counterparty such as Lehman will default on a trade and also creates prices for the contracts that are now privately traded in the bi-lateral over-the-counter market.

Intercontinental, the second-largest U.S. futures market, is competing with NYSE Euronext, Eurex AG and CME Group Inc. to provide guarantees to credit-default swap trades by processing them with a clearinghouse. Intercontinental has agreed to buy the Clearing Corp., a clearinghouse owned by nine major dealers including JPMorgan and Goldman Sachs Group Inc., to get the banks to commit to its service.

Understanding Risks

Pricing contracts that don’t trade often could be accomplished through an auction at the end of the trading day, Sprecher said.

Intercontinental’s credit-default swap clearinghouse would have the ability to mark prices during the trading day in case contracts move sharply higher or lower, said Hill, the finance chief.

“There’s clearly the ability to do intraday margin calls if spreads blow out,” Hill said in an interview. “We are developing the capacity to understand intraday risks.” The process has been complicated, he said.

“It’s an additional complication we’ve had to work through,” Hill said.

Intercontinental also needs federal approval for the credit- default swap clearinghouse in order to close its purchase of Clearing Corp., Sprecher said.

‘Tail End’

Atlanta-based Intercontinental is awaiting regulatory approval from the Federal Reserve and the U.S. Securities and Exchange Commission.

“We’re at the tail end of that” regulatory process, he said. “A lot of decisions have been made, especially in January.”

Getting the contract-pricing process correct is important because investors will be using those prices to determine profit and loss on their positions, he said.

“Our clearinghouse will only be as good as the marks we put in,” Sprecher said.

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