Bloomberg News

ICE Clear Credit Files to Back Markit Emerging Nation CDS Index

April 16, 2012

ICE Clear Credit, the world’s largest credit-default swap clearinghouse, is seeking to guarantee the Markit CDX Emerging Markets Index (CXPEM517) of 15 sovereign nations, according to a regulatory notice.

The clearinghouse, owned by Atlanta-based Intercontinental Exchange Inc., filed the request for approval by the Securities and Exchange Commission on April 3, according to a federal information and news dispatch released today. The emerging markets index would more than triple the number of sovereign countries that ICE Clear Credit backs with its clearinghouse after it began accepting contracts on Brazil, Mexico, Argentina and Venezuela last year.

ICE Clear Credit believes the index “has become increasingly important for market participants to manage risk and express views with respect to emerging market sovereign credit,” according to the notice. Clearing the index “will facilitate the prompt and accurate settlement of swaps and contribute to the safeguarding of securities and funds associated with swap transactions.”

Clearing credit-default swaps on Latin American nations was a first step in overcoming one of regulators’ and banks’ biggest hurdles to curbing the risks that the $26.4 trillion in outstanding contracts pose to the global financial system. While banks have moved many of the contracts linked to corporations into clearinghouses, they’re struggling to do the same for contracts on themselves and countries in which they’re based without having to require collateral postings that would make the trades uneconomical.

Big Challenge

The complexity of housing some of the most volatile and correlated credit swaps in a clearinghouse capitalized by the same banks whose debt is protected by the contracts has prevented their inclusion in the risk-mitigating service. The obstacle extends to contracts linked to countries in which the banks are based. The issue is one of the derivatives industry’s biggest challenges, Jeffrey Sprecher, chief executive officer of Intercontinental Exchange, said in October.

Contracts on financial companies and government entities account for the largest part of the so-called single-name credit-default swap market, according to the Depository Trust & Clearing Corp.

Credit swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. Clearinghouses, which are capitalized by their members, are meant to reduce systemic risk by absorbing and sharing responsibility if a member defaults on its payment obligations. They use daily margin calls to keep accounts current and provide regulators with access to prices and positions.

The Markit CDX emerging market index comprises debt of Argentina, Venezuela, Brazil, Malaysia, Colombia, Hungary, Indonesia, Panama, Peru, South Africa, the Philippines, Turkey, Russia, Ukraine and Mexico.

The SEC is soliciting comments on the proposal now, it said in the notice.

To contact the reporter on this story: Matthew Leising in New York at mleising@bloomberg.net.

To contact the editor responsible for this story: Alan Goldstein at agoldstein5@bloomberg.net.


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