The new venture for clearing credit default swaps - (CDS) developed in conjunction with hedge fund monolith Citadel Investments - has been postponed due to a lack of equity stakeholders.
The CME, which received long-awaited regulatory approval from the Securities and Exchange Commission (SEC) to start clearing CDS contracts last week, is still looking to attract a number of key liquidity providers to the new venture. The Chicago-based firms, which had initially hoped to begin clearing CDS contracts in November 2008, expect to launch the platform in “coming weeks,” a spokesperson said on Thursday.
ICE Trust, a start-up founded by Intercontinental Exchange (ICE), the US futures and commodities exchange, in conjunction with Clearing Corporation, a dealer-owned consortium, was the first party to begin clearing CDS contacts in early March 2009.
CME Clearing approached the market in October 2008, offering a 30% stake in the venture and market-making privileges to equity stakeholders. In an interview with The Banker in February 2009, Kim Taylor, managing director and president at CME Clearing, said that the CME model creates a more “capitally efficient” default fund than ICE Trust because it spreads the risk of default across a broader set of products.
But some analysts believe the predominance of Citadel, among the world’s largest and most influential hedge funds, in the governance of CME Clearing has deterred other equity stakeholders. In February, Brian Yelvington, an analyst at CreditSights, told The Banker that the CME model is favoured by many key players in the dealer community but a lack of liquidity-providing stakeholders would likely inhibit its progress.
Following the collapse of Lehman Brothers in September 2008, a major counterparty in the CDS market, the European Commission and the Federal Reserve demanded that the industry move towards a central clearing counterparty (CCP) model for CDS contracts.
Other contenders in the hotly-contested race to carve out a lucrative chunk of the market include Liffe, NYSE-Euronext’s futures and options subsidiary which has partnered with the London-based clearing provider LCH.Clearnet, and Eurex, Deutsche Börse’s derivatives exchange.
