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CDS Central Clearing Platforms Approved by Regulators

NYSE Euronext Liffe and CME-Citadel's CMDX receive the green light from regulators to launch centralized clearing platforms for credit default swaps.

CME's clearing initiative, however, is different from the others in that CMDX includes an execution platform that will automatically clear trades through the CME Clearing House, which clears the listed futures contracts. Citadel also has created a migration facility to bring over-the-counter CDSs into CMDX and convert them to cleared CDS products.

But McPartland, who moderated a panel discussion on CDS clearing at the Futures Industry Association conference in Chicago in November, says there is concern over how the CDS portion of the CME Clearing House would be separated from the futures clearing. "If there is a liquidity problem on the CDS side, would that end up hurting the people clearing the futures?" he poses.

FIA President John Damgard shared that concern at a recent public hearing in Washington, D.C., on the role of credit derivatives in the U.S. economy, pointing out that one structural issue that has been raised concerns whether to commingle the risk pool that already exists for futures clearing with the CDS risk pool.

TABB's McPartland notes, however, that CME has a big pot of money to support its clearing operations, adding that the futures exchange has set aside billions of dollars to cover losses from its current operations.

According to testimony at the public hearing from CME Executive Chairman Terrence Duffy, CME currently holds more than $100 billion of collateral on deposit and routinely moves more than $3 billion per day among market participants. Duffy argued that one of the advantages of a central clearinghouse is that it could net down the gross outstanding notional CDS exposure that he estimated at around $44 trillion. Duffy added that standardization of outstanding CDS contracts and submission to the CME clearing system would permit a multilateral netting process that would reduce the current open exposures by a factor of five.

While the CME is planning to use its existing clearinghouse for CDS instruments, ICE will form a limited purpose bank, ICE Trust, as a New York Trust Company that will be part of the Federal Reserve System. "The ICE Trust guaranty fund will be for CDS positions only and will not serve as a collateral deposit for any other commodity contracts," said Johnathan Short, ICE's SVP and general counsel, speaking at the hearing.

With the likelihood that more than one clearing system will go live, industry leaders have called for interoperability. "As CDS clearing evolves, it is unclear whether one system will predominate or whether multiple systems will thrive," FIA's Damgard said at the hearing. Damgard suggested that if more than one clearinghouse is successfully launched, regulators should consider an appropriate linkage plan to protect against systemic risk.

Both ICE and CME have said they are offering open-access platforms that will permit other trading platforms to clear CDSs through their clearing facilities.

Ivy is Editor-at-Large for Advanced Trading and Wall Street & Technology. Ivy is responsible for writing in-depth feature articles, daily blogs and news articles with a focus on automated trading in the capital markets. As an industry expert, Ivy has reported on a myriad ... View Full Bio

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