CME Group Plans Pilot of CDS Clearing; Says Confident of Sell-Side Commitments
September 23, 2009
CME Group plans to announce in “weeks ahead” a pilot launch of its credit default swap (CDS) clearing in a pilot program, a joint effort with hedge fund Citadel Investment Group.
CME said Friday it had scrapped plans for a CDS trading platform to focus solely on clearing, but added that “a number of leading sell-side participants are in the process of becoming founding members” of the clearing system, known as CMDX.
CME did not name the sell-side firms. However, Bloomberg, citing unnamed sources reported Friday that the Chicago-based exchange had held discussions with Barclays Plc, Goldman Sachs, Deutsche Bank AG, Morgan Stanley, JPMorgan Chase & Co., UBS AG, Credit Suisse Group AG, about joining CMDX.
The exchange did identify Friday what were described as new buy-side firms that are joining the clearing system as founding members, along with original founder Citadel. They include: AllianceBernstein, BlackRock, BlueMountain Capital Management, the D. E. Shaw group and PIMCO.
The exchange said in the statement that investors will be able to leverage their existing connectivity with CME clearing members, as CME Clearing will support “trade entry through its CME ClearPort platform, enabling connectivity from any trading platform.” CME added that the system will offer a “segregation and portability framework that protects both customer positions and margin in the event that a clearing member defaults.” Products will include Markit CDX indices and “liquid” single name CDS.
“Over the past several months, we have been working closely with all market participants,” said Terry Duffy, executive chairman of CME Group, in a statement. “As a result of this collaborative process, we have refocused our offering to provide clearing-only services.”
“Our solution offers point of execution clearing of CDS trades, the greatest breadth of products to clear which includes single name CDS, a comprehensive and transparent risk management system, the security of our approximately $8 billion financial safeguards package, and an established regulatory framework to protect customer positions and offer margining efficiencies,” said Craig Donohue, CEO of CME Group.
Dealer support is crucial, however. Unless the CME’s buy-side members agree to structure their own CDS and buy and sell it among themselves, dealers must join CMDX as members for the venture to survive. CME is playing catch-up to the dealer-supported CDS clearing subsidiary of the IntercontinentalExchange, New York-based Ice Trust, which has cleared over $2 trillion in total or “notional” CDS trades in North American CDX indices since first launching the service in March.
CME’s CMDX, however, has garnered recent support from some regulators and certain of the buy-side, which are wary of letting one player dominate the market. Some buy-side firms view CME’s offering as more independent of dealer influence. The major sell-side CDS players originally conceived, have funded and helped develop the CDS solution that became Ice Trust. (Ice acquired the dealer-backed Chicago-based Clearing Corp. in March.)
Ice leads the market overseas too through London-based ICE Clear Europe, which has cleared $447 billion in notional iTraxx indices. Its closest competitor, Deutche Borse’s Eurex Credit Clear, through Sept. 11 cleared $131 million after debuting in July. Eurex handled in August the first centrally cleared single-name CDS, a $7.1 million contract covering the debt of German utility RWE AG. ICE expects to begin clearing single-name CDS contracts before the end of September.
