Dealers Agree to Use European-based CDS Clearer
February 20, 2009
Nine of the largest credit derivatives dealers have pledged to begin using by August a central clearinghouse for credit default swaps (CDS) in the European Union.
Concerned that the U.S. will dominate the sector via a stateside clearing solution, EU officials, exchanges and brokers have pushed for a European-based initiative. After a prior agreement with the global dealers collapsed, internal market commissioner Charlie McCreevy had threatened to pass legislation that would force the banks to use a European clearinghouse for eligible CDS contracts.
The letter of commitment, signed by Barclays Capital, Citigroup, Credit Suisse, Deutsche Bank, Goldman Sachs, HSBC, JP Morgan Chase & Co., Morgan Stanley and UBS, “provides the basis for constructive dialogue with the European Commission, both on arrangements for central clearing and on related regulatory matters,” said Eraj Shirvani, chairman of the International Swaps & Derivatives Association (ISDA) and head of fixed income for Credit Suisse in Europe, the Middle East and Africa.
According to ISDA, the banks have also agreed to work with infrastructure providers, regulators and the EC to resolve technical, regulatory and legal issues. Each firm will be able to choose the clearing solution that “might best meet its risk management objectives,” said the trade group.
In a statement, McCreevy said he welcomes the dealers’ commitment but is looking at “whether other measures might be necessary to make sure [credit derivatives] are adequately supervised and do not pose unnecessary risks to financial markets.”
Hours after the agreement was announced Feb. 19, Atlanta-based IntercontinentalExchange said it will create--through its ICE Clear Europe subsidiary--a European-regulated central counterparty for CDS transactions. ICE said it expects to launch the solution, ICE Trust Europe, before midyear. The exchange operator’s U.S. clearing solution, ICE US Trust, has garnered support from Bank of America Corp., Citigroup, Credit Suisse, Deutsche Bank, Goldman Sachs, JP Morgan, Morgan Stanley and UBS.
“We will continue to work with European regulators and the CDS community to construct central clearing and margining systems for this global and vital marketplace,” said Paul Swann, president and COO of ICE Clear Europe. “Our aim is to improve the soundness and transparency of the CDS markets, regardless of physical or political borders.”
LCH.Clearnet said last week that it will launch a Eurozone CDS clearinghouse based in Paris by the end of the year. In conjunction with NYSE Euronext’s derivatives subsidiary, NYSE Liffe, LCH.Clearnet already clears for European CDS indexes--the trades are confirmed and processed through NYSE Liffe’s Bclear platform before passing to LCH.Clearnet.
NYSE Euronext and LCH.Clearnet issued a statement Feb. 18 noting that their clearing service for Markit Group’s iTraxx European indexes--introduced in December--is the only operational solution for credit derivatives in the world. The companies added that the London-based clearing arrangement is available throughout Europe, as well as globally, and that they plan to extend the initiatives to more CDS products “in due course.”
NYSE said earlier this month that it plans to take its derivatives clearing in-house in the second quarter with the launch of LiffeClear, which will alter the exchange operator’s relationship with LCH.Clearnet. NYSE Euronext CEO Duncan Niederauer, who noted that the CDS service’s clearing volumes are currently slow, said that LCH.Clearnet will continue to manage the guarantee fund for Liffe derivatives.
LCH.Clearnet is mulling competing takeover bids from the Depository Trust & Clearing Corp. and a group of European dealers, including London-based Icap. The London Stock Exchange announced today that it has joined the Icap-led group; interdealer brokerages GFI Group, Tradition and Tullett Prebon have also reportedly asked to join the consortium’s bid.
