Intercontinental Exchange Inc. (ICE:US), owner of the only service guaranteeing credit-default swaps, said its European initiative to back $26 trillion in trades with a clearinghouse began today.
ICE Clear Europe is offering to clear trades of the Markit iTraxx Europe indexes after receiving regulatory approval from the U.K.’s Financial Services Authority, Atlanta-based Intercontinental said in a statement today.
“The launch of CDS clearing today in Europe is an important milestone in the move to increased transparency, standardization and security in the over-the-counter markets,” Paul Swann, president of ICE Clear Europe, said in the statement.
Regulators in Europe set a deadline of July 31 for banks to begin using a European clearinghouse to back trades. Eurex AG, Europe’s largest futures market, is set to offer clearing of credit swaps tomorrow, it said last week. Intercontinental’s New York-based ICE Trust U.S. clearinghouse has backed over $1.6 trillion in trades since March, the only effort to have processed the transactions to date.
Members of ICE Clear Europe include JPMorgan Chase & Co., Barclays Plc, Goldman Sachs Group Inc. and UBS AG, among others, Intercontinental said today. Credit-default swaps have a notional value outstanding of $26 trillion, according to the New York-based Depository Trust & Clearing Corp.
Dealers are under pressure to process credit-default swaps trades through clearinghouses in the U.S. and Europe after last year’s failure of Lehman Brothers Holdings Inc., which was among the largest traders of the contracts.
The Clearinghouse Role
Capitalized by members, clearinghouses act as the buyer to every seller and the seller to every buyer in derivatives transactions, insuring both sides against default by the other. They also allow regulators to watch market positions and prices for signs of systemic risks.
ICE Clear Europe is also the clearinghouse for Intercontinental’s European energy futures trading. The company has created a separate clearing system for the credit swaps so the risk from the over-the-counter contracts won’t be mixed with the futures trades.
Intercontinental contributed $10 million to the fund used to make up any member-bank default within the clearinghouse, what’s known as the guaranty fund, the company said. It plans to put up $100 million within two years to be split between the guaranty funds of ICE Trust U.S. and ICE Clear Europe.
Three other clearinghouse owners besides Eurex are offering or plan to offer to clear credit-default swaps. CME Group Inc. (CME:US) and NYSE Euronext (NYX:US) haven’t attracted customers so far. LCH.Clearnet Ltd. plans to start its service by December.
Credit-default swaps were created initially as a way for banks to hedge their risk from loans. They became a popular vehicle for hedge funds, insurance companies and other asset managers to speculate on the quality of debt or on the creditworthiness of companies because they were often easier and cheaper to trade than bonds.
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