Thinking about picking some of this up in PM. Any suggestions? I don't understand these credit default swaps, but looks like this could be good for the financials:
WASHINGTON (Dow Jones)--IntercontinentalExchange Inc.'s (ICE) plan to clear credit-default swap trades received the final approval it needed from the Securities and Exchange Commission Friday, paving the way for it to become the first operational clearinghouse for credit-default swaps in the United States.
The company said in a release that its new clearinghouse, dubbed ICE US Trust, will start offering clearing on Monday for credit-default swap index transactions before it branches out to other types of credit-default swap contracts.
The SEC's approval of ICE US Trust, which exempts the clearinghouse from certain securities laws, marks a big step toward the U.S. government's efforts to offer clearing for over-the-counter derivatives like credit-default swaps, which alone make up an estimated $27 trillion market.
"Regulatory approval allows ICE Trust to bring to market the most comprehensive range of credit-default swap clearing and risk management services available today," said Jeffrey C. Sprecher, chairman and chief executive of ICE.
ICE shares, which closed up 4% at $60.39 Friday, climbed to $61.99 in after-hours trading.
Some critics believe these complex instruments have played a role in the financial crisis. As evidence, they point to the near-collapse of American International Group (AIG), which issued credit-default swaps without having enough collateral to fulfill the provisions in those contracts.
Clearing, regulators believe, will help reduce risks that credit-default swaps pose to financial system and provide regulators with a window into the now opaque market.
"It is critical that we bring increased transparency to credit-default swaps by developing efficient and effective oversight of credit-default swap clearing agencies," said SEC Chairman Mary L. Schapiro.
A Regulatory Consortium
The SEC's approval of ICE Trust comes just days after the Federal Reserve Board and the antitrust division of the U.S. Department of Justice also approved the plans. ICE Trust is structured as a limited purpose bank and will be overseen primarily by the Fed.
The Fed, the SEC and the Commodity Futures Trading Commission agreed in November to share oversight of credit derivatives, heading off a brewing turf battle.
However, regulators' self-imposed year-end deadline passed with no clearinghouses operational in the United States, and the piecemeal approvals that trickled out rankled some who wanted several platforms approved at once, to mitigate any potential first-mover advantage.
CFTC Commissioner Bart Chilton on Friday lambasted what he termed as the SEC's "one-sided action," giving ICE a leg up on the competition by approving it ahead of Chicago-based CME Group Inc. (C), which has developed its own CDS clearinghouse and still awaits SEC approval.
"I had hoped and expected that the SEC would act so as not to disadvantage any market participant, not to create 'regulatory arbitrage,' not to be in the position that government should never be in - of acting such as to create winners and losers in the marketplace," Chilton told Dow Jones Newswires.
ICE, which is based in Atlanta, is one of several exchange groups angling to clear credit derivatives trades in the United States. CME has teamed with the hedge fund firm Citadel Investment Group to develop a platform for clearing and trading credit-default swaps, dubbed CMDX.
CME has secured regulatory approval from the Commodity Futures Trading Commission and the Federal Reserve for CMDX, and continues to await an exemption from the SEC. CME officials said Friday that they believe SEC approval of the platform is imminent, and an SEC spokesman said CME's application is "actively being considered."
Meanwhile, in December, NYSE Euronext (NYX) cleared all the regulatory hurdles for a credit-default swap clearinghouse in the United States. It has already launched a clearing platform in the United Kingdom through a partnership with LCH.Clearnet, but its U.S. platform is still in development.
Market Participation
Despite these efforts by the private sector to offer clearinghouses, some lawmakers and regulators still fear the derivatives industry will not use them voluntarily and are pushing for legislation to mandate clearing. In Europe, for instance, where there are no mandates on clearing, NYSE Euronext has struggled to gain volume.
But there are strong indications that ICE's platform will be put to use. A consortium of banks have already signed on as initial clearing members, including Bank of America (BAC) and its Merrill Lynch unit, Barclays Capital, Citigroup (C), Credit Suisse (CS), Deutsche Bank (DB), Goldman Sachs (GS), JPMorgan Chase (JPM), Morgan Stanley (MS) and UBS (UBS). Each has contributed to the guaranty fund and completed "rigorous technical testing" in recent months, according to ICE.
The exchange secured support from the banks as part of its acquisition of The Clearing Corp., a Chicago-based clearing firm backed by the banks.
The deal was announced in late October and closed today, following approval from the Department of Justice. Terms of the deal included a $39 million cash payment from ICE and a 50% profit-sharing arrangement in ICE Trust.
ICE said Friday it will fund ICE Trust's operations with $35 million from cash on hand and that it has contributed an initial $10 million to the guaranty fund. This figure is expected to rise to $100 million over the next two years, with the guaranty fund's aggregate size determined by the positions held in the clearinghouse.
ICE also said it had tapped Dirk Pruis to serve as president of its new clearinghouse. Pruis previously served as the head of a securities lending consortium called EquiLend. He also oversaw global bank relations and market infrastructure in Goldman Sachs' operations division. ICE shares, which closed at $60.39 per share Friday, climbed as high as $62 in after-hours trading before heading lower, recently $58.01.
Beyond the U.S., ICE plans to develop a separate credit derivatives clearinghouse for Europe, following calls by European regulators for a Eurozone-based solution. The European entity will function within ICE Clear Europe, the exchange's European clearinghouse, and will be regulated by the U.K. Financial Services Authority.
In Europe, ICE expects to initially clear trades in Markit iTraxx credit default swap indexes.
-By Sarah N. Lynch, Dow Jones Newswires; 202-862-6634;
[email protected] -By Jacob Bunge, Dow Jones Newswires; 312-750-4117;
[email protected] Click here to go to Dow Jones NewsPlus, a web front page of today's most important business and market news, analysis and commentary:
http://www.djnewsplus.com/access/al?rnd=uhZWDuT8N%2Fh45Ys7RP60FQ%3D%3D. You can use this link on the day this article is published and the following day.
(END) Dow Jones Newswires
March 09, 2009 07:37 ET (11:37 GMT)
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