Wednesday, December 16, 2009

Derivatives clearing push accelerates (FT)

Original posted in the Financial Times by Michael Mackenzie:

The push for clearing credit derivatives between dealers and their customers accelerated on Tuesday, as the CME Group’s platform began operating, one day after rival, ICE Trust rolled out its service for over-the-counter derivatives.

The CME said in a statement that it cleared both dealer to customer and interdealer Credit Derivative Swaps (CDS) trades on its platform.

Clearing trades that are executed between dealers and their ‘buy-side’ clients such as hedge funds and institutional investors, has been strongly pushed by regulators in the wake of the financial crisis.

The massive growth of credit derivatives this decade has been blamed for exacerbating the financial crisis and regulators have highlighted the lack of transparency in the OTC market where two parties privately agree to a customised contract.

By centrally clearing OTC trades, the counterparty risk between a dealer and their customer is transferred to the clearing house. This is seen mitigating systemic risks - including the risk of failure of a leading dealer - which was highlighted last year when Lehman Brothers collapsed.

The CME Group is backed in its clearing efforts, by a number of large buy-side investors. They include: Citadel Investment Group, AllianceBernstein, BlueMountain Capital Management, D.E. Shaw & Co, Pimco and BlackRock. Their support has compelled dealers, who have been clearing trades through ICE, to recently reach agreement with the CME to start using its platform.

The first bank involved with clearing a customer credit derivative trade through the CME on Tuesday was Barclays Capital.

”Clearing trades through the CME has been customer driven, and many of our clients want to use their platform,” said Paul Hamill, director of credit trading at Barclays Capital.

He said the bank has a pioneer group of customers looking at clearing trades through either the CME or ICE Trust, and that momentum should accelerate in the new year.

”The heavy lifting has been done with the US clearing houses, but we are still working on legal documentation and compliance issues in order to facilitate more customers into clearing,” said Mr Hamill.

On Monday, ICE Trust began clearing dealer to clients credit index trades, and has already cleared $4,300bn of dealer to dealer CDS trades this year.

This week, ICE in Europe started clearing dealer to dealer trades for single name credit default swaps and is expected to start clearing those types of trades in the US next week.

Over time, clearing dealer to client single name trades will begin, traders say.

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