Thursday, July 30, 2009

ICE Starts Clearinghouse For Derivatives in Europe

Posted in the Wall Street Journal by Jacob Bunge:

IntercontinentalExchange Inc. started clearing credit-derivatives trades in Europe this week as dealer banks respond to regulators' call to reduce risk in the $26.5 trillion market.

ICE, which officially launched its European credit-default-swap clearing service Wednesday, is among a handful of exchanges competing to handle credit-derivative transactions in Europe, nearly four years after the industry's first attempt to enter the market.

The financial crisis is the driving factor now. Authorities on both sides of the Atlantic see clearinghouses, which serve as central counterparties between buyers and sellers, as a way to reduce risk in over-the-counter instruments.

CME Group Inc., Eurex and NYSE Euronext also are targeting the European credit-derivatives market with their own clearing ventures.

But ICE's platform carries the support of 10 major dealer banks that have made the Atlanta-based exchange operator the de facto leader in the U.S.

ICE has handled $1.6 trillion in CDS contracts since its U.S. service made its debut in March, while a rival clearinghouse from CME has stalled as the Chicago-based exchange operator works to secure bank support for the venture.

Dealer banks have moved proactively to clear credit-derivatives trades, staying ahead of U.S. authorities' push to mandate clearinghouses for the complex financial instruments.

In Europe, dealers targeted a July 31 deadline to begin routing credit derivatives trades through clearinghouses as exchanges like ICE, Eurex and CME worked to secure regulatory approval for their platforms.

Eurex officials said that its Eurex Credit Clear facility will begin clearing trades on Thursday, with a number of dealer banks signed on as members.

The Frankfurt-based exchange, co-owned by Deutsche Börse Group and SWX Swiss Exchange, made one of the exchange industry's first attempts to get into credit derivatives almost four years ago. But that push failed following withdrawal of support by banks that helped design the product.

Eurex has offered participants a 90% equity stake in the clearinghouse as a means of building support, but it remains unclear how many clearing services for over-the-counter instruments the market will support.

ICE has established a 50-50 profit-sharing agreement with the bank backers of its credit derivatives clearing solution, who signed on after ICE acquired the bank-owned Clearing Corp. earlier this year.

Jeffrey Sprecher, ICE's chief executive, has said that he sees dealer support for the exchange's U.S. credit derivatives clearinghouse translating across the Atlantic.

ICE Press Release:

LONDON, July 29 /PRNewswire-FirstCall/ -- IntercontinentalExchange((R)) (NYSE: ICE), a leading operator of regulated global futures exchanges, clearing houses and over-the-counter (OTC) markets, announced that ICE Clear Europe((R)) has introduced clearing for European credit default swaps (CDS), beginning with iTraxx contracts, effective this week. ICE's CDS clearing operations are designed to address the operational and risk management needs of the credit market, as well as calls by regulators and policy makers for transparency, standardization and systemic risk reduction. The U.K. Financial Services Authority (FSA) has completed its regulatory review of ICE Clear Europe's CDS clearing operations, risk management and governance.

ICE Clear Europe, which also provides clearing services for ICE's futures and OTC energy markets, has established a separate risk pool for clearing CDS, including guaranty fund and margin accounts, as well as a dedicated risk management system and governance structure. Together with ICE Trust U.S. (ICE Trust(TM)), ICE is bringing a common infrastructure to global CDS market participants within their respective regulatory jurisdictions, while leveraging clearing systems and risk management processes already in use by the industry.

Said Paul Swann, President of ICE Clear Europe: "The launch of CDS clearing today in Europe is an important milestone in the move to increased transparency, standardization and security in the over the counter markets. We have developed a sound risk model that recognises the unique requirements of clearing European CDS instruments. By separating the risk pool from our energy markets and employing a bespoke CDS margining system, we are taking the steps necessary to offer the transparency and security provided by clearing, while containing risk exposure within the CDS markets."

Initial CDS clearing members at ICE Clear Europe include: Bank of America, Barclays, Citi, Credit Suisse, Deutsche Bank, Goldman Sachs, HSBC, J.P. Morgan, Morgan Stanley and UBS.

Each clearing member has made a significant contribution to establish the European CDS guaranty fund. The guaranty fund will continue to scale in conjunction with the transfer of CDS positions to ICE Clear Europe. In addition to member contributions, ICE has contributed $10 million toward the ICE Clear Europe CDS guaranty fund, in addition to its $10 million contribution to the ICE Trust guaranty fund to date. ICE remains committed to a guaranty fund contribution of $100 million over a two-year period, which will be split evenly between its U.S. and European CDS clearing houses.

ICE also announced that Suzanne Hubble has joined ICE Clear Europe as Director, CDS Development. Ms. Hubble is responsible for the strategic development of ICE Clear Europe's European CDS clearing business. Prior to joining ICE, Ms. Hubble spent over 10 years at J.P. Morgan where she was most recently responsible for e-Commerce and Strategic Initiatives for the European Credit Trading business.

CDS clearing by ICE follows several successful initiatives already underway within the industry to reduce systemic and operational risks. ICE has played a key role in these initiatives, including involvement in portfolio compression and credit event auctions, which it administers in conjunction with Markit. Credit event auctions have been relied upon by market participants for the orderly settlement of credit derivative instruments referencing more than 70 defaulted entities, including Fannie Mae, Lehman Brothers and General Motors. ICE Trust has cleared $1.6 trillion in North American CDS indexes to date, and is preparing to introduce enhanced protections to support the addition of buy-side participants.

More information, including the ICE Clear Europe CDS rulebook and Frequently Asked Questions, are available at https://www.theice.com/clear_europe_cds.jhtml.

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