Electronic Bond Trading
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Revenues Down, GFI Targeting Electronic CDS Trading in U.S.
December 1, 2008
After posting a third-quarter loss it pinned on the credit crunch, interdealer brokerage GFI Group is making a big push in U.S. credit derivatives trading, gearing up to introduce a new electronic system for credit default swaps (CDS) on its CreditMatch platform.
While the vast majority of CDS e-trading occurs overseas, New York-based GFI hopes to take advantage of U.S. regulators' efforts to streamline the processing of credit derivatives. By year-end, authorities anticipate approving one or two centralized clearinghouses that should reduce counterparty risk in the sector.
GFI is working with its dealer customers on a system for single-name, index, corporate and financial CDS, as well as index tranches and emerging markets credit derivatives, that will help "maintain all the attributes of the over-the-counter market, while adding a degree of transparency to satisfy demands from the regulators," said Francesco Cicero, head of electronic trading at GFI. According to Cicero, who said he is focused entirely on the new solution, an initial rollout of the technology is already under way, but a final launch date may have to wait until at least one clearinghouse gets the nod.
In an Oct. 31 earnings call, GFI chief executive Michael Gooch said that his firm is ready to introduce the new functionality "any time that the regulators mandate it." GFI users will be able to "go in one click to multi-clearing mechanisms," said Gooch, adding that links to the clearinghouses will likely involve Depository Trust & Clearing Corp. and Markit Group.
"Hopefully liquidity will grow in the marketplace once it's transparent, like it is in Europe," he said. "From our perspective it doesn't have significant impact on our day-to-day business, other than [to] create opportunity." If exchange-listed credit derivatives develop, noted Gooch, GFI will execute them alongside the OTC instruments on CreditMatch.
GFI is part of the consortium of firms that late last year invested in Clearing Corp., with the intention of extending its services to OTC derivatives. On Oct. 30, IntercontinentalExchange said it had agreed to acquire Clearing Corp. and establish ICE US Trust, which will be regulated by the New York Fed and provide CDS clearing. Gooch noted that GFI will be a preferred shareholder in ICE US Trust and the firm will have access to the clearinghouse.
GFI is already connected to Bclear, the trade confirmation and processing platform of NYSE Euronext derivatives subsidiary Liffe, said Cicero. Bclear, which feeds trades to LCH.Clearnet, plans to begin clearing trades based on Markit's iTraxx European indexes before year-end. LCH.Clearnet has stated that it will clear for U.S. CDS indexes in early 2009 and is considering single-name CDS and index tranches as well. Eurex, NYSE Euronext, CME Group and Citadel Investment Group have all met with U.S. regulators about providing centralized clearing for CDS.
GFI's current U.S. credit derivatives functionality is the same it offers on CreditMatch in Europe and Asia-live prices and continuous trading, with most of the prices published to the market. But that approach has generated "limited results" in the U.S., said Cicero, who in September moved from London to New York as the firm places more emphasis on its U.S. offering. Though he wouldn't provide details on the new system, Cicero said that "we're trying to engage U.S. clients in a non-traditional way. We are suggesting features that we believe are appealing to the U.S. audience, and we are receiving positive feedback about them."
